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Bond market: Glossary

Credit Market General Notions

Amortized loan - A loan with scheduled periodic payments that consist of both principal and interest.Balloon loan - A type of loan that does not fully amortize over its term. Since it is not fully amortized, a balloon payment (loan payment that is much larger than the other payments) is required at the end of the term to repay the remaining principal balance of the loan.Bridge loan - A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. to pay back) the bridge loan, as well as other capitalization needs. Bridge loans are typically more expensive than conventional financing because of a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other "sweeteners" (such as equity participation by the lender in some loans). To compensate for the additional risk the lender may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.Bullet loan - Type of balloon loan in which only interest is paid for the duration of loan; the principal is paid at the end of the loan as one lump sum payment.Club loan - Loan which is syndicated by the borrower, acting as arranger and agent of its own deal and using its relationship banks. There may be different structures, but documentation will be identical with the different banks.Cross-border loans - Cross-border loans are any loan agreements entered into by the lender and the borrower (or the borrower and several lenders) registered in different jurisdictions.Multi-currency loan - Financing provided with the option of using different currenciesPre-export financing - Funds advanced by a lending institution against confirmed orders from qualified foreign buyers to enable the exporter to make and supply ordered goods. Usually, the exporter arranges a commitment from the buyer to make the payment directly to the lender.Revolver, revolving loan - Banking arrangement which allows for the loan amount to be withdrawn, repaid, and redrawn again in any manner and any number of times, until the arrangement expires.Secured loan - Loan agreement under which a borrower pledges a specific asset or property which the lender can seize in case of default.Subordinated loan - Loan which ranks after other debt. These loans will normally be repayable after other debt has been serviced and are thus more risky from the lender’s point of viewSyndicated loan - A syndicated loan (or "syndicated facility") is a large loan in which a group of banks work together to provide funds for a borrower. There are typically more than 2 banks involved in a syndication. There is usually one or more lead bank that takes a percentage of the loan and syndicates the rest to other banks. A syndicated loan is the opposite of a bilateral loan, which only involves one borrower and one lender (often a bank or financial institution.) A syndicated loan is a much larger and more complicated version of a participation loan.Syndicated loan tranche - - is a part of funds provided in the form of a syndicated loan. Different tranches of one loan can be denominated in different currencies, have different interest rates, tenors and other material parameters defined by organizers.Term loan - Short-term (usually for one to five years) loan payable in a fixed number of equal installments (usually semiannually) over the term of the loan.

Rates of Interest

Bank Rate of The Bank of England - The official bank rate (also called the Bank of England base rate or BOEBR) is the interest rate that the Bank of England charges Banks for secured overnight lending. It is the British Government’s key interest rate for enacting monetary policy. It is more analogous to the US discount rate than to the Federal funds rate. The security for the lending can be any of a list of eligible securities (commonly Gilts) and are transacted as overnight repurchase agreements. Changes are recommended by the Monetary Policy Committee and enacted by the Governor.Basis point (bp) - is a one hundredth part of a percent (%).Basis rate - Basis rate is the indicator, which the margin is added to or subtracted from, to determine the final rate of the loanEURIBOR - Euribor is short for Euro Interbank Offered Rate. The Euribor rates are based on the average interest rates at which a large panel of European banks borrow funds from one another. There are different maturities, ranging from one week to one year. The Euribor rates are considered to be the most important reference rates in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving accounts and mortgages. That’s the exact reason why many professionals as well as individuals do monitor the development of the Euribor rates intensively.

EURIBOR rates are published one business day delay inIndices section, Index type: Interest rates Indicators: EURIBOR.
Federal funds rate - In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate. The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.LIBOR - The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is the primary benchmark for short term interest rates around the world.

LIBOR rates are published with weekly delay in Indices section, Index type: Interest rates Indicators: LIBOR.
LIBOR replacement -

Reform of LIBOR – replacement of LIBOR rates with credit risk for the alternative risk-free rates or near risk-free rates: risk-free rate or near risk-free rate.

It is possible to identify three most important reasons for this reform. Firstly, it is impossible to solve the issue of manipulating the values of interbank rates by LIBOR participating banks. Secondly, it is a high degree of LIBOR dependence on expert judgments, rather than on actual transactions (according to the US Federal Reserve, the daily volume of three-month borrowings is USD 500 mln). Finally, the third reason is the impact of LIBOR on financial stability.

The LIBOR alternative was selected by five advisory councils for the five largest world currencies: US dollar, Euro, Yen, Swiss Franc and British Pound.

In 2017 in the US, the Alternative Reference Rates Committee selected SOFR a rate, which will replace USD LIBOR and will be used in all contracts. At the moment, the Committee is developing an action plan for the transition from USD LIBOR to SOFR.

In 2017 in the UK, the Working Group on Sterling Risk Free Reference Rates recommended to use the rate SONIA as a replacement for GBP LIBOR. In 2018, reforms of SONIA were carried out for a more correct and complete calculation and compliance with the best practices of IOSCO.

In 2017 in Switzerland, the National Working Group on Swiss Franc Reference Rates recommended the SARON rate as an alternative to CHF LIBOR. Starting from June 13, 2019, the National Bank focuses only on the new benchmark SARON and sets the boundaries of its fluctuations. Switzerland became the first country where the regulatory authority began to use the new risk-free rate as a tool of its monetary policy.

In 2016, the Working Group on Risk Free Reference Rates of Japan decided that TONA would replace JPY LIBOR, JPY TIBOR, EUROYEN TIBOR.

More recently than in other countries, work has begun to identify and replace risk rates in euros. In 2018, the Working Group on Euro Risk-Free Rate developed the new benchmark called ESTR (€STR) as a new money market rate that will be an alternative to the three rates: EUR LIBOR, EURIBOR, EONIA.

It is impossible to waive LIBOR without creation of the fixed-period instruments, where the underlying asset is a risk-free rate. In this regard, the financial industry is actively developing new instruments and bringing them to the markets. In December 2017, the ICE launched SONIA futures, and in October 2018 – SOFR futures. In May 2018, the SOFR futures were listed on the CME exchange. In October 2018, the CME exchange started trading in SONIA futures. In October 2018, CME became the world’s first platform to start regular clearing of OTC SOFR swaps, with a maximum contract duration of 30 years. The contract terms allow the exchange of fixed payments in lieu of SOFR, as well as payments in USD LIBOR against SOFR and the effective federal funds rate (EFFR) against SOFR. In October 2017, LCH started clearing of interest rate swaps based on SARON. EUREX was the first to launch SARON futures trading in 2018.

It is anticipated that the publication of LIBOR rates may be stopped from 2022. All working groups and market participants are working to ensure that the full transition to alternative rates does not lead to losses on LIBOR instruments.

The first issue of FRN bonds based on a risk-free rate was held by the European Investment Bank in June 2018. This is a 5Y issue at GBP 1 bln, the interest rate depends on SONIA+0.35%. This was followed by the issues from the US government agency Fannie Mae with reference to SOFR in July 2018 (with maturity of 0.5 years, 1 year, 1.5 years). Then new issues in SOFR and SONIA started to appear several times a month.

Margin - Margin is a fixed part of the floating interest rate. For example, if the rate is 50bp over LIBOR, the Margin is 50bpMosPrime Rate - MosPrime Rate is the National Foreign Exchange Association (NFEA) fixing of the reference rate based on the offer rates of Russian Rouble deposits as quoted by the leading participants of the Russian money market to first class financial institutions. MosPrime Rate is an independent indicative rateNear-Risk Free Rates - Near-Risk Free Rates (RFRs) are overnight benchmark rates based on real transactions and linked to the money market. RFRs are also often related to as simply “risk free rates”.

The daily publication of Interbank Offered Rates (IBORs), which are most commonly used as benchmarks to date, relies on financial institution’s estimation, which makes IBORs dependent on an expert judgment and, hence, highly subjective. Since such uncertainty represents a serious systemic vulnerability, there is a demand for alternative benchmark rates. The main reason for implementing RFRs into global financial markets system is providing better governance and oversight around major interest rate benchmarks.

Some jurisdictions suggest unsecured funding (UK, EU, Japan) rather than secured funding alternatives (US, Switzerland). Yet, the credit risk of parties involved is negligible for overnight terms.

The selected alternative RFRs are reformed: Euro Short Term Rate (€STR) for euro, Sterling Overnight Index Average (SONIA) for sterling, Swiss Average Rate Overnight (SARON) for Swiss franc, Secured Overnight Financing Rate (SOFR) for US dollar and JPY Overnight Unsecured Rate (TONA) for yen.

Most of experts believe the worldwide transition from IBORs to RFRs can not be completed earlier than 2021.
Overnight Call RateTarget of Bank of Japan - The BOJ introduces regularly scheduled monetary policy meetings and the publication of meeting minutes beginning in 1998. Before 1998 till 1972, the target rate is updated weekly.Refinancing Tender Rate - The Governing Council of the ECB sets the key interest rates (Refinancing Tender) for the euro areaSARON -

SARON (Swiss Average Rate Overnight) is a weighted average interest rate of the secured funding in Swiss francs. The rate reflects real transactions and quotes for repo transactions in Switzerland, which are concluded on SIX Swiss Exchange.

SARON was created on August 25, 2009 with historical data available since June 30, 1999.

SARON is continually calculated in real time and published every 10 minutes. In addition, SIX publishes SARON fixing at 12:00, 16:00 and on closing at 18:00. The average daily trading volume in 2018 was around CHF 3.2 billion.

In 2017, the National Working Group on the Reference Rate, representing the participants of the Swiss financial market, proposed SARON as an alternative as part of the LIBOR CHF reform. This measure is a step towards the transition to risk-free rates as part of the global reform of interest rate benchmarks.

It is believed that SARON is a better indicator than CHF LIBOR, since SARON reflects both concluded transactions and binding quotes on the Swiss repo market.

Until June 13, 2019, the Swiss National Bank set the upper and lower limits for the fluctuation of the three-month CHF LIBOR, but now the regulator takes into account only the new SARON benchmark and sets the limits for its fluctuations.

Switzerland was the first country where the regulator began to use the new risk-free rate as an instrument of its monetary policy. In October 2017, the LCH clearing platform began to clear SARON interest rate swaps, and in 2018, the largest exchanges EUREX and ICE Futures Europe launched futures trading.

In September 2019, Credit Suisse Group issued first SARON-linked bonds on the Swiss market. These are Tier 1 bonds, which pay a fixed rate of 3% until 2025, and then the rate is SARON + 3.957%.

SOFR - The Secured Overnight Financing Rate (SOFR) is a near-risk free rate measuring the cost of borrowing cash overnight collateralized by Treasury securities.

While most LIBOR submissions are still based on expert judgment, the SOFR is fully transacted-based, with Bank of New York Mellon (BNYM) and the Depository Trust and Clearing Corporation (DTCC) providing transaction-level data for three repo market segments: General Tri-Party, Inter-dealer Tri-Party and FICC-Cleared Bilateral. This reference rate encompasses a robust underlying market, is nearly risk-free and correlates closely with other money market rates, but less volative than banks rates (e.g. LIBOR).

Each business day, the Federal Reserve Bank of New York calculates and publishes the SOFR at approximately 8:00-8:30 a.m.

First SOFR linked bonds were issued by the GSE Fannie Mae in July 2018 (with maturity of 0.5 years, 1 year, 1.5 years).

SOFR rates are published one business day delay in Indices section, Index type: Interest rates Indicators: SOFR.

SONIA (the Sterling Over Night Interest Average) is the representative of the risk-free rate and a successor to GBP LIBOR.

SONIA is the amount of interest paid overnight on obligations with minimal credit risk, liquidity risk and other risks. SONIA is calculated every business day in London based on the transactions entered into between the financial institutions. The rate administrator is the Bank of England. The calculation methodology was approved on April 23, 2018 after several meetings with market participants.

The first issue of FRN bonds based on SONIA was held by the European Investment Bank in June 2018. This is a 5Y issue at GBP 1 bln, the interest rate depends on SONIA+0.35%.

Some issuers amends terms of outstanding LIBOR linked floates and change rates to daily compounded SONIA, for instance after bondholders approving LLOYDS BANK effective on October 7, 2019 change the terms of its covered bond issue maturing in 2024.WIBOR - Warsaw Interbank Offered Rate€STR -

€STR(Euro Short-Term Rate), formerly called ESTER, is a rate that reflects the weighted average cost of unsecured overnight borrowing in the interbank market of the euro area.

In 2018, €STR was proposed as a new risk-free rate of the money market, which replaces three risk rates: EUR LIBOR, EURIBOR, EONIA. Replacement of the rate is related to the ongoing reform of benchmarks in the world.

Despite the fact that the rate was developed in 2018, its first publication took place only on October 2, 2019. Until that moment, pre-€STR was published – a rate calculated on the basis of data and methodology of the “real” €STR.

The €STR is administered by the European Central Bank. The ECB collects statistical information on money market activities in the European Monetary Union and publishes it in the MMSR. The €STR is calculated on the basis of the weighted average volume of transactions of 50 MMSR participating banks, trimmed by 25% of the top and bottom limits of the volume. A proportional calculation is applied to volumes that overlap with trimming thresholds to ensure that exactly 50% of the total allowable volume is used when calculating the weighted average volume.

The European Central Bank publishes the €STR of the previous business day on the next business day at 08:00 CET (TARGET2 calendar).

In 2019, the average daily volume of transactions on the basis of which the pre-€STR was calculated amounted to EUR 37 billion. This is more than 15 times the size of the EONIA transaction market. On average, pre-€STR is lower than EONIA by 8.5 bps.

Compared to EONIA, the €STR is more stable due to the larger number of participating banks, the larger volume of transactions and the trimmed volume principle when calculating the rate value. Besides that, among the features of the €STR, the opposite effect of the end of the month can be distinguished – the value of €STR falls at the end of the month, while the value of EONIA grows.

The London Clearing House will start clearing the €STR swaps on October 21, 2019.

A transition to discounting the fixed-period instruments at the €STR is scheduled for the second quarter of 2020.

FRNs based on the risk-free €STR were issued for the first time by the issuer Landeskreditbank Baden-Wurttemberg in September 2019. This is a 2-year issue for EUR 250 million, the interest rate depends on €STR + 2%.

Market participants

Agent - Agent is the bank responsible for the loan management after the facility is signedArranger - Arranger is typically a bank responsible for preparation of the deal, negotiating the loan terms with the borrower and syndicating it to the other participants. The Arranger can also act as an agent or one of the syndication participantsAsian Development Bank - is a regional financial long-term lending institution of development projects in Asia and the Pacific. It was established in 1966 with headquarters in Manila (Philippines). Its members include 45 countries, 29 of which are the countries of Western Europe and America.Bank for International Settlements - is a clearing house, acting on a joint basis. The shareholders are central banks of foreign exchange markets. Bank for International Settlements is the main meeting place for central bank governors. Settlements are carried out in Swiss gold francs, the dividend is paid annually in U.S. dollars at the exchange rate of the currency market in Zurich.Bookrunner - A bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in equity, debt, or hybrid securities issuances. The bookrunner usually syndicates with other investment banks in order to lower its risk. The bookrunner is listed first among all underwriters participating in the issuance.Clearstream - is an international clearing system located in Europe, which provides storage, clearing and settlement of transactions with international securities; it was established in 2000 as a result of a merge of Cedel and Clearinghouse Deutsche Boerse Clearing; since July 2002 it has completely come under management of Deutsche Boerse AG. The system comprises three branches: Clearstream Banking Frankfurt, Clearstream Banking Luxembourg and Clearstream Services.Depository - is a professional participant of the security market, performing services on storage of securities certificates and / or registration and transfer of securities title. In Russia, only a legal entity can function as a depository. Historically, the term “Depository" was identified with the bank safe, where values were deposited. Due to the rapid growth of security market, issues of a large number of different securities have become the main object of depository activities.Euroclear - is a system for the settlement of securities (bonds, shares, fund units) transactions in the domestic and international markets. It provides settlement services to major financial institutions located in more than 80 countries. It was established in 1968 in Brussels; group of companies Euroclear Group comprises Euroclear plc., Euroclear Bank and Euroclear France. In September 2002, British Euroclear merged with the settlement organization CrestCo.European Bank for Reconstruction and Development - (EBRD) is a regional interstate bank for long-term lending to countries in Central and Eastern Europe. It was established in 1991. The location is in London.

A list of all outstanding bonds of the EBRD is available at bonds search section.
Financial advisor - A financial advisor provides financial advice or guidance to customers for compensation. Financial advisors, or advisers, can provide many different services, such as investment management, income tax preparation and estate planning.Financial Industry Regulatory Authority (FINRA) - In the United States, the Financial Industry Regulatory Authority, Inc. (FINRA) is a private not-for-profit corporation that acts as a self-regulatory organization. FINRA is the member regulation, enforcement, and arbitration operations of member brokerage-dealership firms and exchange markets. The government agency which acts as the ultimate regulator of the securities industry, including FINRA, is the Securities and Exchange Commission.Foreign bank branch -

Very often huge banks, which operate in some countries in different time and currency zones issue notes acting through its foreign branches in another country for certain legal (for instance tax), administrative and regulatory reasons, including (without limitation) to facilitate timely access to funding markets. In these cases interest payments maybe subject to applicable tax laws and regulations of the country of a branch location.

A branch is not a subsidiary and does not comprise a separate legal entity. The obligations under the notes issued by an issuer acting through its foreign branch are of an issuer only, and investors’ claims under notes are only against an issuer.

Foreign branch is obligated to follow the regulations of both the home and host countries, operating in the country.

Bank of China, which is regulated by the People’s Bank of China has got branches in European, Asian and American financial centres to fund its foreign currency needs in EUR, USD, JPY needs. Another example is Credit Suisse AG acting through its London branch.

Guarantor - A guarantor - is a party who guarantees to provide payment on a bond, loan, or other liability in the event of default. A guarantor acts as a co-signor of sorts, in that they pledge their own assets or services if a situation arises in which the original debtor cannot perform their obligations. Guarantors reduce the risk to loans and liabilities, and usually improve the credit ratings of bonds.International Finance Corporation - is an independent branch of the World Bank, formed in 1971 for investments in the private sector of the countries, following the privatization path.Investor - is any person who commits capital with the expectation of financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement, such as with an annuity.Issuer - A legal entity that develops, registers and sells securities for the purpose of financing its operations.Market maker - is a broker-dealer firm that assumes the risk of holding a certain number of bonds of a particular security in order to facilitate the trading of that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of bonds, and once an order is received from a buyer, the market maker immediately sells from its own inventory or seeks an offsetting order.MILA - MILA (The Mercado Integrado Latinoamericano) is a platform that integrates the depositories and stock exchanges in Chile, Colombia, Mexico, and Peru. It was officially launched on May 30, 2011. The purpose of its creation is the development of the financial markets of member countries by providing investors with a wider choice of securities, issuers, and larger sources of financing.Paying agent - Paying agent - an institution, usually an investment bank, that accepts funds from the issuer of a security and distributes them to that security’s holders. In bonds, it receives coupon payments, which it then gives to bondholders. A paying agent acts as an intermediary in these transactions, and receives a fee for these services.Rating Agency - is a profit organization providing the assessment of the issuers’ solvency, debt obligations, corporate governance quality, asset management quality, etc. The most well-known product of Rating Agencies is the assessment of solvency - credit rating. It reflects the risk of non-payment of a debt obligation and affects the interest rate, cost and debt obligation yield. In this case, a higher rating corresponds to a lower risk of non-payment.SPV or SPE - A special purpose vehicle (SPV) or special purpose entity (SPE) is a company that is created solely for a particular financial transaction or series of transactions.Stock Exchange - is an organization that provides some facilities: security exchange, IPO.The aim of the stock exchange is to help buyers of the stock find sellers of the stock. The big exchanges are LSE, NYSE, Nasdaq, Frankfurt Stock Exchange, Tokyo Stock Exchange, Shanghai Stock Exchange.Surety - An individual or corporation that guarantees the performance or actions of another. A surety , as a general rule, is a party to the original contract of the principal, he signs his name to the original agreement at the same time the principal signs, and the consideration for the principal’s contract is the consideration for the agreement of the surety’s. The surety is therefore bound on his contract from the very beginning, and he is bound also to inform himself of the defaults of the principal debtor, and he is not in any part relieved from his obligations under the contract by the creditor’s failure to inform him of the principal’s default in the contract, for which contract the surety has become the security for.Syndicate - is a group of financial institutions, organized to carry out a particular transaction – an extention of a credit, placement of a bond issue.Syndication participant - Syndication participant is one of the banks providing the syndicated facilityThe United States Securities and Exchange Commission (SEC) - The Securities and Exchange Commission (SEC) is an independent agency of the United States federal government. The SEC holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry, exchanges, and other activities and organizations, including the electronic securities markets in the United States. The mission of SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.Underwriter - is a company or other legal entity that manages the securities issue and their distribution. Underwriter guarantees the issuer the revenue from the sale of securities, and actually buys securities. Typically, an investment bank acts as an underwriter.
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