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Capital Markets Glossary

A short explanation of commonly used terms, used in these courses

Central Clearing

The process where an independent firm (the clearing house) becomes an intermediate counterpart to both the parties to an original trade. The clearing house then uses risk management techniques including variation and initial margin to transform the risk between the two parties.


Collateral

Collateral generally means assets held by one party to offset a credit exposure to another party.


Collateral management

A process to transform credit exposure by receiving assets covering that exposure.


Concentration risk

The idea that a firm could own the majority of the bonds in a specific issue or for a specific counterparty. Should the issue default, the market price of those bonds may sink rapidly. Owning too many of one issue would mean an immediate loss to your firm, higher than if you spread your bond holdings more widely.


Counterparty

Meaning the other firm (bank, corporate, hedge fund) with which you have a trading relationship


Credit limit

A way of measuring the amount of business between two firms. A credit risk officer will define the credit limit and then use systems to ensure the amount of business executed between two firms remains at or under that limit.


Credit Risk

Credit risk from one party to another usually means the current amount of money owed from one to the other at a net portfolio level. Money which counts towards this measurement include unpaid settlement amounts from future coupons on swaps, unpaid margin calls, unpaid considerations on equity or bond trades, or in fact anything yet to be settled. More sophisticated measures of credit risk include simulations of future portfolio behaviour to predict changes in market conditions.


Credit Support Annex

A credit support annex (or credit support deed) is an agreement between two parties to measure exposure and cover that exposure with assets. ISDA provide templates for CSAs and CSDs within which parties define the products covered, the calculation method and the assets eligible to cover the resulting exposure.


CRIF

Common Risk Interchange Format is a file format required as input to an ISDA SIMM calculation. A full specification is here: https://www.isda.org/a/owEDE/risk-data-standards-v1-36-public.pdf


CSA

A credit support annex (or credit support deed) is an agreement between two parties to measure exposure and cover that exposure with assets. ISDA provide templates for CSAs and CSDs within which parties define the products covered, the calculation method and the assets eligible to cover the resulting exposure.


Custodian

An organisation whose business includes record keeping about the existence and ownership of securities such as bonds.