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2010 : Fifth Edition
About Sapient Global Markets
Sapient Global Markets, a division of Sapient, is a leading
provider of services to today’s evolving financial and
commodity markets. We provide a full range of capabilities
to help our clients grow and enhance their businesses,
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How to use this reference guide

Entries are in alphabetical order. Within the guide, capitalised
words and phrases denote a term that is defined in the
relevant asset specific ISDA® Definitions, Supplements,
Protocols or other official ISDA® publication. Words or phrases
in red font denote cross references to entries that are
defined elsewhere in the guide.

sapientglobalmarkets.com
A
Abandonment
The process by which a counterparty will allow an option to
expire or lapse unexercised.

Accreting swap
A swap with an increasing notional as set out in a predefined
schedule.

Accrued interest
The interest which is accumulated on a security, either from the
date of issue or the previous coupon payment, to the present.
The accrued interest will be paid at determined payment intervals
throughout the life of the transaction.

Accumulator
A physically settled equity forward transaction where the future
number of Shares to be delivered is not known at trade inception.
The stock to be delivered accrues on a daily basis until either the
Share price breaches a pre-defined barrier, or a maximum
number of Scheduled Trading Days is reached.

Actualisation
Actualisation is the process of updating a physical gas or power
transaction to reflect the exact volume delivered. In the gas and
power markets, actual metered volumes may not be known
until several months after delivery.

Adherence
The process by which market participants sign up to an ISDA
protocol or to certain trade event processing within the Trade
Information Warehouse.

Adjustment Amount
A penalty amount paid to ISDA® for the submission of off-market
bids into a Credit Event Auction. If the Open Interest is to sell,
high bids are penalised. If the Open Interest is to buy, low offers
are penalised.

1
Administration
A UK bankruptcy process in which a company will appoint a
third party administrator to conduct an orderly wind-down
of the business.

Affirmation
The process by which two counterparties verify that they
agree the primary economics of a trade. The affirmation
process may be done by telephone, voice recording, email
or electronic checkout platform.

All in cost
The cost of funds in a bond issue after fees and expenses.

Allocation
The process by which a block trade is executed by an asset
manager or hedge fund, and is then divided (allocated) to
individual funds managed by that fund manager.

Alpha
A risk adjusted measure of investment fund performance. Alpha
measures the excess of return over the level of risk borne.

Alt A
A classification of a subset of US residential mortgages. Alt A
mortgages are taken out by borrowers with a credit risk profile
between prime and subprime customers.

Altiplano
A mountain range option where the buyer receives a large
fixed coupon if none of the underlying assets in the basket
breaches a pre-determined barrier during a pre-determined
time period. If one of the underlying assets does breach the
barrier, the buyer receives the payout of either a plain vanilla
or Asian call on the basket.

American Depository Receipt (ADR)

See See depository receipt.

2
American option
An option that can be exercised at any time during the term of
the option, up to and including its Expiration Date.

Amortising swap
A swap with a decreasing notional, as set out in a predefined
schedule.

Ancillary services
Ancillary services are designed to maintain the stability and
reliability of the power supply grid. Example services include
spinning reserves, non-spinning reserves, replacement
reserves, frequency responses and black-start agreements
which allow the interruption of supply.

Annapurna
A mountain range option where the buyer only receives a payout
if none of the underlying assets in the basket ever fall below a
pre-determined barrier during a pre-determined time period.

API#2
A pricing index for steam coal reflecting physical trades for
delivery to the Amsterdam-Rotterdam-Antwerp region.
A primary reference index for OTC financial swap trades.

API#4
A pricing index for physical steam coal traded FOB (free on
board) Richards Bay. A common reference index for OTC
financial swap trades.

APX
APX Group, a European energy exchange, operating markets
for electricity and natural gas in the Netherlands, the UK
and Belgium.

Arbitrage
A strategy to take advantage of profitable opportunities in
different markets arising from differential price anomalies.

3
Asian option
See average rate option.

Ask
See offer/ask price.

Asset Backed Security (ABS)

A type of bond or note typically issued by a Special Purpose
Vehicle (SPV) where the bond or note is backed by an underlying
pool of assets. The principal and interest generated by the
underlying pool of assets services the principal and interest
obligations of the bonds or notes.

Asset swap
A structure involving both the sale of an asset to a counterparty
and an Interest Rate Swap, packaged into a single transaction.
In the case of bonds, the asset will usually be a Fixed Rate
instrument where the investor is seeking a Floating Rate return.
The investment bank will therefore package the Fixed Rate bond
with an Interest Rate Swap, swapping the fixed return on the
bond for a floating return, thereby providing the investor with a
synthetic floating asset.

Assignment
The process by which one counterparty (Transferor) agrees to
transfer to a third party (Transferee) its obligations under an
existing transaction they have with another counterparty
(Remaining Party), (see also Novation and Stepping-in/out).

Associated gas
Natural gas found in a crude oil reservoir and extracted
together with the oil.

Atlas
A mountain range option where the best and worst-performing
underlying assets are removed from the basket and the payout
is calculated from performances of the remaining underlying
assets in the basket.

4
Attachment point
The trigger point at which a tranche becomes exposed to losses
in the underlying portfolio. For example, the notional in a tranche
with an attachment point of 3% will reduce after a cumulative
loss of 3% in the underlying portfolio has occurred.

At the money
An option where the exercise price is equal, or very close to, the
current market price of the underlying instrument. This option
has no intrinsic value.

Auction Date
The date on which a Credit Event Auction takes place.

Auction-Settled Transaction
A credit derivative transaction which is cash settled with
reference to the Final Price, as determined in the Credit
Event Auction.

Auto adherence
The automatic submission of a portfolio of transactions into the
processing of a lifecycle event within the Trade Information
Warehouse. Auto adherence requires a positive request by the
counterparties for a transaction to be included in processing
the relevant event, whereas auto-auto adherence involves trades
being selected for processing by the Warehouse.

Auto callable
An exotic option which terminates and pays an enhanced
return if a defined barrier level is breached on a pre-defined
date. Auto callable trades are often used to hedge equity
linked notes.

Automatic Exercise
A commonly used election whereby an option or Swaption
transaction is deemed to be exercised, provided that it is
In-the-money on the Exercise Date without the need to
serve notice.

5
Averaging Date Disruption
A term defined in the 2002 ISDA Equity Derivative Definitions,
to describe how averaging dates are adjusted if they are subject
to a Market Disruption Event. There are three possible elections:
Postponement, Modified Postponement and Omission.

Average rate option

An option where the settlement is based on the difference
between the Strike Price and the average price of the underlying
instrument over a predetermined period. An average rate option
is also known as an Asian option.

Average strike option

An option where the Strike Price is calculated as the average
of a defined number of observations of the average price of the
underlying instrument over a predetermined period.

B
Backloading
The process of inputting existing outstanding OTC transactions
into a trade repository or warehouse.

Backwardation
A condition in which prices for delivery of a commodity are lower
in the succeeding delivery months than in the immediate delivery
month. It is also used in the futures market to describe an
inverted forward curve. The opposite of contango.

Bad (non working) Business Day

A day on which it is not possible to make payments, or days on
which banks are not open for business. Exchanges are normally
closed on Bad Business Days.

Balancing mechanism
A means of ensuring that supply and demand stay balanced in
an electricity grid or natural gas pipeline network.

6
Baltic Exchange
The exchange providing daily freight market prices and
maritime shipping cost indices which are used to settle
forward freight agreements.

Banker’s acceptance
A short term credit instrument used in the international
commodity markets. Issued by a non-financial firm, the
payment of the acceptance is guaranteed by a bank.

Bankruptcy
One of three market standard Credit Events, applicable in the
majority of credit default swaps where the Reference Entity is
a corporate (Bankruptcy does not apply to Sovereign names).
Bankruptcy events include the Reference Entity being dissolved,
becoming insolvent, making an arrangement for the benefit of
its creditors, being wound up, seeking the appointment of an
administrator, liquidator, conservator or other similar official
or having a judgment of insolvency made against it.

Barrel (bbl)
A measure of volume for crude oil and petroleum products.
A barrel, US barrel and standard barrel are all equal to 42
US gallons.

Barrier option
An option which can be exercised (1) if the price of the underlying
instrument has not reached or crossed a predetermined level; or
(2) only if the price of the underlying instrument has reached or
crossed a predetermined level, (see also Knock-in/out).

Baseload contract
A contract for power delivered at a constant rate throughout
the day over a defined period.

Basis (Gross)
The difference between the relevant cash instrument price and
the futures price. Often used in the context of hedging the cash
instrument.

7
Basis (Value or Net)
The difference between the gross basis and the carry.

Basis point
One basis point is one hundredth of one percent, or 0.01%.

Basis risk
The risk of loss arising from the difference between the
economic or legal terms of two derivative transactions that
are intended to hedge each other.

Basis swap
An Interest Rate Swap where the cash flows that are exchanged
between each party are different types of Floating Rates or prices.

Basket
A bespoke, synthetic portfolio of underlying assets whose
components have been agreed for a specific OTC derivative
by the parties to such transaction.

Basket option
An option on the weighted average of several underlying
instruments.

Bermudan option
An option that can be exercised on a number of specific dates
within the Exercise Period.

Bespoke CDO/Bespoke tranche

A synthetic CDO in which the investor is able to select
the names in the reference portfolio, the attachment and
detachment points, or other trade details.

Bid price
The price at which a trader or market maker is willing to
purchase a contract.

Binary settlement
A payout under a derivative contract that is a fixed amount.
This is also known as digital settlement.

8
Biomass Energy
Energy produced by the combustion of plants, vegetation or
agricultural waste.

Black-Scholes model
A complex mathematical model used to determine the price of
European put or call options. The inputs to a Black-Scholes
model are; Strike Price, current price of the underlying, time
to maturity, volatility and the level of interest rates.

Block trade
A single trade transacted by an asset manager or hedge fund,
which is then allocated to a number of different funds managed
by that fund manager.

Bond
A certificate of debt, generally long-term, under the terms of
which an issuer contracts to pay the holder a fixed principal
amount on a stated future date and, usually, a series of interest
payments during its life.

Bond Basis
An interest calculation using 30 days in each month and 360
days in each year. Many eurobonds use this as the basis on
which interest is calculated. A Bond Basis could also involve
a Day Count Fraction which counts the actual number of days
elapsed (Actual/Actual). This is the method used by the US
Treasury for interest calculations involving US Treasury notes
and US Treasury bonds.

Bonus issue
An offer by an issuer to existing shareholders of free additional
shares. Companies may use this corporate action as an
alternative to paying a dividend amount.

Borrowed Money
A category of debt obligation. Typically a credit default swap
will reference the senior unsecured debt of the Reference Entity.
Borrowed Money is a broader category of debt relating to any
funds that have been borrowed by the Reference Entity.

9
Brent blend crude oil
UK Brent blend is a blend of crude oil from various fields in
the North Sea between Scotland and Norway. It is used as a
benchmark for the pricing of much of the world’s crude oil
production.

British Thermal Unit (Btu)

A unit of energy defined by the amount of heat required to raise
the temperature of 1lb of water by 1° Fahrenheit (technically
from 60°F to 61°F). It is used to compare the heat producing
value of different fuels.

Bulk Events
A transaction life-cycle event affecting multiple trades in the
Trade Information Warehouse.

Bullion
Precious metals cast into bars or other non-coin forms.

Business Day Convention

The convention for adjusting any relevant dates which fall on a
bad Business Day.

Butterfly
An option trading strategy involving three option positions with
three separate Strike Prices but the same Expiration Date. The
combination is designed to create a potential gain greater than
the potential loss, although both up-side and down-side are
limited. The number of options in Leg 2 is double that of the
positions taken in Legs 1 and 3, with a Strike Price exactly
intermediate between them. Butterfly structures can also be
traded in the form of swaps.

Buy-side
Investment managers who buy and sell assets and/or enter
into OTC derivative transactions with market-making firms
(the Sell-Side).

10
C
Calculation Agent
The party designated as such in relation to an OTC derivative
transaction. The Calculation Agent acts in good faith and a
commercially reasonable manner to make determinations
relating to any adjustments, disruptions, valuations and
settlements that occur throughout the life of the transaction.
In most cases the Calculation Agent will be one of the parties
to the transaction. The Calculation Agent will usually be a
professional market maker (for example an investment bank).
If both parties to the transaction are market makers then they
can be both deemed joint Calculation Agents and all
determinations will need to be agreed by both parties.

Calculation Period
The number of days between Payment Dates, or between the
Effective Date and the first Payment Date.

Calendar spread
See horizontal spread.

Call option
An option which gives the buyer (holder) the right, but not the
obligation, to buy a specified asset on or before a specified
date.
For physical settlement, the seller (writer) of the option has
the obligation to deliver the underlying asset, at the Strike
Price, if the buyer exercises the option. For cash settlement,
the seller compensates the buyer for the difference between
the underlying price at exercise and the Strike Price.

Call-Put parity
A term used to describe the equivalence of European call and
put options on the same underlying, maturity and Strike Price
when trading a delta neutral portfolio (a portfolio consisting of
offsetting positive and negative delta positions). Call-Put parity
allows traders to create a position equivalent to owning the
underlying stock. An absence of Call-Put parity creates
arbitrage opportunities.

11
Cap
An upper limit placed on the payoff of a trade, limiting the
upside to the buyer and thus the downside to the seller.

Cap and trade

A policy within the EU Emissions Trading Scheme (EU ETS)
which permits an overall limit on the amount of emissions and
allows the trading of emission allowances between participants
of the scheme within the overall cap.

Capacity
The rated load carrying capability of electrical equipment
such as generators or transmission lines. Capacity is
typically expressed in megawatts.

Carbon sequestration
The process of capturing and storing carbon dioxide at the point
of combustion in order to prevent it reaching the atmosphere.

Capitalisation issue
See bonus issue.

Carry (Net financing cost)

The difference between the cost of financing the purchase of
an asset and the cash yield of the asset. Positive carry means
that the yield earned is greater than the financing cost;
negative
carry means that the financing cost exceeds the yield earned.

Carry Forward
A clause in a physical gas contract allowing the buyer to carry
forward gas they have taken in excess of the contract quantity
for future use. The buyer may use the carry forward to offset
the take or pay obligation, although there may be a limit to the
amount of carry forward allowed in any given contract period.

Carry trade
A trade or strategy where the aim is to generate ongoing
positive cashflow.

12
Cascading
The splitting up of a forward contract into a series of shorter
term contracts some time prior to expiry.

Cash CDO (Collateralised Debt Obligation)

A structured credit derivative transaction where the underlying
is typically a portfolio of bonds or loans, sold to an SPV which
then issues tranched securities offering differing risk-reward
characteristics.

Cash market
The market where the physical (non derivative) asset is traded.
For example, foreign exchange, bonds or equities.

Cash Settlement
The discharge of an obligation by payment or receipt of a net
cash amount instead of delivery of the physical asset.

CDO2
A CDO structure where the underlying portfolio is made up of
one or more CDOs, or tranches of CDOs.

CDS Index tranche

A synthetic collateralised debt obligation (CDO) based on a credit
default swap Index where each tranche (equity, mezzanine,
senior, and super senior) references a different segment of
the loss distribution of the underlying credit default swap Index.

Central Clearing Counterparty (CCP)

An organisation that becomes the central counterparty to all
transactions executed in a specific market. Central
counterparties reduce bilateral counterparty credit risk.

Central settlement (credit derivatives)

A process by which DTCC will settle cash movements and fees
on eligible credit derivative trades using Continuous Linked
Settlement (CLS® Bank). DTCC, via CLS, will net these payments
to one net payment per currency per counterparty for a given
value date.

13
Certified Emission Reduction (CER)
A climate credit issued by the Clean Development Mechanism
(CDM) of the Kyoto Protocol.

Chapter 7
A bankruptcy proceeding under US law where a company
ceases trading. A trustee is appointed to liquidate the assets
of the company in order to meet the claims of creditors.

Chapter 11
A form of US bankruptcy that involves the reorganisation of
the business affairs, assets and debts of a bankrupt company.
Otherwise known as bankruptcy protection, it is generally filed
by corporations who may be able to restructure their business
and emerge later as a going concern.

Chapter 15
A US bankruptcy proceeding catering for cross border
bankruptcies.

Charter party
A contract under which the owner of a vessel (ship) leases
or hires a charterer for a fixed period of time or a set number
of voyages. Normally, the vessel owner retains the rights of
possession and control, while the charterer has the right to
choose the ports of call.

Cheapest to deliver
The security which is delivered in physical settlement of a
derivative trade at the lowest cost to the deliverer.

Cherry picking
The process whereby courts uphold transactions favourable to
a bankrupt company and the simultaneous annulment of those
transactions that are unfavourable.

14
Clean Development Mechanism (CDM)
An arrangement under the Kyoto Protocol whereby developed
countries who invest in emission reducing schemes in developing
countries can apply for a CER in recognition of their contribution.
The CER can then be used by the developed nation as a credit
against their Kyoto Protocol emission reduction commitments.

Clean price
The price of a bond net of accrued interest.

Clean spark spread

The difference between the market price of electricity and
the market price of the gas used to generate it, adjusted for
generation efficiency/heat rate and the CO2 emissions cost.
The clean spread therefore represents the net revenue on
power sales after fuel costs and emissions allowance costs
but does not consider cost of production.

Cliquet
A structured trade where the payoff can be likened to that of a
series of consecutive forward starting options, the Strike Price
of each being the Settlement Price of the previous. The profit
from each period (being the Strike Price differential) can either
be paid after each period, held to maturity and then paid, or
manipulated in a more exotic fashion at maturity.

Closeout
A transaction that leaves a zero net position in the market.

Closeout amount
A measure for determining termination payments under the
2002 ISDA Master Agreement. It is designed to provide a
flexible means of determining the termination amount payable
upon the occurrence of an Event of Default or a Termination
Event. The Determining Party is required to calculate, in a
commercially reasonable manner, the loss or cost that would
result from entering into transactions that are the economic
equivalent of the terminated transactions in the then prevailing
market conditions.

15
Closeout netting
The process following an Event of Default under an ISDA Master
Agreement through which all outstanding OTC transactions
under the master are terminated. The net exposure between
the defaulting and non-defaulting parties is calculated in order
for claims against either party to be made.

Closing trade
A bought or sold trade which is used partly to offset an open
position, or fully offset it and close it out.

Cogeneration
See Combined heat power.

Collar
An option trading strategy involving the purchase of an Out-of-
the-money put option and the sale of an Out-of-the-money call
option on the same underlying and at the same maturity. A collar
allows for limited upside gains and limited downside losses.

Collateral
An acceptable asset posted to/by a counterparty used as a
form of credit risk mitigation. OTC derivative collateralisation
arrangements are agreed between counterparties and
documented in the Credit Support Annex (CSA) of the ISDA
Master Agreement. The agreements detail the economic and
operational characteristics of the collateral relationship.

Collateral call
The process by which a demand for margin / collateral is issued
to a counterparty following the calculation of the Collateral
requirement. Collateral requirements are usually calculated on
a daily basis.

Collateral dispute
The process by which a counterparty disputes a collateral call.

16
Collateral in transit (pending move)
Collateral that has been instructed to be delivered or
returned but has not yet settled. For the purposes of the
margin call calculation, pending collateral moves are
considered to have settled.

Collateral Requirement
Amount of collateral that needs to be transferred to satisfy
the counterparty’s requirements.

Collateral substitution
The process where one form of collateral is substituted for
another.

Collateralised Debt Obligation (CDO)

A structure used to distribute risk to investors through tranching
a portfolio of credits, and issuing notes or swaps of different
risk profiles to investors. The risk of the tranche is determined
by an attachment point and a detachment point. Riskier tranches
will earn a higher investor premium, to reflect the higher risk.
The CDO portfolio can be static or managed, depending on the
specific terms of the transaction. CDO notes will typically be
issued to the investor by a Special Purpose Vehicle (SPV).

Collateralised Loan Obligation (CLO)

The securities issued by a Special Purpose Vehicle (SPV), where
the cashflows payable under such securities are generated from
the receivables on a portfolio of loans. The securities are
typically structured in a variety of tranches.

Combined heat power

The production of two forms of energy, such as high-temperature
heat and electricity, from the same process. For example, the
steam produced from a generator boiler could be used for
industrial heating. Also know as co-generation.

17
Combined Cycle Gas Turbine (CCGT)
An energy efficient gas powered system, where gas combustion
drives a gas turbine and its exhaust gases pass through a boiler,
generating steam that drives a second turbine.

Commissioning gas
– Gas produced when a new field starts production;
– The gas needed during the initial start-up of a power station.

In both cases, the amount and timing of the gas requirements

are not certain.

Commercial Mortgage Backed Security (CMBS)

A type of bond or note issued by a Special Purpose Vehicle (SPV),
where the bond or note is backed by an underlying pool of
commercial mortgage backed securities. The principal and
interest generated by the underlying pool of assets effectively
services the principal and interest obligations of the bonds
or notes.

Commodity derivative
A derivative contract where the value of the contract is derived
from an underlying commodity or commodity Index. Commodity
derivatives can be physically or cash settled. Primary underlyings
include metals, agricultural goods and energy.

Commodity futures
A bilateral contract to pay for a commodity at a set price at
an agreed time in the future. Commodity futures are
exchange traded.

Common stock
Shares, also known as ordinary Shares, which make up the
majority of equity capital of most companies. In holding common
stock, investors are conferred an ownership stake in the
underlying corporation, entitling them to dividend payouts and
voting rights at company meetings. Ownership of common
stock provides the potential for capital gains and losses due to
a rise or fall in the share price. However, shareholders are the
last to be paid out in the event of a failure of a company.

18
Composite
A derivative trade which incorporates foreign exchange risk
into the payout. Final and initial levels are converted into the
settlement currency at the relevant exchange rate on the
respective dates. The performance calculated thus incorporates
both the exchange rate fluctuation and the performance of the
underlying during the period.

Compounding
The process by which the value of an investment increases by
adding the accumulated interest back on the principal amount.
In effect, the investment is earning interest on interest as well
as principal.

Conditional variance swap

A variance swap which accrues realised volatility only when
the previous day’s underlying price falls within a pre-specified
range. There are 3 main types of conditional variance swap:
up-variance, down-variance and corridor variance swap.

Conditionally transferable
A conditionally transferable obligation is only transferable
between parties under certain circumstances. For example,
the consent of the debt issuer may be required before
ownership can be transferred.

Confirmation
A written record agreed between two counterparties setting
out the terms of an individual OTC transaction.

Conservatorship
A U.S. legal concept describing the establishment of an entity,
normally part of government, to take legal control of another
entity. The appointment of a conservator constitutes a
Bankruptcy Credit Event in the 2003 ISDA Credit Derivative
Definitions.

19
Constant Maturity Swap (CMS)
An interest rate derivative in which one leg periodically fixes
against a certain maturity on the swap curve, for example the
5 year fixed swap rate. The other leg is typically a vanilla
floating leg based on LIBOR.

Contango
A condition in which prices for delivery of a commodity are
higher in the succeeding delivery months than in the immediate
delivery month. It is also used in the futures market to describe
an upward sloping forward curve. The opposite of backwardation.

Continuous Linked Settlement (CLS®)

A service offered by CLS Bank International that reduces
settlement risk through a simultaneous, global, multi-currency
settlement system.

Contract For Difference (CFD)

A cash settled total return swap or forward, where the parties
agree to exchange, on the maturity of the contract, the difference
between the opening price and closing price of the underlying.

Convenience yield
The convenience yield describes the premium that represents
the value of having the physical product immediately to hand
and offers a theoretical explanation for the strength of
backwardation in the commodity markets.

Convergence
The movement of the cash asset price toward the futures price
as the Expiration Date of the futures contract approaches.

Convexity
The curvature in the bond price and yield relationship.

Copula

20
A statistical tool describing how the distribution of single risks
join together to form joint risk distribution. Copulas are used in
the valuation of synthetic CDO tranches and other correlation
sensitive products.

Corporate
In the credit derivative market a Corporate is a term used to
describe a borrower that is a limited company (or similar entity)
other than a government, bank or insurer.

Corporate action
An event initiated by a company that has an affect on the
shares of that company. Examples of corporate actions
include; dividends, stock splits, stock consolidations, rights
issues, bonus issues, spin-offs, and delisting.

Correlation
A statistical measurement of the extent to which the movements
of two variables are related. In finance, it is normally used to
describe the relationship between the price movements of two
financial instruments.

Correlation swap
A structure in which one party sells an option on a basket and
simultaneously buys individual options on each of the basket
constituents. The buyer of this structure will be In-the-money
if the basket components are negatively correlated.

Cost Insurance and Freight (CIF)

A CIF shipping cost means the cost of cargo, insurance and
freight to a named destination are all included in the price.

Corridor variance swap

A conditional variance swap which accrues realised volatility
only when the previous day’s underlying price is between two
pre-specified levels.

21
Coupon
The nominal annual rate of interest paid on a financial
instrument, expressed as a percentage of the principal value
or as a Floating Rate based on a reference rate such as LIBOR.
The interest is paid to the holder of the security by the borrower.
The coupon is generally paid annually, semi-annually or, in
some cases, quarterly depending on the type of instrument.

Counterparty credit risk

In the context of the trading of OTC derivatives, counterparty
credit risk is the risk that a counterparty will fail to meet its
obligations under a derivative contract due to a deterioration in
the counterparty’s creditworthiness.

Covered bonds
A debt security backed by cashflows from mortgages or public
sector loans. They are similar to asset backed securities
created in securitisation, however covered bond assets remain
on the issuer’s consolidated balance sheet.

Covered option
A written option which is matched by an opposing cash or stock
position in the underlying asset, or by an opposing option
position of specific characteristics.

Covered Transaction
A transaction that can be cash settled under an ISDA Credit
Event Protocol and associated auction. Covered Transactions
include single name credit default swaps, tranched or untranched
transactions referencing a credit Index, Constant Maturity
Swap transactions (both portfolio and single name), principal
only and interest only transactions, first to default and nth to
default transactions, recovery lock transactions, Swaptions
(both single name and portfolio). Covered Transactions include
those documented under either the 1999 or 2003 definitions.

22
Crack Spread
In the futures markets, the crack spread is a specific spread
trade involving simultaneously buying and selling contracts in
crude oil and one or more oil products, typically gasoline and
heating oil.

Credit Contingent Threshold

A threshold that is contingent on the credit rating of the
counterparty. In the event of a credit rating change, the threshold
either reduces or increases according to a pre-defined
schedule.
Minimum transfer amounts can also be credit rating contingent.

Credit Default Swap (CDS)

The simplest credit derivative contract, designed to isolate
credit risk and allow it to be transferred between parties. In a
single name credit default swap, the credit risk of a Reference
Entity is transferred from protection buyer to protection seller.
In return, the protection buyer pays the seller a Fixed Rate
premium over the life of the transaction, or until a Credit Event
occurs, in which case there is a compensatory payment from
seller to buyer.

Credit derivative
An over the counter (OTC) financial derivative instrument that
enables the isolation and separate transfer of credit risk, (see
also credit default swap).

Credit Derivative Cash Settlement

Settlement of a credit derivative contract under which a Credit
Event has occurred, by a payment from protection seller to
protection buyer. The payment is equal to the difference in the
notional of the contract and the Final Price of an agreed
Reference Obligation, as determined by Cash Settlement
valuation mechanics or in a Credit Event Auction.

23
Credit Derivative Physical Settlement
Settlement of a credit derivative contract under which a Credit
Event has occurred by delivery of a Deliverable Obligation of
the Reference Entity from protection buyer to protection seller.
Under Physical Settlement the seller also pays the buyer the
notional cash amount of the contract.

Credit Event
An event linked to the deteriorating creditworthiness of an
underlying Reference Entity in a credit derivative transaction.
The occurrence of a Credit Event triggers full or partial
termination of the contract and a compensatory payment from
protection seller to protection buyer.

Credit Event Auction

An independently administered synthetic auction process on a
set of defined Deliverable Obligations that sets a reference Final
Price that can be used to facilitate Cash Settlement of all
Covered Transactions following a Credit Event.

Credit Linked Note (CLN)

A structured note conferring on the holder an economically
equivalent position to holding both a fixed income security and
acting as the seller of protection in an embedded credit default
swap. The coupon payable on the credit linked note reflects
the credit quality of both the issuer and the underlying Reference
Entity (or entities). Credit linked notes mature below par if any
of the underlying Reference Entities suffers a Credit Event
during the life of the issuance.

Credit Support Annex (CSA)

The legal document which contains the agreed collateral terms
between the two parties to OTC derivatives under an ISDA
Master Agreement. For example, Thresholds, Independent
Amounts and Minimum Transfer Amounts.

24
Cross currency Interest Rate Swap
An Interest Rate Swap where the interest payments are in two
different currencies and the exchange rate, for the final exchange
of notional, is agreed at the outset of the transaction.

Cross option
An option which pays out in a currency other than the local
currency of the underlying asset. The two main types of cross
option are quanto and composite options.

Currency future
A contract which requires delivery of a specific amount of one
foreign currency at a specified future date in return for a given
amount of a second currency.

Currency swap
A foreign exchange agreement between two parties to exchange
a given amount of one currency for another currency for spot
delivery, and to reverse the transaction for forward delivery at
an agreed rate after a specified period of time.

CUSIP
A unique nine digit identification number, allocated to
securities
settling through the US clearing systems by an organisation
named the Committee on Uniform Securities Identification.

25
D
Daily Contract Quantity (DCQ)
In a wholesale gas contract, this is the average amount of gas
the buyer can take in its daily nominations. The maximum rate
at which the buyer can ask the seller to deliver is a function of
the DCQ and the swing.

Dated Brent
A term for a cargo of Brent blend crude oil that has received
its loading date range. This normally occurs 15 working days
ahead of loading.

Day Count Fraction

The number of days between coupon Payment Dates (Calculation
Period) divided by the number of days in the year as specified
in the applicable Day Count Convention. The Day Count Fraction
is then input to calculate the accrued interest and the present
value of the coupon.

Dealer poll
The process of finding a reference price for an asset by
obtaining
quotes from multiple dealers in that asset.

Default
The failure of an organisation to perform their obligations under
a financial contract.

Default Date
The date on which a Credit Event is deemed to have occurred.

Definitions
The market standard provisions by which the terms of a
derivative transaction are described. The definitions are
published and maintained by ISDA®.

26
Degree Day
A measure of the variation of one day’s temperature against
a standard reference temperature, typically 65° Fahrenheit
(18° Celsius). Degree days are used as a basis for temperature-
related weather derivative deals. There are both cooling
degree days (CDDs) and heating degree days (HDDs).

Delisting
The process of removing the quotation of the price of a share
of a listed company on the Exchange on which it trades, thereby
preventing the purchase or sale of the stock through the
Exchange. Delisting normally occurs when a company declares
bankruptcy, following merger, acquisition or other Succession
Event, or if the company ceases to satisfy the listing rules of
the relevant Exchange.

Deliverability
The rate at which gas can be supplied from a storage facility in
a given period. In underground storage the rate would depend
on a number of factors, including reservoir pressure, reservoir
rock characteristics and pipeline capacity. The term is also
used for the volume of gas that a field, pipeline, well, storage
or distribution system can supply in a single 24-hour period.

Deliverable Obligation
Debt obligations of a Reference Entity that has suffered a
Credit Event that are eligible to be delivered under Physical
Settlement of any relevant credit derivative contracts or that
can be used to provide the reference price for Cash Settlement
of a credit derivative.

Delivery
The physical movement from seller to buyer of the underlying
asset on which the derivative is based.

Delta
The change in the monetary value of an instrument for a one
basis point change in the price of that instrument.

27
Demurrage
A penalty charge levied when a vessel fails to load or unload
its cargo within the time period (or laytime) stipulated in the
relevant contract.

Depository receipt
A security that is traded on a local stock exchange representing
shares issued by a company listed on a foreign stock exchange.
Such securities are often generically called American depository
receipt (ADR).

Derivative
A financial contract that transfers risk from one party to the
other. A derivative derives its value from the price or level of
some other underlying asset such as a bond, loan, equity,
currency, commodity, index, published interest rate or a
combination of the above.

Designated Maturity
The time period for which the Floating Rate in a derivative
transaction is quoted. For example, six month USD LIBOR.

Detachment point
The trigger point above the attachment point, after which
losses in the underlying portfolio no longer reduce the
notional of a tranche.

Determining party
In the event of a cancellation as a result of an extraordinary
event, a payment (cancellation amount) needs to be determined.
As the determining party is theoretically a neutral third party,
they will have no costs or liabilities tied up in the transaction
and as a result, their cancellation amount will be zero. The
election of a third party as determining party ensures that a
valid cancellation amount will be established.

28
Diagonal spread
The purchase of both a long and a short position in two options
of the same type (put or call) but with different Strike Prices
and Expiration Dates.

Digital settlement
See binary settlement.

Dirty price
The price of a bond inclusive of accrued interest.

Discount
The condition of the price of a bond that is lower than par. The
discount equals the difference between the price paid for a
security and the security’s par value. If a bond with a par value
of $1,000 is currently selling for $990 dollars (or 99% of par), it
is selling at a discount.

Discrete total return swap (TRS)

An equity total return swap on a single stock or Basket of single
stock underliers. Discrete TRS are confirmed under long form
Confirmation (without an MCA), under bespoke/in-house MCAs
or under the ISDA Equity Finance Swap Annex.

Dispersion trade
A structure in which one party sells an option on an Index and
simultaneously buys individual options on each of the Index
constituents. The buyer of this structure will be In-the-money
if the Index components are negatively correlated.

Dispute Resolution
The process of resolving a collateral dispute. Where parties
are unable to agree upon the valuations of certain trades, the
dispute resolution provisions outlined in the ISDA CSA provides
a mechanism for the parties to resolve their differences.

29
Disrupted Day
Any Scheduled Trading Day on which the relevant Exchange
or Related Exchange fails to open, or upon which a Market
Disruption Event occurs.

Distributed generation
A distributed generation system is characterised by smaller,
geographically dispersed and interconnected generators,
rather than one central generator.

Dividend amount
A distribution of a portion of the profits of a company to their
shareholders. Dividends are made after withholding of
retained earnings.

Dividend swap
A cash-settled forward transaction where the payout is
determined by multiplying a pre-agreed number of shares by
the difference between dividend benchmark, agreed at the
time of trade execution, and the actual dividend amount per
share paid by the issuer.

DK
Short for ‘don’t know’. A term used to describe the process by
which one counterparty to an alleged transaction attests that
the trade does not exist.

Downstream
Supply chain activities in the oil and natural gas industry from
a refinery to retail.

Down variance
A conditional variance swap which accrues realised volatility
only when the previous day’s underlying price is below a pre-
specified level.

30
Dubai Crude Oil
A benchmark crude produced in Dubai. Dubai crude is commonly
used as a reference oil price in the Asia-Pacific region.

Duration
A measure of the effective maturity of a bond. Duration is an
approximation for the price change of a bond for a given change
in the interest rate, and is used as a measure of sensitivity of
bond prices to market changes. Duration is measured in units
of time. Duration includes the effects of time until maturity,
cash flows and the yield to maturity.

E
Early Closure
The closure, on any Exchange Business Day, of the Exchange
(or if an Index transaction, the Exchange(s) in respect of 20
percent or more of the securities comprising the Index) or
Related Exchange, prior to its scheduled closing time, unless
one hours notice is given of the Early Closure.

Effective Date
The date on which obligations under a derivative transaction
begin to accrue or take effect.

Electronification
The process by which derivative post-trade processes are
automated. Electronification is often used specifically to refer
to the process of making transactions electronically eligible
for matching.

Eligible Currency
Acceptable currency for cash collateral as agreed by both
counterparties.

31
Eligible Collateral
Collateral that is acceptable under the terms of a Credit
Support Annex.

Emission Reduction Unit (ERU)

A measure of carbon dioxide emissions. One ERU equates to
one metric tonne of carbon dioxide and is the unit used to
measure CO2 emissions for participants of the Joint
Implementation (JI) scheme within the Kyoto Protocol.

Emissions trading
A market in the trading of polluting emissions allowances.
The market has emerged from the binding commitments of
the Kyoto Protocol and the EU ETS.

Equity derivative
An OTC contract, the value of which is derived from one or
more equity linked underlyings, for example Shares or an
equity Index.

Equity Index swap

An obligation between two parties to exchange cash flows based
on the percentage change in one or more stock indices for a
specific period with previously agreed reset dates. The swap is
cash settled and based on notional principal amounts.

Equity/stock option
An option where the underlying is an individual equity or share.
On exercise of the option the specified amount of Shares, or
the difference between the market value of the Shares and the
Strike Price, is exchanged between the buyer and the seller.

Equity swap
A derivative contract where payments are linked to the change
in value of an underlying equity, Basket of equities or Index. The
equity return payer pays to the equity return receiver any increase
in the value of the underlying plus any dividends received. The
equity return receiver pays the equity return payer any decrease
in the value of the underlying plus funding cost.

32
Equity/first loss tranche
The first loss and riskiest tranche in a CDO where there is no
subordination. For example, a tranche with a 0% - 4%
attachment/detachment point.

Eurobond
A bond that is denominated in a currency other than that of the
country of the issuer. For example, a USD denominated bond
issued by a UK corporate.

European Federation of Energy Traders (EFET)

A European energy trading association comprising of ninety
companies from twenty-three member states who publish
documentation templates with an aim to promote standard
terms for energy trading contracts.

European option
An option that can only be exercised by the buyer on the
Expiration Date.

European Union Allowance (EUA)

Emission credits issued by the EU ETS to the participating
parties in their air pollution reduction scheme.

European Union Emissions Trading Scheme (EU ETS)

Established by an EU Council Directive in 2003, the EU ETS
aims to control and reduce emissions of carbon dioxide from
member states, with additional potential to regulate a further
five greenhouse gases. The measures set legally binding
emission targets for governments to achieve with a view to
increasing the use of renewable energy across the EU.

Event of Default
A set of prescribed events in an ISDA Master Agreement, the
occurrence of any of which will give the non-defaulting party
the right to terminate all outstanding transactions.

33
Everest
A long term Mountain Range option where the final payout is
based on the worst-performing underlying asset in the basket.

Ex dividend date
The last day on which a party can purchase shares and
receive the next upcoming dividend from the share issuer.
The share price will fall by the amount of the dividend after
which the shares are known as ex dividend.

Exchange
The principal stock Exchange on which the share or the Index
components are traded.

Exchange Business Day

Any Scheduled Trading Day on which each Exchange and
Related Exchange in respect of a trade are open for trading for
their respective trading sessions.

Exchange Cleared Derivatives (ECD)

Derivative products traded bilaterally and then transferred
(or novated) to an exchange. The derivatives are then cleared
centrally by the exchange.

Exchange Disruption
An Exchange Disruption is any event (other than an Early Closure)
that disrupts or impairs the ability of market participants to
effect transactions in, or to obtain market values for the share
(or if an Index transaction, 20 percent or more of the securities
comprising the Index) or listed options or futures contracts on
the underlying.

Exchange traded Fund (ETF)

A financial instrument listed and traded on a stock exchange
that holds underlying assets such as shares. Often an ETF will
track an equity index.

34
Execution only (give-up agreement)
A tri-party agreement that is signed by the executing broker,
the clearing broker and the client. This agreement sets out the
terms by which the clearing broker will accept business on
behalf of the client.

Exercise
The process by which the buyer of an option may take up the
right to buy or sell the underlying asset.

Exercise Day
A day on which the buyer (holder) of an option may exercise
the right to buy or sell the underlying asset.

Exercise Price
The fixed price, per share or unit, at which an option buyer
(holder) has the right to buy (call) or sell (put) the underlying
asset.

Exotic option
A non-vanilla option.

Expected Recovery Rate (ERR)

The recovery rate expected by the market at the point of
bankruptcy. In efficient markets, defaulted bonds will
theoretically trade at the ERR.

Expiration Date
The last date on which an option can be exercised. After this
date the option is deemed to lapse or be abandoned.

Ex Ship
A shipping contract delivery provision whereby responsibility
for any risks associated with the cargo resides with the shipper
until the ship has arrived at the designated port and the
cargo is available for delivery.

35
Extraordinary Dividend
The definition of what constitutes an Extraordinary Dividend
is at the determination of the Calculation Agent, unless
specified within a Confirmation. Essentially they are unexpected
dividends
paid outside of the normal practice of an issuer.

Extraordinary Event
An Extraordinary Event that affects the underlying Shares or
Index. For example, a Merger Event, tender offer,
nationalisation or Index Disruption Event.

Extraordinary trading session

A trading session organised by ISDA® outside of normal
business hours to reduce the potential market risk impact
associated with an organisation’s imminently expected
bankruptcy filing. In the session, market participants enter
into new transactions with each other such that the OTC
derivative positions they have with the potentially defaulting
party are offset.

F
Failure to Pay (FTP)
A Credit Event that is triggered if a Reference Entity fails to
make interest or principal payments due under the terms of
one or more of their debt obligations. FTP is usually subject
to a minimum payment requirement and a Grace Period.

Federal Energy Regulatory Commission (FERC)

The US government body that regulates the US interstate
energy markets.

Federal funds rate

The interest rate at which US private depository institutions

36
lend cash balances (federal funds) to other similar institutions.

Final Price
A reference Final Price determined in a Credit Event Auction
or through a bilateral Cash Settlement valuation methodology.
The Final Price is used to cash settle transactions after a
Credit Event.

Financial future
A futures contract based on a financial instrument such as a
currency, interest rate, debt instrument or financial Index.

First loss basket

A credit derivative transaction based on a basket of Reference
Entities. Following a Credit Event, a portion of the transaction
terminates and settles as if it were a single name credit
default swap. First loss baskets were developed in response
to Nth to default protection sellers who preferred a contract
to endure on a reduced notional following a Credit Event, with
the continuation of the payment of the premium, albeit on a
reduced notional, mitigating some of the losses. Pricing
depends on the correlation between the names in the basket,
with highly correlated baskets being more expensive (as further
defaults are more likely in a highly correlated basket).

First to default basket

A credit derivative transaction where the payoff is based on
the first asset to default in a basket of underlying Reference
Entities. Once a default occurs the transaction terminates
and is settled.

First Method
A payment convention following an Event of Termination under
a 1992 ISDA Master Agreement. The convention stipulates
that the net termination payment is only transferred between
the parties if the payment is owed from the defaulting to the
non-defaulting party. Regulatory capital benefits, in relation
to transactions documented under an ISDA Master Agreement
specifying First Method were withdrawn following concerns

37
that this method could disrupt the orderly conducting of
insolvency proceedings. As a result, it is rarely used and was
excluded from the 2002 ISDA Master Agreement.

First Notice Day

The first day on which notices of intent to deliver physical
commodities against futures market positions can be made.

Fixed income
The interest calculated as a constant specified percentage of
the principal amount, paid at the end of specified periods on
a security. The periods are usually annual or semi-annual.

Fixed Rate
An interest rate which does not vary during the life of a
transaction.

Fixed Rate Payer

The Buyer of Protection under a credit derivative contract, or
the payer of the Fixed Rate of interest in an Interest Rate Swap.

Flip flop
An Interest Rate Swap that allows the buyer to switch between
receiving a Fixed Rate and a Floating Rate of interest on defined
dates during the life of the contract.

Floating Rate
An interest rate which is reset at predetermined intervals by
reference to a market reference rate (such as LIBOR).

Floating Rate Payer

The Seller of Protection under a credit derivative contract,
or the payer of the Floating Rate of interest in an Interest
Rate Swap.

Floating Rate Note (FRN)

A bond which pays a variable rate of interest.

38
Floor
A lower limit placed on the payoff of a trade, guaranteeing a
minimum payoff to the buyer.

Flow trading
Trading activity relating to the execution of customer orders
by a market maker.

Following Business Day Convention

A type of Business Day Convention where payment days that
fall on a bad Business Day roll forward to the next good
Business Day, regardless of whether or not it falls in the next
calendar month.

Foreign exchange derivative

A derivative contract where the underlying is a currency or
basket of currencies.

Forward
A contract involving the sale by one party and the purchase
by another party of a predefined amount of an underlying
instrument, at a predefined price and at predefined date in
the future.

Forward Rate Agreement (FRA)

An OTC contract, similar to a future contract, but where the
tenor of the contract is bespoke to that specific contract. On
a future contract the tenor is fixed by the Exchange.

Forward start option

An option where the strike price of the option is not taken on
the trade date but instead is to be taken at some point in the
future (e.g. trade date plus 3 months).

Free on Board (FOB)

Under an FOB contract, the seller provides the underlying

39
commodity at a loading installation, so that all costs
associated with loading the vessel have been paid by the
seller. However the buyer takes responsibility for shipping
and insurance costs.

Full clearing member

A firm that is a full member of a central clearing mechanism.
Full clearing members contribute to the collateral reserves
of the Exchange and execute transactions on behalf of non-
members.

Full termination
The process whereby the entire transaction is terminated as
opposed to partial termination.

Fully transferable
An obligation that is fully transferable is freely tradeable with
no restrictions. For example, no consent of the borrower is
required to transfer ownership of the asset.

Fund administrator
A firm providing accounting and administration services to
buy-side clients.

Funded option
An exotic option where the buyer pays interest over the life of
the transaction instead of an upfront premium amount.

Futures
An exchange traded agreement to take or make delivery of
an asset (buy or sell) at a specific time in the future for a
specific price agreed today.

Futures and Options Association (FOA)

A trade association dedicated to promoting the smooth
functioning of exchange traded derivative contracts through
the publication of standardised documentation and guidelines.

40
Futures price valuation
A method of valuation for equity Index derivatives, the
Settlement Price being sourced from the exercise price of a
listed contract on the Index rather than the level of the Index
at such time.

G
Gamma
A term in option theory measuring the rate of change of delta.
Gamma is used as a measure of how quickly the outright
exposure to the underlying can change. In correlation
transactions, gamma can be classified as single name gamma
or cross gamma: single name gamma is an exposure to a
single name in the basket moving; cross gamma is an exposure
to all names in the basket moving simultaneously.

Gasoil
A widely traded oil product used primarily in heating and
transportation. Otherwise known as diesel.

Gearing
The characteristic of derivatives which enables a far greater
reward (or loss) for the same, or much smaller, initial outlay.
It is the ratio of exposure to investment outlay; for example
an investment of $1 gives an exposure equivalent to a $10
investment and hence a gearing of 10.

Global clearing
The channeling of the settlement of all futures and options
trades through a single clearing counterparty or through a
number of clearing counterparties.

globalCOAL®
A trade association for the coal trading industry who define
coal quality specifications and publish standardised Coal

41
Trading Agreements (SCoTA).

Gold fixing (Gold Fix)

The setting of the gold price at 10:30 AM (first fixing) and
3:00 PM (second fixing) in London by five representatives
of the London Gold Market.

Grace Period
A period, normally 30 days, in which a borrower is permitted
to make interest or principal payments that it has missed. In
credit derivatives, the Grace Period is the period after which
a potential Failure to Pay becomes an actual Failure to Pay
and hence a Credit Event.

Grace Period Extension Applicable

If Grace Period Extension is applicable, protection is deemed
to be valid under a credit derivative contract if a potential
Failure to Pay occurs before the Scheduled Termination Date,
but the actual Failure to Pay occurs afterwards (i.e. after the
Grace Period has expired).

Grid
A power or gas transmission system.

Gross
A derivative or asset position expressed without netting bought
and sold trades.

Guarantor
A person or entity who guarantees to meet certain specified
payment obligations of another party if such other party should
default on the relevant obligation.

H
Haircut

42
See valuation percentage.

Hard Credit Event

A Credit Event in which all debt obligations of the Reference
Entity have become due and payable immediately, resulting
in them all trading at the same value equal, in efficient
markets, to the expected recovery rate.

Heat rate
A measure of how efficiently a generator converts fuel into
electrical energy.

Hedge fund
A buy-side private investment fund that employs diverse
trading strategies. Strategies may include short selling and
other forms of leverage.

Hedging
A trading strategy which is designed to reduce or mitigate risk.
A second transaction is entered into to offset the risk of the first.

Henry hub
The delivery point in the US for the largest Nymex natural gas
contract by volume. Henry Hub is in Erath, Louisiana, and is a
large system of pipeline interconnectors.

High water mark

The historically highest NAV (Net Asset Value) of an investment
fund. Performance fees are only paid by investors in the fund
when a new high water mark has been achieved.

Himalaya
A Mountain Range option where the payout is based on the
average performance of the best-performing component
in the basket on each calculation date. The number of
components in the basket reduces over the life of the option
as the best performer on each calculation date is removed for

43
future calculations, so that on the last calculation date there is
only one underlying asset in the basket.

Horizontal spread
An option trading strategy consisting of the simultaneous
purchase and sale of two options of the same type and Strike
Price but with different Expiration Dates. Also known as a
Calendar Spread.

Hybrid Basket
A Basket containing both stocks and Indices or underlyings
from a combination of asset classes (such as a foreign
exchange rate or a commodity).

Hypothecation
The pledging of assets (typically cash or securities) to a third
party broker to secure funding provided by such broker (for
example, the delivery of assets to a broker to secure positions
held in a margin trading account). A security interest in the
assets is created in favour of the broker; legal ownership of
the assets will typically remain with the customer.

I
Independent Amount /Initial Margin
An additional collateral amount that is requested over and
above the mark to market of a trade or portfolio of trades. This
covers any fluctuations in the value of the collateralised
portfolio which may occur between review periods.

Independent clearing organisation

An independent clearing organisation which is capitalised
without recourse to the members of the Exchange. The
organisation will guarantee to each member the performance
of the contracts by the contract registered in the organisation’s
name, thus removing counterparty risk against the other

44
clearing members.

Independent System Operator (ISO)

An organisation responsible for ensuring the efficient use
and reliable operation of a supply network and, in some
cases, power generation facilities. ISO responsibilities
vary by jurisdiction, but may include co-ordinating capacity
allocation; overseeing the balancing of inputs and outputs,
managing system emergencies and reserves, and ensuring
new facilities are built when required.

Index
A synthetic portfolio of underlying assets calculated and
published by a designated index sponsor and used to
measure the performance of the specific market or sector.

Index Adjustment Events

If the underlying of an Index trade is permanently cancelled
and no successor is found, this constitutes an Index
cancellation and the trade will be adjusted by the Calculation
Agent in accordance with the fallback provision selected in
the Confirmation. Additionally, if the Index (or the method
of determining the Index level) is materially amended (an
Index modification), or the Index sponsor fails to calculate or
publish a level on a day (an Index disruption), the trade will
similarly be adjusted or cancelled by the Calculation Agent.

Index sponsor
The company or organisation which calculates and publishes
an index. Examples include Standard & Poor’s, Dow Jones,
FTSE International.

Injection
The process of placing natural gas into storage. The cost of
injection is an important element in gas storage costs. Injection
can also refer to the process of injecting gas into an oil
reservoir in order to maintain pressure and extract more oil.

Inflation linked derivatives

45
About Sapient Global Markets
Sapient Global Markets, a division of Sapient, is a leading
provider of services to today’s evolving financial and
commodity markets. We provide a full range of capabilities
to help our clients grow and enhance their businesses,
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centers in Bangalore, Delhi and Noida, India.

How to use this reference guide

Entries are in alphabetical order. Within the guide, capitalised
words and phrases denote a term that is defined in the
relevant asset specific ISDA® Definitions, Supplements,
Protocols or other official ISDA® publication. Words or phrases
in red font denote cross references to entries that are
defined elsewhere in the guide.

sapientglobalmarkets.com
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