This glossary provides easy-to-understand definitions for common financial terms, perfect for anyone new to finance or looking to brush up on key concepts.

1. Settlement:
The process of completing a trade by transferring money from the buyer and securities from the seller. Think of it as the final payment and delivery step when purchasing an item online.

2. Trade Date:
The day a trade is agreed upon or executed between two parties. It's like the date you place an online order.

3. Settlement Date:
The day the trade is finalized and money or securities are exchanged. For example, if the trade date is Monday and the settlement is T+2, the settlement date is Wednesday.

4. CUSIP vs. ISIN:
Unique codes used to identify financial securities.

  • CUSIP (Committee on Uniform Securities Identification Procedures): Common in the U.S., identifies stocks and bonds. Think of it as a barcode for securities.
  • ISIN (International Securities Identification Number): Used globally to standardize security identification. Like an international passport for financial instruments.
  • SEDOL (Stock Exchange Daily Official List): A seven-character code used for securities listed on the London Stock Exchange.

5. T+1, T+2 & T+3 Settlement:
Settlement cycles where trades are finalized one, two, or three business days after the trade date. Most stock markets now use T+2.

6. Buy-In:
If a seller fails to deliver securities by the settlement date, the buyer purchases them from another source to complete the trade.

7. Broker:
A person or company that helps buyers and sellers trade financial products like stocks or bonds.

8. Clearing:
The process of ensuring that both the buyer and seller agree on the trade details before finalizing it.

9. Clearing House:
An institution that ensures trade settlements happen smoothly and reduces the risk of default by either party.

10. Counterparty:
The other person or institution involved in a trade. For example, if you buy stock, the seller is your counterparty.

11. Custodian:
A financial institution that securely holds assets for investors and ensures they are managed correctly.

12. Payment vs. Payment (PvP):
A system where payments between two parties are made simultaneously to reduce the risk of one side defaulting.

13. Delivery vs. Payment (DvP):
A settlement method where the buyer receives securities only when they make the payment. It's like paying cash on delivery when shopping online.

14. Free of Payment (FoP):
A settlement where securities are delivered without immediate payment. This may occur in cases such as transferring securities between accounts held by the same investor or for gifting securities.

15. Failed Trade:
When a trade is not completed on time due to missing funds or securities.

16. Matching:
A process where both parties in a trade confirm the trade details to ensure agreement before settling.

17. Confirmation:
Verifying and agreeing on the details of a trade, such as the price, quantity, and settlement date.

18. Trade Lifecycle:
The entire process of a trade, from placing the order to final settlement.

19. Reconciliation:
Comparing trade and settlement records to ensure there are no errors.

20. Collateral:
Assets pledged by one party to secure a financial transaction.

21. Cash Settlement:
A trade is settled by paying the difference between the agreed price and market value in cash rather than delivering the actual asset. Example: If you buy gold futures but don't want actual gold bars delivered, the difference between the contract price and market price is paid in cash instead.

22. Physical Settlement:
The actual delivery of the underlying asset (like stocks or bonds) instead of cash.

23. Brokerage Fee:
A fee charged by brokers for helping clients buy or sell securities.

24. SWIFT:
A secure global network used by banks to send financial transaction messages.

25. Trade Confirmation:
A document confirming the details of a trade, such as the price, settlement date, and number of securities.

26. Netting:
The process of offsetting payments between parties to reduce the total amount payable. Example: If Bank A owes Bank B $5,000, and Bank B owes Bank A $3,000, only $2,000 is transferred instead of two payments.

27. Futures Contract:
An agreement to buy or sell an asset at a predetermined price on a future date. Farmers often use it to lock in crop prices before harvest.

28. Over-the-Counter (OTC) Trade:
A trade conducted directly between two parties without an exchange.

29. Trade Execution:
The act of completing an order to buy or sell a security.

30. Securities Lending:
Temporarily lending securities to another party. Often used to facilitate short selling or provide liquidity. Example: A hedge fund borrows shares from an investor to sell them in anticipation of a price drop.

31. Depository:
A financial institution that holds securities in electronic form for investors and handles their transfer and safekeeping.

32. ISDA (International Swaps and Derivatives Association):
An organization that sets standard legal agreements for derivative trading globally. ISDA agreements help reduce risks and legal uncertainties in complex financial transactions.

33. Securitization:
The process of bundling financial assets (like mortgages) into securities that can be sold to investors.

34. Hedging:
A strategy to reduce or offset financial risks. Example: Buying gold to protect against currency depreciation.

35. Yield:
The income generated from an investment, usually expressed as a percentage of the investment's cost.

36. Risk Premium:
The extra return an investor demands for taking on additional risk.

37. Basis Point (BPS):
A unit of measurement for interest rates or financial percentages. One basis point is equal to 0.01%.

38. Swap:
A financial agreement where two parties exchange cash flows or liabilities. Example : An interest rate swap where a fixed rate is exchanged for a floating rate.