Glossary

ABCP

Asset-backed commercial paper (ABCP) is a form of commercial paper that is collateralised by financial assets. ABCP is a short-term instrument with an initial maturity of between 1 and 360 days (usually around 30 days). It is issued from an asset-backed commercial paper programme, also known as a conduit.

ABS

An asset-backed security (ABS) is a security the income payments and therefore value of which derived from and collateralised by (or "backed" by) a specified pool of underlying assets. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitisation. This process allows the risk of investing in the underlying assets to be stratified as each security will represent a portion of the total value of the diverse pool of underlying assets. The different instruments ussed from a vehilce represent differing levels of risk, as they represent differnet priorities of payment. The pools of underlying assets can include payments from credit cards, auto loans, and mortgage loans, or more esoteric cash flows such as payments from aircraft leases, royalty payments and movie revenues.

Call account

‘Call account' is a bank deposit where funds can be withdrawn at any time.

CD

‘Certificate of deposit', or CD, is a bank deposit with a set maturity date and pre-determined, fixed interest rate. Investors receive a bearer certificate which can be bought or sold.

CP

Commercial paper is an unsecured promissory note with a fixed maturity usually between 1 day and 1 year. The bulk of paper issued has a maturity or less than 3 months. It is normally issued by a wide range of sovereigns, supranationals, larger corporations and banks.

Credit rating agency

A credit rating agency (CRA) is a company that opines on a debtor's ability to make timely interest payments and to pay back their debt.  The degree of confidence is expressed in terms of a scale with alphanumeric gradings.  The inverse of the confidence of repayment is the probability that the debt issuer will not pay as due and default on its undertakings.  Some CRAs have methodologies which they apply to funds of various types to express opinions on aspects of their operation.

EC

The European Commission - www.ec.europa.eu

ECB

The European Central Bank - www.ecb.int

EONIA

Eonia (Euro OverNight Index Average) is an effective overnight interest rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market.  The rates are calculated by the European Central Bank (ECB), based on all overnight interbank assets created before the close of real time gross settlement systems (RTGS) at 6pm Central European Time (CET).

ESMA

The European Securities and Markets Association - successor to Committee of European Securities Regulators (CESR) - www.esma.europa.eu

ESRB

The European Systemic Risk Board - www.esrb.europa.eu

FRN

Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, such as LIBOR or federal funds rate, plus a quoted spread (a.k.a. quoted margin). The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread.

FSB

The Financial Stability Board - www.financialstabilityboard.org

IOSCO

The International Organisation of Securities Commissions - www.iosco.org

LIBID

The London Interbank Bid Rate (LIBID) is a bid rate; the rate bid by banks on deposits (i.e., the rate at which a bank is willing to borrow from other banks). It is "the opposite" of the LIBOR (an offered, hence "ask" rate, the rate at which a bank will lend).  Conventional wisdom used to assert that a LIBID rate could be calculated by subtracting a fixed amount (often given as 1/8 th of 1%) from the prevailing LIBOR rate, however this is no longer the case as bid/offer spreads have tightened in recent years.

LIBOR

The London Interbank Offered Rate (LIBOR) is the interest rate that the leading banks in London would be charged if borrowing from other banks.

MMF

A money market fund (MMF, also known as money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities. 

Prime money market fund

A ‘Prime' money market fund is a money market fund (MMF) which principally invests in non-government securities.

Repo

A repurchase agreement, also known as a repo or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest.

Rule 2a-7

Money market funds in the United States are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act defines the quality, maturity and diversity of investments by money market funds.

SEC

The U.S. Securities and Exchange Commission - www.sec.gov

SONIA

SONIA is the Sterling Overnight Index Average, the reference rate for overnight unsecured transactions in the Sterling market. The SONIA fixing is calculated as the weighted average rate of all unsecured overnight sterling transactions.

TD

‘Time deposit', or TD, is a generic term for a bank deposit where funds cannot be withdrawn for a fixed period of time.

Treasury bills

‘Treasury bills' are short-term Government debt, usually with a maturity of one year or less.

Treasury money market fund

‘Treasury' money market fund is a money market fund which exclusively invests in government securities.

UCITS

Undertakings for Collective Investment in Transferable Securities (UCITS) are investment funds that have been established in accordance with the UCITS Directive, initially adopted in 1985. 

WAFM/WAL

‘Weighted average final maturity' (WAFM) or  ‘Weighted average life' (WAL), is a measure of credit risk. WAL is calculated by taking the final maturity of the underlying money market instruments held by the fund, weighted according to the relative holdings per instrument.

WAM

‘Weighted average maturity', or WAM, is used to measure interest rate risk. WAM is calculated by taking the average length of time to maturity (fixed rate) or the next interest rate reset (floating rate) for each underlying money market instrument.