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[The objective of this glossary is to have terms definitions so we can cross reference with the Taxonomy map and elsewhere]

Table of Contents


A bond is a fixed income instrument that represents a loan made by an investor to a borrower for a determined period of time and in which the borrower pays the lender a coupon (annually or semiannually) and the face value at the end of the period (bullet) or following an agreed amortizing schedule (amortizing). Bonds are called fixed-income instruments because returns are fixed. Compared to Equity instruments, bonds do not carry any kind of ownership of a company and therefore rank senior to equity instruments. The term senior refers to the preferential position for claims during a default. Bonds represent the largest segment of capital markets in terms of size ($100.13 trillion in 2017 according to Wikipedia).   


High Yield ("HY" or Junk)  

High Yield describes the bonds that are rated BB+ or below by rating agencies, denoting a higher probability of default (high risk product). Given the higher risk, High Yield bonds bear a higher coupon.

Investment Grade - ("IG")

Investment Grade describes the bonds that are rated BBB- or above by rating agencies, denoting a lower probability of default. Given the safer nature of the instrument, the investor base is more broad compared to High Yield bonds, and it is normal to see insurance and pension companies buying this type of bonds as for these investors it is more important to preserve capital.  



Financials FIG

FIG  stands for Financial Institutions, In capital markets practice, FIG is the sector that represents Banks, Insurance and Pension companies, Asset Managers and Brokerage firms.

Covered Bonds

Covered bonds are debt instruments issued by Banks that are secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default. While the nature of this preferential claim, as well as other safety features (asset eligibility and coverage, bankruptcy-remoteness and regulation) depends on the specific framework under which a covered bond is issued (tends to change across jurisdictions), it is the safety aspect that is common to all covered bonds. Given the secured nature of the instrument, covered bonds have the highest ratings.

Senior Unsecured / Senior OpCo / Senior Preferred

Senior HoldCo / Senior Non-Preferred

Tier 2

Tier 2 bonds are subordinated instruments issued by banks. Tier 2 bonds have a defined maturity and coupon payment is mandatory. Tier 2 bonds can absorb losses and be bail-in-able so together with AT1 bonds are often called "bank capital". Given the subordinated nature of the bonds and the risk of losing the principal upon Bail-in event, the instruments carry a lower rating to reflect this risk. In Europe, banks are required by the regulator to have a 2% of Risk Weighted Assets in the form of Tier 2 bonds. 

Additional Tier 1 ("AT1")

AT1 bonds are the most subordinated form of bonds (and together with Tier 2 instruments are often called "bank capital" instruments) that rank senior only to equity. AT1 bonds have a Perpetual character (no fixed maturity), no incentive to redeem, and the payment of coupons is discretionary (coupons are paid if the bank has distributable reserves). AT1 bonds can absorb losses (be converted to equity or be written-down upon the trigger event) when the capital of the issuing financial institutions falls below a supervisor-determined level. The purpose of AT1 instruments is to have a buffer of a readily available source of capital that protects senior bondholders and depositors in times of crisis. In Europe, banks are required by the regulator to have a 1.5% of Risk Weighted Assets in the form of AT1 bonds.

Collateralized Bonds

Collateralised Debt Obligations ("CDO")

Collateralised Debt Obligations are structured products that are backed by other assets. A CDO can be thought of as a promise to pay investors in a prescribed sequence (tranching), based on the cash flow the CDO collects from the pool of bonds or other assets it owns. 




The word repo refers to the repurchase agreements that govern this market.  Essentially it is a collaterized loan. The repo market allows banks and investors to exchange high-quality assets, usually US government bonds, for cash funding. Borrowers then repurchase the assets for a slightly higher price at an agreed date, usually the next day, creating a short-term loan.  The market lets banks meet their short-term funding needs and is essential for the smooth operation of the dollar-based financial system. Market  activity is concentrated between 7:00 and 8:30 am EDT and the NY FED actively monitors and intervenes in the market.   

Reference: Triparty-Repos by the NY FED, this describes the Repo Market, the terms and risk associated with it and the various calculations and formulae that govern the yield calculation, not just tri-party. 

Opening leg: The value of the collateral provided is greater than the cash lent. This difference is called "the haircut". For example, if the value of the securities is $100 and the cash lent is $94, the haircut is $6.  

Time between Opening and Closing legs is usually a day or two. This is the term of the repo. If the term of the repo is overnight, it is called an overnight; everything else is called a term repo. Term repos are more complicated due to margin calls. The observed price of the security rises or falls, there may be margin calls to preserve the haircut.

Closing leg: 

Breaking News: In the  week of September 16 of 2019 there was a huge problem in the repo market. On Sept 16 and 17. lenders disappeared from the market, leaving many who wanted short term funding without takers; this created a huge spike in the overnight and term rates (rates spiked to 10%, when Federal Reserves target rates are 2.0 to 2.25). The commotion was quelled only when the NY FED stepped in providing liquidity in the market. Speculation abounds as to the root cause. The main effect was that there was more demand for cash than there was supply.

  • Corporation tax day Sept 15 resulted in cash drain from money market funds
  • Fed QE balance sheet is being reduced
  • High quantity of Treasuries hit the market at this point in the funding cycle ($54 Billion)- raising demand for cash
  • High LCR (Liquidity Coverage Ratio) requirement from big banks (JPM, Citi, Wells, BOA) hold 300+ billion dollars in cash (total held at Fed is $1.3 Trillion). This drains cash from short term lending market, especially since these big banks are dealers and market makers.
  • What role would DLT play in this? There are at least a couple of PoCs  for Repos a. Broadridge b.<insert>

Suggested Antidotes:

  • Be more nimble in the repo market FED (the market is an early morning one in New York as funding needs are expressed between 7:00 and 8:30 am) At this point the FED (NY Open Market desk) is not setup to do this (not enough expertise, not enough traders, slower decision making process etc.) 
  • Longer "term repos" by the  FED
  • Start more organised buying of Treasuries or other assets  again FED
  • Target overnight rates to be made lower FED
  • Standing repo facility FED
  • Change regulation to require less HQLA ratio SEC etc.
  • Involve smaller banks 

Bilateral Repos

Triparty Repos