This glossary presents two kinds of terms:

• Terms specific to our architecture, such as association. We will generally give a definition and a reference to a more extensive discussion.
• More general terms that are of particular importance to the material on this site.

This is not a general financial or IT glossary. There are many good on-line financial dictionaries. See [Investopedia] and

Please contact us if there are terms you would like added, or discussions that could be expanded.

association

An association is a specific component of the Framework and an entity in the Data Structures. It captures the relationship among records of an event or operation. For example, a cancellation associates two records, the original and the reversal. A correction associates three, the original, reversal, and new value. Technically, the records being associated are register entries.

Aka keyoff, linkage.

See the discussions in Data Structures and Knowledge Base.

balance

See positions and balances.

business day convention

Convention that determines how coupon payment dates falling on a non-business date are handled.

See "BDC" in Date Count Conventions for detailed information.

clean price

dirty price

These terms relate to fixed income securities that normally include interest bought/sold as a component of the net money.

A security trade is done on a clean price basis if the interest is figured independently and than added to the principal (which is figured from the clean price). If interest is not figured separately, it is said to be done on a dirty price basis because the price must include a factor to cover interest bought/sold.

See price below and Clean and Dirty Prices for an in-depth treatment.

clearance

On this site we uses clearance to refer to the process of verifying and agreeing upon the terms of a trade in preparation for settlement.

Unfortunately, these terms are often used interchangeably (particularly within IT departments). Even [AICPABDSec06] says "receipt or delivery of securities against payment." Adding to the confusion is the fact that in banking (as opposed to the securities industry) clearing an item such as a check is indeed the same as settling it.

custodian

Custodians (such as DTC) hold securities (and often cash) for other firms. They manage the movements associated with settling trades and performing other transfers.

Positions at a custodian positions are on a settled (not settlement date) basis. See Date Bases.

day count convention

Indication of the convention used for determining the number of days in a month and the number of days in a year to be used in the calculation of bond interest.

See Day Count Conventions.

declaration date

The date that a corporation announces a corporate action, such as a dividend (see Dividends) or stock split.

See also record date and payment date.

effective date

The date that the transaction is reflected within a system. A trade that is done on one date, but not entered until the following day (an "as-of" trade), has an effective date one day later than the trade date.

More specifically, it is the date that the register entry is entered into the system. If a trade is corrected, for example, the effective date of the reversal and of the new record is the date the correction is done; the effective date of the original trade is not affected.

It is sometimes referred to as booking date or entry date.

See Date Bases for further explanation and a discussion of how it affects positions and balances.

ex-dividend date (ex-date)

Date on which a trade with normal settlement (e.g., T+3) will have a settlement date after the dividend record date. It will thus not add to the position qualifying for entitlement to the dividend.

See Dividends.

inventory

A firm's inventory consists of the securities it has bought and sold for its own account.

net money

The amount of money changing hands on a transactions. It thus includes any fees and commissions.

For a trade on a coupon-bearing security, it is the sum of the principal and interest bought/sold (and any fees and commissions). See Bond Prices in the Market for a discussion.

OurCo

The name we use for the securities firm used in the examples and discussions. It can be a broker/dealer, investment bank, hedge fund, pension fund, or similar institution. See Architecture for a discussion of the intended audience for this material.

par and face (fixed income securities)

The "par" amount of a security is the remaining amount of principal to be received by holders of a security as of a particular point in time. The "face" amount of a bond is the par amount as of the issue date of the security.

The distinction is important for amortizing securities, i.e., where principal is being paid down over time. The most common examples are asset-backed securities, such as mortgage or credit card pools. The "face" is original principal, e.g., $1,000,000, which never changes. As the mortgage or credit card holders pay down their loans, the remaining principal (the "par") declines.

In terms of valuing the security, it is the par value that is important. The principal amount of a trade = par * price.

For record keeping, the face is most often used, simply because it is fixed. Depositories (such as the Fed) track securities at face value, for instance.

For fixed income securities such as Treasury or corporate bonds, the face and par are the same, because there is no paydown. Par is sometimes defined as the amount that will be received by holders at maturity. While true for many types of bonds, it is true only because they don't pay down principal. This obscures the more precise nature of the term.

If there is a final interest payment (coupon) at maturity, in addition to the principal, this amount is not included in par.

payment date

The date on which dividend (see Dividends) and interest payments (see Coupon Interest) are made to holders of record.

See also declaration date and record date.

positions and balances

In the industry, "balance" refers to a monetary total (such as inventory principal, counterparty receivable, or interest income), and "position" refers to a quantity total (such as a trader position or a position on the stock record).

See the discussion in Framework.

price

principal

The price determines the value of the principal, as in "principal = quantity * price". This applies to both trades and balances on positions. Price does not cover other elements of a trade, such as fees, commissions, and (most importantly) interest bought/sold. See also net money and Bond Prices in the Market.

quantity

The amount of a security, such as number of shares of a stock, option contracts, or face value of bonds.

See also positions and balances.

record date

The date used to determine entitlement to events such as interest payments, dividends (see Dividends), and corporate actions. Basically, a firm is entitled based on its settlement position on the record date.

See also declaration date and payment date.

register

The record of impact on the firm's positions and balances. It is primarily the accounting distribution (i.e., debits and credits), of both money and quantity. Trades, such as Buys and Sells, have one register entry. Cancellations also have register entries, to record the reversal. Related register entries, such as a transaction and it's reversal, are linked through an association.

See the discussions in Data Structures and Knowledge Base.

settlement

The satisfaction of the contractual terms of a transaction. Also referred to as closing a transaction.

We avoid defining it in terms of an exchange of securities and/or cash because transactions can settle via pair-offs or other means.

See Transaction Operations for further discussion.

See also clearance for the relationship between these two terms.

settlement date

There are, unfortunately, a number of related and sometimes conflicting uses for this term. On this site it is used as follows:

• For contractual transactions, such as buys and sells and repos and reverses, the date that the transaction is expected to close, normally via an exchange of cash and/or securities. We say "normally", because a trade can be settled in other ways, such as pair-offs.
• By extension, the date that a transaction affects the settlement date set of books. Such transactions include journal entries, coupon and dividend payable/receivables, and receives and delivers. For most of these the settlement date is the same as the trade date.

See Positions and Balances for further discussion of contractual terms. Transaction Operations addresses a variety of settlement through examples and discussion.

Other terms used for this sense include value date (common in Europe) and contractual settlement date.

The confusion comes when a term is needed for the date that a transaction actually settles. This concept can be very slippery; see Settlement as Trade Status.

tenor

The amount of time until a cash flow occurs. For example, a Treasury Bill maturing on 17 June 2009 would have a tenor of 4 months on 17 February 2009. The tenor changes with the current (or as-of) date.

Sometimes the term "maturity" is used for this concept, but this can be misleading. It usually refers to the maturity date (17 June 2009 in the example) or the original tenor (e.g., 1 year if the bill were issued on 17 June 2008). For these reasons the term "remaining maturity" is sometimes used.

However, coupon payments also have a time period until the cash payment, and "remaining maturity" would hardly be appropriate.

trading profit and loss

realized P&L

unrealized P&L

total economic P&L

These related terms are a major topic of this site. See Inventory and Trading P&L for an in-depth treatment.

trial balance format

The convention of displaying debit amounts (and long positions) as positive and credit amounts (and short positions) as negative.

Note that this is only a convention, like showing debits on the left and credits on the right. There are no implications about the figures themselves beyond this. Positive amounts aren't "good", nor negative amounts "bad". Trading P&L showing as -150 in trial balance format is generally considered better than -100, for instance. Like any convention it requires a period of acclimation.

What this convention captures explicitly, of course, is that debits and credits offset. This makes enforcing balancing and recognizing offsetting positions very simple. For an audience in accounting and IT, where these concerns are paramount, this is generally the most useful convention (see Audience for the purposes of this site). This is the convention used most commonly within accounting systems.

The other common convention is "natural sign". A credit in an asset account would appear as a negative, while a credit in a liability account would appear as a positive number. This is a useful convention for financial reports, which generally have a wider and different audience.

There are a number of drawbacks with the natural sign convention for material such as that on this site. First, the natural sign convention makes it very difficult to enforce balancing or recognize offsetting amounts, of course. Next, it is extremely (and painfully) dependent on getting the association of accounts with their natural signs correct. Further, it avoids the issue of how to represent totals, where the choice of "natural sign" may not be obvious. Certain accounts also present a problem for this approach. For instance, Accumulated Depreciation normally has a credit balance, but that credit balance is "naturally" presented with a minus sign.

While we have been discussing presentation formats, trial balance format is particularly well-suited for the storage of values, for all the reasons given above. With such a basis, presenting figures in natural sign (or another convention) is relatively straightforward. The reverse is not true.

yield

return

discount rate

We use these terms interchangeably, with differences by context.

If you invest $100 and receive $107 in one year's time, your yield (or return) is 7%.

If you are going to receive $107 in one year on an investment, and it's present value is $100, we say the investment is being discounted at 7%.

In all cases the percentage is based on an annual basis. If you invest $100 and receive $103.50 in half a year, your return is 7.1225%.

There are alternative definitions of these terms, particularly yield.

These measures, and bond valuation and pricing more generally, are treated in detail in Bond Pricing in the Market.

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