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illyfrancis edited this page Jul 30, 2013 · 36 revisions

Global custody

For Funds (Mutual funds / Exchange traded funds)

Derivatives

  • Three categories

    • OTC - customized, bilateral agreements that transfer risk from one party to the other. OTC derivatives, are sometimes called swap agreements or swaps, are negotiated privately between the two parties and then booked directly with each other
    • Standardized, exchange-traded derivatives - listed derivatives or futures. In contrast with OTC derivatives, listed derivatives are executed over a centralized trading venue known as an exchange and then booked with a central counter party known as a clearing house.
    • Cleared derivatives, which like OTC derivatives are negotiated bilaterally but like listed derivatives are booked with a clearing house

  • Swap

    • A bilateral agreement to exchange cash flows at specified intervals (payment dates) during the agreed-upon life of the transaction (maturity or tenor). Entering a swap typically does not require the payment of a fee

  • Interest rate swaps

    • An agreement to exchange interest rate cash flows, calculated on a notional principal amount, at specified intervals (payment dates) during the life of the agreement. Each party's payment obligation is computed using a different interest rate. In an interest rate swap, the notional principal is never exchanged. Although there are no standardized swaps, a plain vanilla swap typically refers to a generic interest rate swap in which one party pays a fixed rate and one party pays a floating rate (usually Libor - The London Interbank Offered Rate).
    • Various [examples](http://www.fpml.org/spec/2003/wd-fpml-4-0-2003-08-04/html/fpml-4-0-examples.html#Interest Rate Derivative Examples) of IRS represented by FpML

  • CDS - credit default swap

    • A swap designed to transfer the credit exposure of fixed income products between parties. Also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the load. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default.

    • The buyer of a credit default swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the debt security. In doing so, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

    • An example with CDS buyer, Bond issuer, and CDS seller in this video

  • CDX - Credit default swap index

    • A credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is a completely standardized credit security and may therefore be more liquid and trade at a smaller bid-offer spread. This means that it can be cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it would be to buy many single name CDS to achieve a similar effect. Credit default swap indexes are benchmarks for protecting investors owning bonds against default and traders use them to speculate on changes in credit quality. (from wiki)

  • CDT or CXT - Credit default swap index Tranches

  • Tranches

    • From wiki
    • From investopedia
    • A piece, portion or slice of a deal or structured financing.

Standard deviation

  • variance (before sqrt), so higher the SD more risky it is
  • proper formula
  • Note Population Standard Deviation uses 1/N
  • Sample Standard Deviation uses 1/(N-1)
For example, using Sample SD formula
if the annual rate of return of a security over five terms
Given monthly returns of 2%, 7.5%, 1%, 6%, 1.5%
then the average is 3.6%

(3.6 - 2)^2 = 2.56
(3.6 - 7.5)^2 = 15.21
(3.6 - 1)^2 = 6.76
(3.6 - 6)^2 = 5.76
(3.6 - 1.5)^2 = 4.41

Sum = 34.7 / (5 terms - 1) = 8.675
sqrt(8.675) = 2.9 (standard deviation)

Mean value

  • Arithmatic mean - sum then divide : (a + b + c) / 3
  • Geometric mean - multiply all then take the root of number : (a * b * c)^(1/3)
  • The geometric mean takes previous values into account by linking them so it may be more relevant when averaging the funds performance etc

General

BIC
  • Bank identifier codes == Swift address or codes == ISO 9362
  • Format - 8 or 11 characters **** ** ** ***
    • Bankcode (4)
    • ISO3166-1alpha contry code (2)
    • Location code (2)
    • Branch code (3) - optional, 'XXX' for primary office
    • when given 8 chars, assume primary office
MIC
  • Market identification code - ISO 10383
  • Codes for exchanges and market identification, looks like ****
Transaction Status
  • RVP - receive versus payment
    • A settlement procedure in which an institutional sell order is accompanied by the requirement that cash only be accepted in exchange for delivery upon settlement of the financial transaction. Receive versus payment provisions arose when institutions were prohibited from paying money for securities until they held the securities and they were in negotiable form.
    • from the seller's perspective
    • investopedia
  • DVP - delivery versus payment
    • A securities industry settlement procedure in which the buyer's payment for securities is due at the time of delivery. Delivery versus payment (DVP) is a settlement system that stipulates that cash payment must be made prior to or simultaneously with the delivery of the security. Delivery versus payment is from the buyer's perspective; from the seller's perspective, this system is called receive versus payment (RVP). DVP/RVP requirements arose as a result of institutions being prohibited from paying money for securities before the securities were held in negotiable form.
    • investopedia

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