20 terms

OTC markets and clearing

Central counterparty: An entity that interposes itself between the two sides of a trade, becoming buyer to every seller and seller to every buyer, and managing the resulting risk with margin and a default fund.
Collateral: Assets pledged to secure an exposure, so that if the pledging party defaults the other side can sell the assets to cover what it is owed.
Contract for difference: A leveraged bilateral contract paying the difference between an asset's opening and closing price, with no ownership of the underlying and no exchange involved.
Credit default swap: A contract where the buyer pays a periodic premium for protection against a credit event at a reference entity, and receives compensation if that event occurs.
Credit support annex: The collateral agreement attached to an ISDA master, specifying what collateral is posted against derivative exposure, how often, and in what form.
Equity swap: A swap exchanging the return on a stock, basket or index for a floating financing rate, used for synthetic exposure, hedging and cross-border access.
Exchange-traded derivative: A standardised futures or options contract traded on an organised exchange, with a clearing house as counterparty to every trade and daily margin settlement.
Forward rate agreement: A contract fixing an interest rate for a future period on a notional amount, settled in cash for the difference between the agreed rate and the actual rate.
Haircut: The discount applied to collateral's market value when calculating how much credit it supports, sized to cover potential price falls before the collateral could be sold.
Interest rate swap: An agreement to exchange fixed interest payments for floating payments on a notional amount, the largest derivative market in the world by outstanding notional.
ISDA master agreement: The standard contract governing bilateral derivatives between two parties, under which every individual trade sits as a confirmation to one overarching legal framework.
Issuer credit risk: The risk that the bank behind a structured note or ETN fails to pay, since these instruments are unsecured obligations rather than claims on a pool of assets.
Liability-driven investing: Building a portfolio to match a known future stream of payments rather than to maximise return, with interest-rate sensitivity matched to the liabilities.
Netting: Combining multiple obligations between two parties into a single net amount, reducing both settlement flows and the exposure at risk if one side defaults.
Over-the-counter derivative: A derivative negotiated privately between two parties rather than traded on an exchange, customisable in every term and carrying direct exposure to the other side.
Overnight index swap: A swap exchanging a fixed rate for the compounded average of an overnight rate, widely used to read market expectations for central bank policy.
Swap: A bilateral contract to exchange two streams of payments over time, defined by a notional amount that is usually never exchanged and used to convert one exposure into another.
Swaption: An option to enter an interest rate swap on set terms at a future date, giving the buyer the right to pay or receive fixed without the obligation to do so.
Total return swap: A contract where one party pays the entire return of an asset, including income and price change, and receives a financing rate in exchange.
Wrong-way risk: Exposure to a counterparty that increases exactly as that counterparty's own creditworthiness deteriorates, so the protection is weakest when it is most needed.

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