<<

. 10
( 10)



AAA to A+ to BBB+ to BB+ to B+ to Below
Asset AA A’ BBB’ BB’ B’ B’ Unrated

Sovereign 0% 20% 50% 100% 100% 150% 100%
a
Banks“option 1 0% 20% 50% 100% 100% 150% 100%
Banks“option 2b < 3 month 20% 20% 20% 50% 50% 150% 20%
Banks“option 2b > 3 month 20% 50% 50% 100% 100% 150% 50%
Corporates 20% 100% 100% 100% 100% 150% 100%

a
Based on the risk weighting of the sovereign in which the bank is incorporated.
b
Based on the assessment of the individual bank.
Source: BIS
308 THE GLOBAL MONEY MARKETS



Loans made to unrated borrowers will be placed in a separate band
that carries the full risk weighting of 100%, although the BIS has stated
that regulators should review the historical default experience of the rele-
vant market and assess whether this weighting is suf¬cient. Short-term
credit facilities with corporates that remain undrawn, which under Basel I
attract a zero weighting, would be weighted at 20% under Basel II.
Compared to Basel I, under Basel II there is a greater allowance for
credit risk reduction, principally in the form of recognition of securities as
collateral. The following assets would be recognized as collateral:

– cash and government securities (as currently recognized under Basel I)
– securities rated BB- and above issued by a sovereign or public sector
entity
– securities rated BBB- and above
– equities that are constituents of a main index, or listed on a recognized
investment exchange
– gold

Securities placed as collateral will be given a “haircut” to their market
value to re¬‚ect their price volatility.

Internal Ratings Based Approach
In the IRB approach banks™ assets are categorized in accordance with
their own internal risk assessment. To undertake this approach a bank
must have its internal systems recognized by its relevant supervisory body,
and systems and procedures must have been in place for at least three
years previously. This includes a system that enables the bank to assess
the default probability of borrowers. If using an IRB approach a bank
will use its own internal ratings to categorize loans in probability-to-
default or PD bands. The number of PD bands set up is at the discretion
of the bank. The BIS has compiled a formula that enables the bank to cal-
culate the capital allocation requirement in accordance with its PD bands.
Exhibit 14.5 sets out the capital requirements under Basel I and both the
standard and IRB approaches under Basel II.
If using the advanced approach, banks may recognize any form of
collateral and set their own parameters when using the BIS formula for
calculating capital, following approval from their banking supervisory
body. For the ¬rst two years after such approval, the credit risk element
of capital allocation cannot be lower than 90% of the allocation calcu-
lated under the foundation approach; after two years the BIS propose to
review the advanced approach and comment.
309
Bank Regulatory Capital



EXHIBIT 14.5 Capital Requirements under Speci¬ed PD Bands

Credit Rating PD Band Basel I Standard Approach IRB Foundation Approach

AAA 0.03 8.0 1.6 1.13
AA 0.03 8.0 1.6 1.13
A 0.03 8.0 4.0 1.13
BBB 0.20 8.0 8.0 3.61
BB 1.40 8.0 8.0 12.35
B 6.60 8.0 12.0 30.96
CCC 15.00 8.0 12.0 47.04

Source: BoE

Operational Risk
One of the most controversial elements of the Basel II is the new capital
charge to cover banks™ operational risk. The Committee has proposed
three different approaches for calculating the operational risk capital
charge. These are:

– the basic indicator approach, under which a 20% of total capital
would be allocated;
– a standardized approach, under which different risk indicators will be
allocated to different lines of business within a bank; this would be the
level of average assets for a retail bank and assets under management
for a fund manager. The Committee would set the capital charge level
for each business line in accordance with its perceived level of risk in
each national jurisdiction, and the total operational risk would be the
sum of the exposures of all business lines;
– an internal estimation by a bank of the expected losses due to opera-
tional risk for each business lines. Operational risk here would be risk
of loss as a result of fraud, IT failures, legal risk, and so on.

Total Minimum Capital
The sum of the capital calculation for credit risk exposure, operational
risk and the bank™s trading book will be the total minimum capital
requirement. This capital requirement will be expressed as a 8% risk-
asset ratio, identical to the rules under Basel I.

Pillar 2”Supervisory Approach
A new element of the Basel II accord is the requirement for a supervision
approach to capital allocation. This is based on three principles. First,
310 THE GLOBAL MONEY MARKETS



banks must have a procedure for calculating their capital requirements in
accordance with their individual risk pro¬le. This means they are required
to look beyond the minimum capital requirement as provided for under
Pillar 1, and assess speci¬c risk areas that re¬‚ect their own business activi-
ties. This method would consider for instance, interest rate risk exposure
within the banking book, or prepayment risk as part of mortgage business.
These procedures will be reviewed constantly by banking supervisory
authorities. Secondly, the risk-weighted capital requirement calculated
under Pillar 1 is viewed as a minimum only, and banks are expected to set
aside capital above this minimum level to provide an element of reserve.
Supervisors will be empowered to require a bank to raise its capital level
above the stipulated minimum. Finally, supervisors are instructed to con-
stantly review the capital levels of banks under their authority, and act
accordingly in good time so that such levels do not fall below a level
deemed suf¬cient to support an individual bank™s business activity.

Pillar 3”Disclosure
The Basel II accord sets out rules on core disclosure that banks are
required to meet, and which supervisors must enforce. In addition there
are supplementary disclosure rules; these differ from core rules in that
banks have more ¬‚exibility on reporting them if they are deemed not rele-
vant to their speci¬c operating activities, or of they are deemed non-mate-
rial. The disclosures include:

capital: the elements that make up the bank™s capital, such as the
types of instruments that make up the Tier 1 and Tier 2 capital;

capital adequacy: this covers the amount of capital required against
credit, market and operational risk, as well as capital require-
ments as a percentage of the total capital of the bank;

risk exposure: the overall risk exposure of a bank, as measured by
credit risk, market risk, operational risk, and so on. Hence this
would include profile of the ALM book, including maturity pro-
file of the loan book, interest-rate risk, other market risk, essen-
tially the sum of the exposures measured and monitored by a
bank™s risk management department.

As part of Pillar 3, banks using an IRB approach when calculating their
capital requirement are required to disclose their internal policies and
procedures used as part of the approach.
In compiling the new Accord, the Basel committee wished to expand
capital requirements to cover other areas of risk, such as market risk and
311
Bank Regulatory Capital



operational risk. It recognizes that a bank™s capital should re¬‚ect the level
of risk of its own portfolio, but also that this may best be estimated by a
bank™s own internal model rather than any standard ruling provided by a
body such as the BIS.
In any event the proposed rule changes have attracted considerable
comment and the ¬nal form of the rules that are eventually adopted may
bear little resemblance to the proposals listed above. There is a growing
consensus among practitioners that perhaps the markets themselves
should carry more of the supervisory burden rather than regulators, for
example narrowing the scope of deposit insurance,7 or by requiring
banks to issue speci¬c kinds of uninsured debt. Holders of such subordi-
nated debt are more concerned with the ¬nancial health of a bank
because their investment is not guaranteed, and at the same time they are
not interested in high-risk strategies because their return is the same every
year regardless of the pro¬t performance of the bank (i.e., the ¬xed cou-
pon of their subordinated bond). Therefore the yield on this subordinated
debt is in effect the market™s assessment of the risk exposure of the bank.
Charles Calomiris of Columbia University8 has suggested that regulators
should place a cap on this yield, which would force the bank to cap the
level of its risk exposure, but this level would have been evaluated by the
market, and not the regulatory authority.
One improvement of Basel II over Basel I is that it acknowledges that
“one size” does not ¬t all banks, and that greater ¬‚exibility is required in
the capital allocation process. The IRB approach should result in a lower
capital charge than the standardized approach, and as such should
encourage the development of risk management systems in banks that are
incentivized to adopt this approach. Depending on the nature of their
activities, some banks will have higher risk pro¬les compared to others,
and as such need more risk management than would be provided simply
by a minimum capital level. This is the reasoning behind the three Pillar
approach, and principally Pillar 2, which empowers supervisors to inter-
vene if they feel steps taken by an individual bank are not adequate. This
is meant to extend beyond a requirement to increase capital levels. Pillar
3 is also crucial to this overall process, as it is designed to ensure that
there is adequate disclosure, not just of risk exposure but also of the pro-
cedures used to calculate capital under the IRB approach.

7
Many countries operate a deposit insurance scheme that guarantees the level of a
private customer™s deposits in a bank should that bank fail. In the UK for example,
the arrangement is that if a bank or building society is declared bankrupt, individuals
are entitled to compensation of 90% of their savings with that institution, up to a
maximum of £18,000 per individual.
8
As described in “Better than Basle,” The Economist, June 19, 1999.
312 THE GLOBAL MONEY MARKETS



REACTION AND CRITIQUE
The weight of market reaction and comment to the Basel proposals ini-
tially led to a second draft of the proposals being introduced, in January
2000, following the ¬rst draft in June 1999. The consultative period was
also extended by one year, so that ¬nal implementation of the Accord will
not take place until 2005.
The general market opinion has been that Basel II does at least attempt
to focus on the economic substance and risk characteristics of new market
instruments, as opposed to their structural form. With one or two notable
exceptions, banks should ¬nd that their overall level of capital allocation
remains broadly similar to that under the previous regime. The IRB
approach, by being split into a foundation and advanced options,9 enables
a larger range of banks the option of adopting it, rather than just the larger
ones that might be expected to have the requisite internal systems.
The most contentious element of the proposals is the charge for oper-
ational risk. The Accord allows three approaches for determining this
charge. The ¬rst, the “basic indicator,” uses a simple one-level indicator,
while the second is a standardized approach that speci¬es different levels
of charge for different business lines. The third option is an internal mea-
surement mechanism that enables banks to use their own internal loss
data to estimate the charge. The overwhelming market response to these
proposals was that they resulted in too high a charge for an element of
risk that is still vaguely de¬ned. However the three different options will
produce different results, and this ¬‚exibility was introduced in the second
draft after the market™s negative reaction to the blanket 20% operational
risk charge stated in the ¬rst draft. For instance, a senior vice-president of
a middle-tier investment bank has stated that using the third approach
produces a capital charge that is $500 million lower than that produced
by the ¬‚at 20% charge.10 Therefore banks will probably wish to ensure
that their internal systems and procedures are developed such that they
can employ the internal method. Nevertheless, it remains to be seen if the
proposals are adopted in their current form.
Under the proposals, capital relief can be obtained by the use of col-
lateral, bank guarantees, and credit derivatives. These proposals should
result in a rise in the use of synthetic securitizations such as synthetic col-
lateralized debt obligations transactions, to reduce capital exposure of
bank balance sheets. The Accord stipulates a haircut (denoted by H in
the draft) to be applied to collateral, in accordance with its credit quality,
as a protection against market risk. This is not controversial. Collateral,

9
This was introduced at the time of the second draft proposals.
10
RISK, February 2001, p. 27.
313
Bank Regulatory Capital



non-bank and non-sovereign guarantees and credit derivatives also will
be subject to a charge of 0.15 of the original charge on the exposure,
known as w. This charge is designed to re¬‚ect risks associated with these
instruments, such as legal and documentation risks. However the credit
derivatives market has reacted negatively to this proposal, suggesting
that w is not required and will have an impact on the liquidity of the
default swap market. The w factor is expected to be modi¬ed or removed
in the ¬nal draft.
The Accord has greatest impact on emerging markets, and has been
welcomed for instanced by non-sovereign issuers in these markets. This is
because under the new Accord banks may rate other banks and corporate
borrowers at a higher level than the sovereign rating of the home country.
Under Basel I, no institution could be rated higher than its domicile coun-
try rating. As a result banks may target stronger corporate borrowers in
lower-rated emerging market economies. In the standardized approach
extra risk buckets of 50% and 150% for corporate exposures have been
added to the existing 20% and 100% buckets. This makes the new
Accord more risk-sensitive. The impact on bank risk weightings of the
new proposals for certain sovereign credits is given in Exhibit 14.6.
Higher-rated banks will probably wish to adopt the IRB approach, while
smaller banks are likely to adopt the standardized approach until they
have developed their internal risk management systems.


EXHIBIT 14.6 Bank Risk Weightings under Basel II: Selected Asian Economies

Sovereign Current risk Proposed risk
rating weight (%) weight (20%)

Australia Aa2/AA+ 20 20
China A3/BBB 100 100
India Ba2/BB 100 100
South Korea Baa2/BBB 20 100
Malaysia Baa2/BBB 100 100
Pakistan Caa1/B- 100 150
Philippines Ba1/BB+ 100 100
Singapore Aa1/AAA 100 20
Taiwan Aa3/AA+ 100 20
Thailand Baa3/BBB- 100 100


Ratings source: Moody™s/S&P
index



30/360 day count convention, Allstate Life, 99 programs. See European ABC
12“14, 61, 234 Alternative loans, 204 programs
AMBAC, 181 Asset-backed debt securities, 76“
American Express, 192 77
Abbey National group, 139
Amortization. See Assets Asset-backed security (ABS), 1,
Absolute prepayment speed
period, 201. See also Rapid 80“81, 151, 180. See also
(ABS), 191
amortization period Credit card-backed ABS;
Accelerated securities (AS), 200
provisions. See Early amorti- Credit cards; Floating-
Acceptance ¬nancing, 94
zation provisions; Rapid rate ABS; Short-term ABS
usage, 96
amortization provisions cash ¬‚ow, 189“190, 190
ACCESS dealers, 48. See also
rate, 291 ¬‚oaters, 189
Non-ACCESS dealers
schedule, 189 market, 101
Accounts payable, 43
structure, 194. See also Con- sectors, 190“208
Accreting swap, 253, 259
trolled amortization struc- Assets. See Long-dated assets;
Accrual tranches, 168“169
ture Non-amortizing assets
Accumulation period, 194
Amortizing swap, 253, 259 amortization, 189
ACT/360, 10, 14, 56“57, 112
Annual dollar cash ¬‚ow, 110“ exposure, 131
ACT/ACT, 8
111 prepayment options, 292
Actual prepayments, 175“177
Annualized yield, 213 pricing, 302
Actual/360 day count, 234
Annuity. See Perpetual annuity pro¬le, 291
Actual/360 day count conven-
Arbitrage, 131“133, 245 Assumed index, 113
tion, 8, 10“12, 73, 227,
condition, 246 Auctions, 58. See also Multiple-
274
Archibald, Christine M., 27 price auctions; Single-
usage, 18, 113“114, 122, 237,
Arithmetic average, 91 price auctions; U.S. Trea-
240
Asian ¬nancial crisis (1998), 131 sury auction
Actual/365
Ask yield/price, usage, 29 cycles, 24
basis, 20
Asset and liability committee Australia, ABC paper market, 81
day count convention, 73, 138
(ALCO), 284“285 AUTO. See Automobile loans
Actual/actual day count conven-
Asset and liability management Automobile loan-backed securi-
tion, 8“10, 12, 16, 32
(ALM), 230, 275. See also ties, 190“192
usage, 17, 57
Traditional ALM cash ¬‚ow, 191“192
Adelson, Mark H., 77
book, 310 payment structure, 192
Adjustable-rate mortgage (ARM),
concept, 277“279 prepayments, 191“192
153
concepts, 283“284 Automobile loans (AUTO), 76,
Adjustable-rate securities, 102
desk, 281“285 189
Adjusted simple margin, 108,
developments, 284“285 Automobile repossession, 191
111“114
foundation, 276“281 Available funds cap (AFC), 189,
Adjusted total margin, 108, 111,
manager, 279 202
114“115
traditional approach, critique, Average life measure, 158“160
Advanta Mortgage Loan Trust,
295“296 Average life tranches, 169
198, 200
Asset-backed commercial (ABC)
Advanta Revolving Home Equity
paper, 4, 76“81
Loan Trust, 201 BA Master Credit Card Trust,
conduits, 77
Agency CMOs, 162 196
types, 78“79
Agency discount notes, 14 Back-set swap, 260
credit, 79“80
Agency mortgage passthrough Balance sheet, 279“280, 299,
legal structure, 78
securities, 154“155 305. See also Bank bal-
liquidity enhancement, 79“80
Agency passthrough, 156 ance sheet
market. See Australia; Non-US
Agency securities, 46 constraints, funding/control,
ABC paper market
Agricultural Credit Banks, 59 281




315
316 Index


Balance sheet (Cont.) elements, 306“312 Bond markets, 67
context, 279 reaction/critique, 312“313 Bond-equivalent yield (BEY),
hedging, 280 supervisory approach, 309“ 16“19, 29, 32
increase, 285 310 formula, 17, 57
management, 285 Basel rules, 297 Bonds. See Support bonds
structure, 275 Basic indicator, usage, 312 classes, types, 162“177
window dressing, 91 Basis risk, 188“189 demand/supply, 131
Balloon loan. See Short-term bal- Basis swap, 260 insurance, 181
loon loan Basis trading, 131 Book-entry form, 47, 63
Balloon mortgages, 153 BCCI, 305 Bootstrapping technique, 268
Bank balance sheet, 280 Bear Stearns, 82, 83 Borrowed funds, 131
Bank bills, 94 Whole Loan Prepayment Vec- Borrowed money, 225
Bank discount tors model, 184 Borrowers
basis, 17, 29, 41, 55, 212“213 Below-market rate, 86 characteristics, 198
yield, 15“16, 31, 73 Benchmark classi¬cation, 197
yield, 32 bills, 18“19. See also Federal defaults, 94
Bank ¬nancing, dependency, 95 National Mortgage Asso- Borrowing costs, 222
Bank for International Settle- ciation Borrowing/lending agreement,
ments (BIS), 297“299, government bond. See Matu- 123
301 rity British Bankers Association
proposals, 306, 308 security. See Maturity (BBA), 87, 222
regulatory requirements, 298 Bennett, Paul, 43 Brokerage ¬rms, 211
requirements, 300 Bhattacharya, Anand K., 192 Broker/dealer, 254
rules, 300 Bid/ask rates, 29 Brokers. See Interdealer brokers
Bank of England, 298 Bid-ask spreads, 33 Buckets. See Maturity; Time
open market operations, 140“ Bid-offer spread, 236, 267, 283. Bullet-payment structure, 193“
141 See also Dealers 194
study, 132 Bids/offers, quotations, 212 Burrell, Leo, 192
Bank regulatory capital, 297 Bid-to-cover ratio, 28 Business-to-business receivables,
Bankers acceptances, 5, 85, 94“ Bills of exchange, 94 76
97 BIS. See Bank for International Busted PAC, 175
creation, 95“97 Settlements Buy-and-hold strategy, 41, 42,
eligibility, 97 Black-Scholes model, 272 70
Federal Reserve discontinua- Bloomberg, 8“15, 35, 69, 227. Buy-back. See Debt
tion, 95 See also C5 screen; CCR Buyer, 119“120, 126. See also
sale, 97 function; Direct Issuer Pro- Collateralized mortgage
Banking gram Description Issuer obligation
counterparties, 305 screen; MMR screen; margin amount, 142
institutions, 2 Money Market Program margin percentage, 142
failure, action, 303“305 Description screen; PX1 Buyer™s Margin Account, 126
transactions, 280 Governments screen
Banking book, 296, 301 calculation, 112 C5 screen (Bloomberg), 39
interest rate risk, 278 graph, 36 Calendar dates, 42
liquidity, management, 291 information, 59 California Educational Facilities
transactions, 301 news report, 48, 49 Authority, 204
usage, 281 reports, 130 Call feature, 107
Banking regulatory capital screens, 27, 32, 74, 88, 91, 93 Call option, 105, 272
requirements, 298“303 display, 184, 192, 194 Call provisions, 105
Bankruptcy, event, 299 presentation, 120, 200, 202 Call swaption, 264
Bankruptcy-remote SPC, 76, 78 services, 115, 139 Callable bond, 160
Barclays Capital, 139 usage, 272 Callable repo, 134“135
Barclays plc, 88 Bloomberg-de¬ned prepayment Calomiris, Charles, 311
Basel Accord, 124, 299, 306 rate notation, 184 Cantor, 34
Basel capital ratios, 298 Board-level decisions, 285 Cap Floor Collar Calculator
Basel Committee on Banking Bond Market Association, mas- screen (Bloomberg), 271,
Supervision, 124, 299 ter repurchase agree- 273
Basel I, 308 ment, 123“124, 126, Capital, 280, 310. See also Bank
rules, 300“303 141“150 regulatory capital; Total
Basel II, 297, 308“309 default, events, 146“149 minimum capital
accord, 309 de¬nitions, 141“144 adequacy, 310
proposal, 306 intent, 149“150 requirements, 299
improvement, 311 margin maintenance, 144“145 allocation process, 311
proposals, 298, 302 purchased securities, segrega- amount, 298
Basel II rules tion, 145“146 de¬nition, 298
317
Index


Capital (Cont.) CBOT. See Chicago Board of principal, generation, 171
ratios. See Basel capital ratios Trade recognition, 308
relief, 312 CCR function, usage (Bloomberg), sale, 78
requirements. See Banking reg- 196“197 selling/buying, 123
ulatory capital require- Certi¬cate of deposit (CD), 60, types, 123
ments; Minimum capital 278. See also Large- usage, 95
requirements; Off-balance denomination CDs; Collateralized loan, 119
sheet instruments; Risk- Large-denomination making, 122
based capital require- negotiable CDs; Negotia- Collateralized mortgage obliga-
ment; Risk-weighted capi- ble CDs; Sterling CDs; tion (CMO), 161“178,
tal requirement Thrifts 199. See also Agency
level, 300 equivalent yield, 16“17, 31, CMOs; Nonagency CMOs;
reporting, 284 55“56 Sequential-pay CMOs
treatment, 301 face value, 19 buyers, 176
Capital Adequacy Directive. See futures. See Eurodollar CDs creation, 163, 167, 180
European Union interest rates (quoted), 20 ¬‚oaters, 102
Capital allocation (CA), 298, issuers, 86“87 principles, 161“162
301 market, 139 structure, 169, 172
Caplet matching, 290 tranches, 182
expiration, 271, 272 yields, 87“90 Commercial banks, 2, 85, 90,
Caps, 5, 229, 270“273. See also conversion. See Simple yield 190, 289
Lifetime cap; Periodic cap Charge-offs, 196 arti¬cial barriers, 70
attainment, 106 Chase Manhattan Auto Owner trust departments, 68
determination, 108 Trust 2001-A, 192 Commercial bills, 94
rate, 271 Cheque/checking accounts, 289 Commercial paper, 14, 67. See
restriction, 102 Chicago Board of Trade (CBOT) also Asset-backed com-
spread, 274 interest rate futures contracts, mercial paper; Dealers;
Captions, 271 270 Foreign currency denomi-
Carry-adjusted price, discount, swap futures contract, 269“ nated commercial paper
113 270 characteristics, 68“70
Cash. See Long cash; Short cash Chicago Mercantile Exchange, credit ratings, 70“76
balance sheets, 298 212, 215, 239 investors, 75
management bills, 24 Citibank Credit Card Master issuers, 70“71, 81
market, 225 Trust I, 194 market, disruption, 79
instruments, package, 232“ Citibank, negotiable CDs, 277 maturities, 68
233, 253 Citigroup Mortgage Securities, program, 69
matching, 290 Inc., 184 rates, 98
out¬‚ows, 275 Clearing bank CDs, 276 underwriting, 70
products, 297 Clearinghouse, 210 yields, 71“76
reserve funds, 181“182 role, 211 Commodity Credit Corpora-
securities, 308 Closed-end HEL-backed securi- tion, 45
settlement, 60 ties, 197“200 Compensating payment, 261
Cash ¬‚ows, 101, 116, 156“158. cash ¬‚ow, 198 Competitive bids, 48, 49. See
See also Annual dollar payment structure, 198“200 also Non-competitive bids
cash ¬‚ow; Asset-backed Closed-end HELs, 189, 201. See Conditional prepayment rate
security; Auto loan-backed also Fixed-rate closed-end (CPR), 156“159, 191,
securities; Closed-end HEL- HELs; Variable-rate closed- 198, 202
backed securities; Fixed- end HELs Conduits. See Asset-backed com-
rate cash ¬‚ow; Interest CMT, 153 mercial paper
attributable value, 42 Coen, Maureen R., 76 administrative agent, connec-
characteristics. See Senior Collared ¬‚oater, issuance, 102“ tion, 80
tranche 103 Conforming loan, 197
delivery, 111 Collars, 102, 274. See also Effec- Constant maturity Treasury swap,
determination, 164 tive collars; Initial upper 259
discounting, 115 collar Consumer loans, 76, 135
net present value. See Swaps Collateral, 125, 137 Consumer Price Index (CPI), 104
ratio, 56 Collateral, 5, 131“133, 262. See Consumer retail installment loan,
redistribution, 163 also Floating-rate collat- 201
stress, 187 eral; General collateral; Continental Illinois, 305
usage, 152 Non-speci¬c collateral Contract period, 223
Cash-day settlements, 47 average life, 167 Contract Table screen (Bloomberg),
Cash-¬‚ow analysis, 64 credit quality, 187 216
Cater Allen, 139 delivery, 126“128 Contraction risk, 160“161
on special, 130 protection, 168
318 Index


Controlled amortization struc- ratings, 67, 307 paper, 69“70
ture (CAM), 190 risk, 123“128, 132, 187“188. contrast. See Direct paper
Controlled-amortization struc- See also Third-party guar- quote sheets, 16, 31
ture, 193“194 antor sale, 58
Convenience value, 43 concern, 180 Debt. See Fixed-rate debt; Float-
Cook, Timothy Q., 35 exposure, 77, 123“124, 187 ing-rate debt
Cooke, Peter, 299 hedging, 262“263 buy-back, 131
Cooke ratio, 299 integration, 284 cancellation, 131
Corporate bonds spread, 107 instruments. See Short-term
selling, 257 support. See Program-wide debt
underwriters, 131 credit support; Third-party obligations. See Financial insti-
Corporate debt credit support tutions; Short-term debt
instrument, 81 tranching, 182 securities. See Corporate debt
issuance calendar, 257 unions, 85 Defaults, 181
securities, 76“77 value-at-risk, 262 absence, 181
Corporate obligations, 67 Credit card receivable-backed environment, 183
Corporate takeovers, ¬nancing, security, 193 events. See Bond Market Asso-
68 Credit card receivables (CARD), ciation
Cost of carry adjustment, 113 76, 190 price, 112
Counterparties, 221, 229, 258, ABS, 192“197 probability, 254
260. See also Banking pool, 193 risk, 278
creditworthiness, 124 portfolio, 196 Defensive securities, 106
integrity, 211 Credit card-backed ABS, 188 Deferment period, 204
risk, 210, 231, 301, 303 Credit card-backed securities, Delinquencies, 196
Country markets, 3 188 Deliverable bills, 43
Coupon Credit cards Deliverable day, 268
dates, 267 borrowers, 78 Delivery date, 210, 268
formula, 104, 106, 108, 198 portfolio performance reports, Demand deposits, 291“292
interest payments, 254 197 Den Norske Bank, 305
leverage, 103 Credit-sensitive MBS, 180 Deposit insurance (scope), reduc-
payments, 84, 116, 268 Cross-border markets, 2 tion, 311
rate, 101, 113, 189. See also Cross-border requirements, 298 Depository institutions, 5, 86, 90
Passthroughs Cross-border trade receivables, Deposits
level, 112 80 collection, 280
restrictions, 102“103 Cross-currency repo, 134 dividing, 292
reset date, 109, 113 Cross-currency swaps, 263“264 withdrawals, 276
difference, 110 Currency swap, 81, 263, 305. Deposit-taking, share, 280
remaining time, 106 See also Fixed-¬‚oating Derivatives
resetting, 106 currency swap; Floating- contract, 209
Coupon Treasuries, 32. See also ¬‚oating currency swap exchanges, 2
Longer-term coupon Trea- Current assets, 280 instrument. See Non-exchange-
suries Current exposure, 305 traded derivative instru-
delivery, 18 Current liabilities, 280 ment
Coupon-paying bonds, 15 Current yield, 108“111 usage, 305
Covered contractual payment Current/when issued bills, matu- trading, 131
entitlement, 150 rity dates, 29 transactions, 124
obligation, 150 Curtailment, 153, 189 DES. See Security Description;
Credit. See Asset-backed com- CUSIP, 23, 50 Security Display
mercial paper Custodians, 127 Deutsche Bank, 139
analyses, 93 Deutsche Terminbourse, 217
enhancement, 181. See also Dierdorff, Mary D., 77
Day count
External credit enhance- Differential swap, 261
basis, 7“8
ments; Internal credit en- Direct Issuer Program Descrip-
conventions, 7“14, 32, 50, 61,
hancements; Pool-speci¬c tion Issuer screen
112“114
credit enhancements; Pro- (Bloomberg), 73
comparison, 240
gram-wide credit enhance- Direct paper, dealer paper (con-
Days Between Dates (DCX), 10,
ments trast), 69“70
14
excess, 77 Disclosure, 310“311
Dealers. See ACCESS dealers;
form, 183 Discount
Non-ACCESS dealers; Pri-
mechanisms, 180“188 accretion, 84
mary dealers; Securities;
history, 197 basis, 24
U.S. Treasury dealers
performance, 181 yield. See Bank discount
allocation, 58
protection, 183 basis
bid-offer spread, 235
quality, 261. See also Collateral margin, 108, 115“117
commercial paper, 74
319
Index


Discount (Cont.) Equity, 280 Federal Deposit Insurance Cor-
notes, 47, 65. See also Federal markets, 67 poration Improvement Act
Farm Credit System; Fed- Equivalent yield. See Certi¬cate (FDICIA), 150
eral Home Loan Bank of deposit Federal Direct Student Loan Pro-
System; Federal Home Equivalent-maturity government gram (FDSLP), 204
Loan Mortgage Corpora- bond, 262 Federal Family Education Loan
tion; Federal National Estate taxes, 66 Program (FFELP), 64, 204
Mortgage Association Euro Euribor contract, 217 Federal Farm Credit Banks
issuance, 50 Euro swap curve, 265 Funding Corporation, 60
program, 49 Eurocurrencies, 2 Federal Farm Credit System
rate, 49. See also Stop out dis- Eurodollar CDs, 36, 86, 88“90, (FFCS), 46, 59“62
count rate 215 discount notes, 60
Discount equivalent, 61 futures, 215“219 ¬scal agent, 60
Discount instruments, 14“19, Eurodollar CDs futures contract, maturity securities, interest,
71. See also Short-term 215“216, 238, 241, 243 60“62
discount instruments bundle, 254 Federal Funds (federal funds), 5,
182 days to maturity (less usage, 247 19, 85, 90“94
than), 17 Eurodollar futures rate, 238 amount due, 93
182 days to maturity (more Euro-Libor, 261 futures contract, 219“220
than), 18“19 European ABC programs, 80 market, 93“94
price, 18 European Union (EU), Capital rate, 35, 91“93, 98, 131. See
Discount Notes, 60 Adequacy Directive, 298, also Effective federal
Diversi¬cation, 262 299, 303 funds rate
Dollar discount, 54, 213“214 Event risk, 181 Federal Home Loan Bank System
formula, 61“62 Excess (EXE) bond, 202 (FHL Bank System), 46,
Dollar interest, calculation, 18 Excess spread, 189 57“59
Dollar LIBOR, 87 Exchange delivery settlement discount notes, 58“59
Dollar price, 156 price (EDSP) methodol- ¬‚oater, issuance, 104
Domestic CDs, 88, 90 ogy, 267“268 Federal Home Loan Banks, 58
Dow Jones Industrial Average Exchange-traded government inverse ¬‚oater, issuance, 103
(DJIA), drop, 38 bond futures contracts, Federal Home Loan Mortgage
Dual-indexed ¬‚oater, 104 265 Corporation (FHLMC),
Duffee, Gregory R., 35 Exchange-traded interest-rate 45, 53“57, 154“155, 197
Duration, 103. See also Effective swap contract, 265“269 CMOs, 162
duration; Index duration; Export-Import Bank of the dealer group, 53
Spread United States, 45 discount notes, 53
DV01 report, 293 Extendible swaps, 258 Reference Bills, 54“57
Extension risk, 160“161, 168 auctions, 54
External credit enhancements, Federal Housing Authority (FHA),
Early amortization provisions,
180“181, 188 155, 202
194
Federal Housing Finance Board,
Economic Development Corpo-
58
ration, 102“103 Fabozzi, Frank J., 117, 171, 192,
Federal Land Bank Associations,
Effective annual yield, periodic 225
59
interest rate conversion, Face value, 47, 54, 61, 212. See
Federal National Mortgage
20“21 also Notes
Association (FNMA), 45,
Effective collars, 175“177 assumption, 74
47“53, 154“155, 197
Effective date, 234, 261 Face-value investment, 12, 16,
Benchmark Bills, 47“53
Effective duration, 103 31
CMOs, 162
Effective federal funds rate, 91 Failure, action. See Banking
discount notes, 47
Effective margin, 112 institution
Federal Open Market Committee
Eleventh District Cost of Funds Farm Credit Act, 60
(FOMC), 91
(COFI), 102 Farm Credit Banks, 59
Federal Reserve, 219. See also
Eleventh Federal Home Loan Farmers Housing Administra-
New York Federal Reserve
Bank Board District Cost tion, 45
Bulletin (2001), 93
of Funds (COFI), 153 FAs. See Funding agreements
data series, 93
Embedded option, 107, 111, 117 Federal agency securities, 123
discontinuation. See Bankers
Emerging market economies, Federal Agricultural Mortgage
acceptances
313 Corporation, 45“46, 62“
Open Market Committee, 42
Enron Corp., 101, 111 64
regulations, stipulations, 85
¬‚oater Federal Deposit Insurance Act
rescue. See Long-Term Capital
adjusted simple margin, (FDIA), 150
Management
computation, 114 Federal Deposit Insurance Cor-
Statistical Release H.15, 35
spread, 112 poration (FDIC), 85
tightening cycle, 42
Equipment loans, 76
320 Index


Federal Reserve Bank of New Floating-rate asset, 234. See also terms, 223
York, 53 Synthetic ¬‚oating-rate asset trading, 222
data collection, 68“69 Floating-rate bond, 233, 256 Forward-start swap, 234, 261
Federal Reserve Banks, 28, 90 Floating-rate collateral, 188 Forward-starting swap, 264, 267
Federal Reserve Board, time Floating-rate debt, 82 Free market economy, 303
deposits data series, 86 market, 256 FSA, 181
FGIC, 181 Floating-rate markets, 254 Fully supported program, par-
Finance companies, 2 Floating-rate MTN, 82, 84 tially supported program
Financial asset, 85 Floating-rate note, 111, 234 (contrast), 78“79
Financial information vendors, market, 258 Funding
69 Floating-rate payer, 230, 234, account, 194
Financial institutions, 2“4, 150, 235 management, 284
161, 256, 258 Floating-rate payments, 226, Funding agreements (FAs), 85,
debt obligations, 85 244, 246“247 98“99
Financial market culture, differ- calculation, 237“240 Future ¬‚oating-rate payments,
ences, 3 determination. See Future determination, 238“240
Financial/global crises, 36 ¬‚oating-rate payments Futures, 209. See also Eurodollar
Financing rate, 113 present value, calculation, 241“ CD futures; Short futures;
First Chicago, 102 245 U.S. Treasury bills
First Chicago NBD Corp., 102 Floating-rate products, 101, 151 contracts, 210“212. See also
First lien. See Properties Floating-rate receiver, 230, 232 Federal Funds; Short-term
Fitzgerald Securities, Inc., 34 Floating-rate securities (¬‚oat- interest rates
Fix rate, 113 ers), 5, 35, 101. See also position. See Long futures
Fixed coupon bond, 234 Inverse ¬‚oaters; Planned price, 210
Fixed-¬‚oating currency swap, amortization class Futures Contract Description screen
263 duration, 108 (Bloomberg), 213, 215, 219
Fixed-income investments, 46 features, 101“105 Futures/forward contracts, pack-
Fixed-income markets, 8 price, 108 age, 253
Fixed-rate assets, 283 factors, 106“108
Fixed-rate bond, 233 volatility characteristics, 106“ G-10 group, 299
class, 161 108 Gap. See Fixed-rate gap; Liquid-
Fixed-rate cash ¬‚ow, 267 purchase, 258 ity; Margin; Variable-rate
Fixed-rate closed-end HELs, 198 reset dates, comparison, 109“ gap
Fixed-rate debt, 82 111 calculation, 295
market, 256 types, 104 management, 277, 282
Fixed-rate gap, 293 Floating-rate tranches, 169“171 measurement, 295
Fixed-rate investors, 258 Floors, 5, 229, 270, 273“274 models. See Maturity
Fixed-rate issue, 105 attainment, 106 pro¬le, 291, 292
Fixed-rate level-payment fully determination, 108 report, 293
amortized mortgage, 152“ rate, spread, 274 risk/limits, 286“290
153, 158 Flotions, 271 Garbade, Kenneth D., 42, 43
Fixed-rate markets, 254 Foreclosures, 181 Garban ICAP, 139
Fixed-rate payer, 230“232, 235“ Foreign currency denominated Garban Ltd., 34
238 commercial paper, 81 GE Capital commercial paper, 73
bene¬ts, 248 Foreign exchange rates, 104 maturity (time), 74
Fixed-rate payments, 236“237, ¬‚uctuation, 134 GE Capital Corporation, 82
246“247. See also Swap Forward contracts, 209“210 GE Life and Annuity Assurance
rate buying/selling, 209 Co., 99
calculation, 240“241 package, 231“232 General American Life Insurance
settlement, frequency, 240 Forward dated loan, 221 Co., 98
Fixed-rate quote, 260 Forward discount factor (FDF), General collateral (GC), 130, 136
Fixed-rate receiver, 236, 248 243, 246“247 General Services Administration,
Fixed-rate repo, 134 Forward price, 210 45
Fixed-rate security, 106 Forward rate, 227, 243, 260. See Gift taxes, 66
Fixing date, 223 also Period forward rate Gilt repo, 138
Fleming, Michael J., 33, 131 Forward rate agreements (FRAs), market. See United Kingdom
Flight to quality, 38 209, 221“228, 277, 300 gilt repo market
Floater tranche, 170 basics, 221“222 users, 140
Floaters. See Floating-rate securi- contract. See Over-the-counter Gilt-edged Market Makers
ties guarantee, 279 (GEMMs), 136
Floating-¬‚oating currency swap, mechanics, 222“225 Glass-Steagall Act, 70
262 pricing, 225“228 Global Debt Securities, 60
Floating-rate ABS, 188“189 rate, 223 Global Master Repurchase
Floating-rate agreements, 1 settlement date, 226 Agreement, 123
321
Index


Global money markets price, 214 Interest-bearing instrument, 71,
introduction, 1 risk, 188 211
LIBOR, importance, 36 In¬‚ation index, 104 Interest-bearing securities, 211
overview, 3“6 Inheritance taxes, 66 yields, 14
Global MTNs, 98 Initial margin, 211 Interest-only (IO) class, 192
Gold, recognition, 308 Initial PAC bands, 172 Interest-rate gap, 292“295
Goldman Sachs, 83. See also Uni- Initial PAC collars, 172 Interest-rate liabilities, 264
versal Commercial Paper Initial upper collar, 174 hedging, 261
Government INPUTS, 114 Interest-rate risk, 285“295
bond. See Maturity Inside markets, 34 exposure, control, 270
auctions, 130 Institutional investors, 70, 161 Interest-rate sensitivity, 278
securities, 308 Institutional-oriented funds, 98 Intermediaries, 2, 210
dealers, 133 Instruments. See U.S. govern- Intermediate-term loans, 59
Government National Mortgage ment agency Internal credit enhancements, 181“
Association (GNMA), 45, Insurance companies, 2 186, 188
154“155, 160, 197 arti¬cial barriers, 70 Internal ratings based (IRB)
passthroughs, 162 Integrated investment banks, 2 approach, 306“307, 313
Government sponsored enterprises Interbank brokering market, 139 Internal ratings-based approach,
(GSEs), 45“47, 53 Interbank market, 262 308“309
creation, 57, 62, 64 Interdealer brokers, 33“35 International Monetary Market
status, 65 Interdealer market, 34 (IMM), 43, 212, 215
GovPX (venture), 34 Interest. See Federal Farm Credit International Securities Market
Grace period, 204 System; Maturity; Repur- Association, 123
Gramm-Leach-Bliley Act (1999), chase agreements International Swap Dealers Asso-
70 cash ¬‚ows, 292 ciation (ISDA), 135
Gree Tree Financial Corporation, charge, 224 benchmark, 269
202 gap, 277 Inverse ¬‚oaters, 103, 169
Grieves, Robin, 41, 42, 51 income, 64 dividing, 170
Gross portfolio yield, 196 margin, 277 price volatility, 171
Gross WAC, 182 payment, 224, 274 Inverted Treasury yield curve,
Guarantee fee, 154 dates, 84 128
rates, 291 Investment
sensitivity report, 295 banking ¬rms, issue distribu-
Haircut, 124, 308
Interest rate, 5. See also Market tion, 83
inclusion, 125
agreement, 270 guidelines, 123
Hard bullet (HB), 190
decrease, 273 objectives, accomplishment, 161
Health care receivables, 76
derivatives. See Off-balance opportunities, 84
Hedging, 131, 259. See also Bal-
sheet interest-rate deriva- rate, 28, 114
ance sheet; Credit; Inter-
tives vehicles, 1
est rate risk; Interest-rate
determination. See Semiannual Investment banks. See Inte-
liabilities; Liquidity
interest rate grated investment banks
reporting. See Risk
difference, 222, 224 arti¬cial barriers, 70
situations, 216
futures contracts. See Chicago group, 53
High street banks, 303
Board of Trade Investment grade rating, 182
Higher Education Act, 204
hedge, 264 Investors, ¬‚exibility, 54
High-quality security, 97
increase, 221, 248 Invoice price, 214“215
High-risk transactions, 303
quoted. See Certi¬cate of deposit IRSB, 254
Hilliard Farber & Co., 34
shocks, 184 ISDA. See International Swap
Hold-in-custody (HIC) repo, 127
usage, 241 Dealers Association
Holding period, 110
volatility, increase, 277 ISSUE SIZE, 63
Home equity loan (HEL/HOMEQ),
Interest rate risk, 257, 276. See Issues, underwriting, 84
197. See also Closed-end
also Banking book
HELs
hedging, 281
¬‚oaters, 198 Jackson National Life, 99
limits, setup/monitoring, 281“
HEL-backed deal, 200 JCPenney, 192
282
security. See Closed-end HEL- Junior tranches, 182“183
management, 283“284
backed securities; Open-
measurement, 281, 293
end HEL-backed securities Kambhu, John, 43
monitoring, 281
structures, 199 King & Shaxson Bond Brokers
Interest rate swap, 232, 263, 305
HSBC, 88, 139 Limited, 139
book, 266
Hull, John C., 254 Knight-Ridder, 35
computing, 236“253 Kuwait, invasion, 38
description, 229“231
Illiquid investments, 98
market, 256
Index Large-denomination CDs, 86
Interest-bearing basis, 24, 87
duration, 108
322 Index


Large-denomination negotiable decrease, 273 Mann, Steven V., 41, 42, 51,
CDs, 85“90 forward rates, 247 117, 225
Lazards, 139 one-year cap, 271 Manufactured homes, 201
Lee, Wanda, 76 rate, 244, 278 Manufactured housing loans
Legal structures, 187 spread, 88 (MANUF), 76, 190
Lending lines, 262 sterling, 82 Manufactured housing-backed
Letter of credit (LOC), 96 strike rate, 271 securities, 201“202
Level I PAC bond, 178 usage, 230, 238“239, 256, Marcus, Alan J., 41, 42, 51
Level II PAC bond, 178 269 Margin. See Adjusted simple mar-
Level III PAC bond, 179 6-month, 110, 153, 188, 230, gin; Adjusted total margin;
Leveraged inverse ¬‚oater, 103 260 Discount; Interest; Main-
Leveraging, 131 payment, 232 tenance margin; Quoted
Liabilities. See Current liabilities; receiving, 231 margin; Repurchase agree-
Long-term liabilities; Non- benchmark, 39 ments; Required margin;
interest-bearing liabilities bid rate (LIBID), 87 Simple margin
Liberty Brokerage Inc., 34 comparison. See U.S. Treasury change, 107
LIBID. See London Interbank bills determination. See Market
Offered Rate contract. See Sterling LIBOR de¬cit, 126, 142
LIBOR. See London Interbank contract excess, 142
Offered Rate forward rates, 226 gaps, 295
LIBOR-to-arrears swap, 260 importance. See Global money lending, 124
Life insurance companies, 98 markets maintenance. See Bond Mar-
Lifetime cap, 153 LIBOR-based ¬‚oaters, 205 ket Association
Liquidity, 262, 285“295. See LIBOR-in-arrears swap, 260 measures, 111“117
also U.S. Treasury bills netting, 262 notice deadline, 142
book, 276 receiving, 235 requirements, 107, 211“212
constraints, 281 relationship. See U.S. Treasury Margin swap, 260“261
de¬nition, 276 bills Marginal gap, 286
marketability, 277 setting, 223 Maritime Administration, 45
difference, 33 London International Financial Marked-to-market, 210
enhancement, 71. See also Futures Exchange (LIFFE), Market
Asset-backed commercial 215, 217, 266“267 collateral, margin, 126
paper Long cash, 2 fundamentals, 267
facility. See Program-wide Long futures, 210 interest rate, 160, 284
liquidity facility position, 210 margin, change (determination),
gap, 285“286, 295 Long Term Credit Bank, 305 107
hedging, 281 Long-dated assets, 280 participants, 136, 211, 231,
management, 284, 290“292. Long-dated forward contracts, 254, 267
See also Banking book 232 price, 109, 113
measurement/monitoring, 281 Longer-dated swaps, 254 quotes, 233“236
needs, meeting, 140 Longer-term coupon Treasuries, rate, 106
premium, 75 33 risk, 262, 275, 310
pre-set contingencies, 292 Long-Term Capital Management, integration, 284
requirement, 88 Federal Reserve rescue, 38 value, 142
risk, 77, 107, 275“276, 281, Long-term debt, 280 de¬nition, 126
286 Long-term forward contracts, Marketplace, infrastructure, 2
shortage, 140 232 Mark-to-market, 211
Loan book, 310 Long-term liabilities, 280 Master Notes, 60
Loan repayment period, 204 Long-term loans, 59 Master repurchase agreement. See
Loan-backed securities. See Small Long-term security, 161 Bond Market Association
Business Administration Lopez, Jose A., 33 MasterCard, 192, 193
Locked-in spread, 279 Loss-absorbing characteristics, Matched book, running, 128
Lockout period, 193 299 MATIF, 217
London Interbank Offered Rate Maturity, 152
(LIBOR), 35, 98, 135, benchmark government bond,
Maas, Bernard, 76
215, 222. See also Dollar 131
Macroeconomic climate, settling,
LIBOR buckets, 286
38
1-month, 107, 169“171, 188, date, 85, 223
Maintenance margin, 211
198, 201, 230 gap models, 296
requirements, 212
3-month, 38, 65, 101“104, guarantee, 194
Make/take delivery, 28
153, 205, 226 instruments, interest, 19“21
Makovec, Ian, 81
calculation, 237 payment, reinvestment, 43
Malvey, Paul F., 27
comparison, 258 pro¬le, 278
Management bills. See Cash
current value, 241 range, 53
323
Index


risk-free benchmark security, 97 loans, 151“153, 201 Non-rated borrowers, 307
securities, 61 market. See Residential mort- Non-sovereign issuers, 313
interest. See Federal Farm gage market Non-speci¬c collateral, 130
Credit System passthrough securities, 154“ Non-US ABC paper market, 80“
Treasury securities, 46 161. See also Agency mort- 81
value, 71 gage passthrough securities Non-U.S. corporations, 81
variations, 84 Mortgage-backed debt securities, Non-vanilla interest-rate swaps,
Mayle, Jay, 7, 13 76“77 258“261
MBIA, 181 Mortgage-backed products, 179 Norian Bank, 305
Medium-term notes (MTNs), 67, Mortgage-backed security (MBS), Notes (package), face value, 64
81“84. See also Floating- 1, 5, 80“81, 151. See also Notional amount, 236, 237,
rate MTN; Global MTNs; Short-term MBS 246, 270, 273
Short-term MTNs; U.S. de¬nition, 154“155 Notional cash ¬‚ow, 268
MTNs markets, 101 Notional ¬xed rate, 268
Member institutions, 58 usage, 154 Notional principal, 261
Mercury Finance Co., default, 71 Multi-class passthroughs, 161 Notional sum, 221, 223
Metropolitan Life Insurance com- Multicurrency Commercial Paper NRSROs. See Nationally recog-
pany Co., 98 (Merrill Lynch), 81 nized statistical rating
Mezzanine (MEZ) bond, 202 Multiple tranches, 187 organizations
Michigan Higher Education Loan Multiple-price auctions, 27 Off-balance sheet instruments,
Authority, 204 Multi-seller programs, 78 298
MidCap 400. See Standard & contrast. See Single-seller pro- capital requirements, 300
Poor™s grams usage, 305
Minimum capital requirements, Municipal funds. See Short-term Off-balance sheet interest-rate
306“309 municipal funds derivatives, 283
MMR screen (Bloomberg), 71, Municipality, tax receipts, 120 Of¬ce of Federal Housing Enter-
76, 128 prise Overnight (OFHEO),
Money brokers, 2 47, 53
Nationally recognized statistical rat-
Money center banks, 1, 303 Off-market swap, 261
ing organizations (NRSROs),
Money market curves (MMCV), Off-the-run issue, 33
70“71, 78“79
74 Ogden, Joseph P., 42
Near-cash instruments, 276
Money Market Program Descrip- Old Mutual plc, 139
Nearness. See Money
tion screen (Bloomberg), On special. See Collateral; On-
Negotiable CDs, 86. See also
83 the-run Treasuries; Securi-
Citibank
Money markets, 2“3. See also ties
Net interest, 198
Global money markets On-the-run issue, 33
Net portfolio yield, 196
calculations, 7 On-the-run Treasuries, on spe-
Net present value. See Swaps
equivalent yield, 31, 55 cial, 257
Net WAC, 182
funds, 1 On-the-run U.S. Treasury yield
New Deal Program, 66
instruments, 5, 55, 133 curve, 254
New York Federal Reserve, 33
mutual funds, 1, 86, 98 On-the-run yield curve, 256
New York Life, 99
securities, 3 Open Market Committee. See
Nippon Credit Bank, 305
yield, 41 Federal Reserve
Non-accelerating senior (NAS)
curve, 87 Open Market Desk, 33
tranche, 199“200
Money market-type instruments, Open market operations, 33, 90.
Non-ACCESS dealers, 48
178 See also Bank of England
Nonagency CMOs, 179“188
Money, nearness, 276 Open-end HEL (HELOC), 200“
structures, 180
Month-end bills, 43 201
Nonagency securities, 179
Month-end data, 69 Open-end HEL-backed securi-
Non-amortizing assets, 189“190,
Monthly payment rate (MPR), ties, 200“201
194
196“197 Operational risk, 306, 309
Non-amortizing security, 193
Monumental Life, 99 Option-adjusted spread (OAS),
Non-competitive bids, 48, 49
Moody™s Investors Service, 77, 108, 117, 284
Non-exchange-traded derivative
195 Organization for Economic
instrument, 225
Special Comment, 98 Cooperation and Devel-
Non-¬nancial companies, 75
study, 99 opment (OECD), 301
Non¬nancial corporations, 68
Mortgage. See Adjustable-rate Oslobanken, 305
Non-government securities, valu-
mortgage; Balloon mort- Overnight money, 90
ation, 266
gage; Fixed-rate level-pay- Overnight repo, 120
Non-interest bearing liabilities,
ment fully amortized Over-the-counter (OTC)
289, 291
mortgage agreement, 209
Non-investment grade rating,
balance, 152, 157 FRA contract, 266
182
designs, 151“153 instruments, 230
Non-prime CDs, 88
institutions, 2 Non-pro¬t organizations, 204
324 Index


PAC. See Planned amortization performance reports. See Credit disbursement, 168, 170, 172,
class cards 173
Paper-bill spread, 75 return, optimization, 285 Principal repayments. See Sched-
Par value, 106, 156 yield. See Gross portfolio uled principal payments
Parental Loans for Undergradu- yield; Net portfolio yield reinvestment, avoidance, 161
ate Students (PLUS), 204 Preference shares, 303 schedule, 176, 179
Partially supported program, Premiums, amortization, 84 Principal-amortization period,
contrast. See Fully sup- Prepayments, 152, 175, 198, 193
ported program 207. See also Actual pre- Private entity, 179
Participation certi¬cate (PC), 155 payments; Auto loan- Private Export Funding Corpo-
Passthroughs, 180. See also Gov- backed securities ration, 45
ernment National Mort- benchmark. See Public Securi- Private investors, 2
gage Association; Multi- ties Association Pro rata principal, share, 199
class passthroughs concept, 190 Probability-to-default (PD)
coupon rate, 154 conventions, 156“158 bands, 308“309
securities. See Agency mort- environment, 183 Pro¬t objectives, 275
gage passthrough securi- form, 181 Pro¬t/loss (P/L), 264
ties; Mortgage options, 105. See also Assets Program information, 83
structure, 193 exercising, 160 Program-wide credit enhance-
Payment invoice, 61 protection, 199. See also ments, 79
Payment rules, 163“164 Planned amortization class; Program-wide credit support, 78
Payment structure, 187 Two-sided prepayment Program-wide liquidity facility, 79
Payment-to-income ratio, 180 protection Projected prepayments, 158
Payoff equivalent, 232 provisions, 105 Properties, ¬rst lien, 197
Paythroughs, 161 rate notation. See Bloomberg- Prospectus prepayment curve
structure, 192 de¬ned prepayment rate (PPC), 198
Pension funds, 68 notation Protection period, 271
Period forward rate, 226, 244 ratios, 292 Public Debt Act of 1942, 24
Periodic cap, 153 risk, 153, 160“161, 167, 177 Public Securities Association
Periodic coupon interest, pay- disappearance, 175 (PSA), 123, 159“160
ment, 168, 170, 172, 173 signi¬cance, 160 assumption, 158
Periodic interest rate conversion. speed, 156 prepayment benchmark, 156“
See Effective annual yield stability, 202 158
Periodic payment, 189 vector, generation, 184 range, 174“177
Perpetual annuity, 109 Present value (PV), 245“247, rate, 173
Pillar 1, 306“309 253. See also Basis point; speeds, 172
standardized approach, 307“ Swaps usage, 167, 172
308 calculation. See Floating-rate Purchase
Pillar 2, 309“310 payments date, 143
Pillar 3, 310“311 Pre-set contingencies. See Liquid- price, 113, 143
Planned amortization class (PAC). ity Purchased securities, 143
See Busted PAC Pre-tax basis, 303 segregation. See Bond Market
bondholders, 171 Price Association
bonds, 172“175, 178“179 differential, 142“143 Put option, structure. See Embed-
¬‚oaters, 175 ¬‚uctuation, 215 ded put option
PAC I bond, 178 quotes, 155“156, 268. See also Put price, 105
PAC II bond, 178“179 U.S. Treasury bills Put provisions, 105
PAC III bond, 179 volatility, characteristics. See Put swaption, 264
prepayment protection, 176 Floating-rate securities Putable swaps, 258
schedule, 177 Price Table (PT) screen, 177, 184 PV. See Present value
tranches, 171“177, 199 Price-based contract, 267 PVBP report, 293, 295
PLUS. See Parental Loans for PRICING, 272, 274 PX1 Governments screen (Bloom-
Undergraduate Students Pricing berg), 29
PNC Bank, 204 rate, 143
Pool reference, 35 Quanto option, 261
factor, 156 Primary dealers, 27, 33“34 Quarter-end bills, 43
insurance policies, 181 Prime CDs, 88. See also Non- Quoted margin, 101, 107“108,
Pool-speci¬c credit enhancements, prime CDs 112“117
79 Prime rate, 143, 149, 188 Quote/settlement, difference, 236
Portfolio. See Short-duration port- Principal interest payments, 254
folios Principal pay down window, 167 Ramanlal, Pradipkumar, 41, 42,
consequences, 177 Principal payments, 268 51
managers, 285 deferrence, 175 Ramsey, Chuck, 171
Range note, 104
325
Index


Rapid amortization period, 201 Reset risk, 188 borrowing/lending, 124
Rapid amortization provisions, Residential mortgage market, 63 dealer, 69
194 Retail-oriented funds, 98 holders, payment, 154
Rating agency, requirements, 180 Return lending, 122
RBS Financial Markets, 139 risk-adjusted measures, 284 market, 138
RBS NatWest plc, 88 swap. See Total return swap life, 109
Real Estate Mortgage Investment Reuters, 35, 69, 139 on special, 132, 257
Conduit (REMIC), 161 Reverse ¬‚oaters, 103 par amount, 28
Receivables. See Trade Reverse repos, 119, 122“124, purchase, 212
purchase, 4 133 reversing in, 123
Recessionary economic periods, rates, 128 reversing out, 122
191 Revolving credit lines, 201 specialness, 131
Reference Bills. See Federal Revolving period, 193, 201 Securities and Exchange Act of
Home Loan Mortgage Risk 1933, 68
Corporation aversion, 88 Securities and Exchange Com-
Reference rates, 102, 198, 204“ exposure, 310 mission (SEC), 68
205, 223. See also Swaps assessment, 284 Rule 415, 81
change, 109 hedging, reporting, 284 shelf registration, 83
difference, 104 limits, setting, 284 Securities Industry Association
usage, 226, 237, 258, 270 management, 286 Standard Securities Calcu-
value, 109 systems, 311 lation Methods, 7
Regular-day settlements, 47 perceived level, 309 Security Description (DES), 13,
Regulatory capital, 297 premium. See Sovereign risk 50, 54, 60, 82
REMIC. See Real Estate Mort- weighting, 300 presentation, 177, 184, 194“
gage Investment Conduit Risk-adjusted exposure, 300 195, 201, 205
Replacement securities, 148 Risk-averse investors, 257 Security Display (DES), 8, 10
Repo/Reverse Repo Analysis Risk-based capital requirement, 6 Segregated customer account,
(RRRA) screen, 120“121, Risk-weighted assets, 301 127
125, 137 Risk-weighted capital require- Self-liquidating commercial trans-
Re-pricing intervals, 295 ment, 310 action, 97
Repurchase RMJ Securities Corp., 34 Seller, 119“120, 126
date, 119, 143 Roller coaster swap, 253, 259 margin amount, 144
price, 119“121, 143 Rollover, 68 margin percentage, 144
Repurchase agreements (repos), risk, 70 Seller/servicer, quality, 187
19, 90, 112, 119. See also Roosevelt, Franklin D., 66 Selling Group of Discount Note
Bond Market Association; Rowe & Pitman, 139 Dealers, 48
Callable repo; Cross-cur- RRRA. See Repo/Reverse Repo Semiannual interest rate, deter-
rency repo; Global Master Analysis mination, 21
Repurchase Agreement; Rule 415. See Securities and Senior tranche, 182“183, 192
Overnight repo; Reverse Exchange Commission cash ¬‚ow characteristics, 184
repos; Whole loan repo Rural Electri¬cation Administra- Senior/subordinated structures,
basics, 120“123 tion, 45 181“183
documentation, 123 Rural Housing Service (RHS), Sequential (SEQ), 190
interest, 121“122 155 Sequential-pay CMOs, 162, 175
margin, 120, 124“126 Rural Telephone Bank, 45 structures, 168
market, 221. See also United Russia, currency Sequential-pay tranche (SEQ),
Kingdom gilt repo market default, 75 162“168, 202
participants, 133 devaluing, 38 Servicing
structures, 133“135 fee, 154
terminology, 122“123 spread, 152
Safe havens, 38
rate, 113, 120. See also Two- Setting date, 234
Saidenberg, Marc R., 75
way repo rates Settlement
Scheduled bond, 178
determinants, 128“131 date, 113, 210, 216, 223. See
Scheduled principal payments,
transaction, 124, 257 also Forward rate agree-
177, 198
usage, 137 ments; Swaps
Scheduled principal repayments,
Required margin, 105 usage, 232
158, 171, 175
Reserve banks, 2 day, 74
Scottish Amicable, 140
Reserve funds, 181 difference. See Quote/settlement
Sears, 192
Reserve requirements, 88, 97 frequency. See Fixed-rate pay-
Second tier issues, 71
Reset date, 108, 234, 260, 272 ments
Secondary market, 32“35, 70
comparison. See Floating-rate payment, 214
Securities. See Defensive securi-
securities price, 211
ties; U.S. government secu-
payoff, 273 sum, 223
rities
remaining time. See Coupon Settlement money, 120, 125, 137
amortization, 105
326 Index


Shelf registration. See Securities Small Business Administration Student loans (STDLN), 190
and Exchange Commis- (SBA), 45 SUB. See Subordinated
sion loan-backed securities, 207“208 Sub-market yield, 106
Shifting interest structure, 183 loans, 208. See also Variable- Subordinate tranche, 183
Short cash, 2 rate SBA loans Subordinated (SUB), 190
Short futures, 210 pools, 208 Subordination level, 183
Short positions, 210, 225 SBA-backed securities, 207 Support bonds, 174“175, 177“
covering, 133 Small Business Secondary Market 179
Short selling, 130 Improvement Act (1984), class, protection, 179
Short-dated yield curve, 130 207 Support tranche, creation, 179
Short-duration portfolios, 161 SMM. See Single-monthly mor- Supranational institutions, 81
Short-run liabilities, excess, 285 tality Swap rate (SR), 240, 268
Short-term ABS, 5, 187 Soft bullet (SB), 190 calculation, 229, 241
Short-term assets, 285 Sovereign authority, 2 determination, 245“247
Short-term balloon loan, 153 Sovereign domicile, 307 ¬xed-rate payments, 248
Short-term borrowing, 153 Sovereign governments, 81 Swapnote, 265“269
Short-term debt, 66, 292 Sovereign risk, 88 contract, 265
instruments, 4, 85 premium, 88 speci¬cations, 267“269
obligations, 46 Special purpose corporation (SPC), trade spread history, 269
Short-term discount instruments, 4. See also Bankruptcy- Swaps, 35, 135, 229. See also
23 remote SPC Cross-currency swaps; Cur-
Short-term ¬xed-rate products, Split tier issues, 71 rency swap; Interest rate;
101, 151 Spread, 200. See also Excess Non-vanilla interest-rate
Short-term ¬‚uctuations, 292 spread; Option-adjusted swaps; Total return swap;
Short-term funding requirement, spread Vanilla swap
87“88 capturing, 128 agreement, 231
Short-term funds, 68. See also determinants. See Swaps cancellation, 261“262
U.S. government short- duration, 108 cash ¬‚ows, net present value,
term funds measures, 101, 108“117 259
Short-term interest, 65 Spread for life, 108, 112 contract, 265. See also Exchange-
Short-term interest rates, 39 Stafford loans, 204 traded interest-rate swap
contracts, 217 Standard & Poor™s contract
futures, 266 credit rating, 202 administration requirements,
contracts, 212“220 MidCap 400, 104 267
trading, 225 security, rating, 184 conventions, 233“236
movement, 130 Standard Chartered Bank, ¬‚oater, curve, 256
trading, 225 104 description. See Interest rate
Short-term investments, 68 Standard Life, 140 swap
Short-term liabilities, liquidation, STDLN. See Student loans ¬‚oating-leg, 258
43 Stepped spread ¬‚oaters, 104 futures contract. See Chicago
Short-term loans, 59 Step-up swap, 259 Board of Trade
Short-term MBS, 5, 151 Sterling CDs, 136 cash-settling, 269
Short-term MTNs, 4 Sterling LIBOR contract, 217 payment, computation, 236“
Short-term municipal funds, 1 Stock Exchange Money Brokers 237
Short-term rate level, increase, (SEMBs), 136, 139 position, interpretation, 231“
276 Stock Market Reset Term Notes 233
Short-term repos, 127 (Merrill Lynch), 104 reference rate, 233
Short-term security, 161 Stojanovic, Dusan, 71 settlement date, 237
Siegel, Jeremy J., 38 Stop out discount rate, 49 spreads, 247
Sigma, 246“247, 267 Stop yield, 27 determinants, 253“258
Simple interest, 56“57 Strahan, Philip E., 75 term, 237
Simple margin, 112 Strike rate, 270“273 terminology, 233“236
Simple yield (365-day basis), CD STRIPS, 8 transaction, 230
yield conversion, 20 Structural risk, 77 valuation, 247“253
Single-monthly mortality (SMM) Structured notes, 35 Swaptions, 259, 264“265. See
rate, 157, 191“192 Student loan asset-backed securi- also Call swaption; Put
Single-price auctions, 27 ties (SLABS), 202“204 swaption
Single-seller conduits, 79 indexing, 205 Synthetic ¬‚oating-rate asset, 258
Single-seller programs, 78 Student Loan Marketing Associ- Synthetic foreign currency denom-
multi-seller programs, contrast, ation, 46, 64“65, 204 inated commercial paper,
79 Student loan portfolio, 65 81
Site-built homes, 201 Student loan prepayments, 207 Systemwide Bonds, 60
Skip-day settlements, 47 Student loan-backed securities,
SLM Student Loan Trust, 205 202“208 Tax bills, 43
327
Index


Tax liens, 76 Unit trusts, 1 U.S. Treasury rates, 98
TBA. See To be announced United Kingdom gilt repo mar- U.S. Treasury securities, 24. See
Teaser period, 153 ket, 136“141 also Maturity
Teaser rate, 153 participants, 139“140 supply, decrease, 265
Telerate, 69 structure, 138“139 U.S. Treasury yield curve. See
Tennessee Valley Authority (TVA), United Kingdom market, 140 On-the-run U.S. Treasury
45, 46, 66 structure, 138 yield curve
Term CDs, 86 United States Code, 149 USSPS Index GP, 254
Termination money, 137 Universal Commercial Paper
Terrorist attacks (2001), 90, 91 (Goldman Sachs), 81 Valuation model, 117
Thakker, Nimmish, 265 U.S. Department of Education Value-at-risk (VaR), 284, 302.
Third tier issues, 71 (DOE), 204 See also Credit
Third-party acceptance, 94 U.S. Department of Housing and limits, 282
Third-party credit support, 79 Urban Development (HUD), Vanilla swap, 261
Third-party guarantor, 78 47 Variable-rate closed-end HELs,
credit risk, 181 U.S. government 198
Thrifts, 85 budget surpluses (1998/1999), Variable-rate gap, 293
CDs, 86 25 Variable-rate SBA loans, 207
cost of funds, calculation, 153 credit/faith, 23 Variable-rate securities, 102
Tick size/value, 215, 268 U.S. government agency Variation margin, 211
Tiers, 300“302 instruments, 45 Vaughan, Mark D., 71
Time U.S. government securities, 32 Veterans Administration (VA),
buckets, 293 U.S. government short-term funds, 155, 202
draft, 96 1 Visa, 192, 193
series plot, 75, 91 U.S. MTNs, 98 Volatility
To be announced (TBA) trade, 156 U.S. Treasuries, safety, 38 characteristics. See Floating-
Top tier issues, 71 U.S. Treasury rate securities
Top top tier, 74 borrowing, 46 estimate, 272
Total adjusted margin, 114 bulletin, 23 increase. See Interest rate
Total minimum capital, 309 credit line, 63 level, 91
Total return swap, 135 U.S. Treasury auction
Trade process, 24“28 Washington Metropolitan Area
bills, 94 results, determination, 26“28 Transit Authority, 45
date, 223, 233, 268 schedule, 24“26 Weak link test, 181
receivables, 76 U.S. Treasury bills, 4, 16, 23, 54, Weighted average, 91
Trading 278 rate, 109“110
book, 301 2-week, 132 Weighted average coupon (WAC)
hours, 32, 268 auction, 27“28 rate, 154, 158“159, 163.
procedures, 155“156 bids/offers, 29 See also Gross WAC; Net
unit, 268 curve, 51 WAC
Traditional ALM, 282“283 futures, 212“215 Weighted average life (WAL),
Tranches, 163“173, 182“184. contract, 212 194
See also Accrual tranches; LIBOR, comparison, 35“39 Weighted average maturity (WAM)
Floating-rate tranches; Plan- liquidity, 23 rate, 154, 158“159, 161,
ned amortization class; maturing, 51 163
Sequential-pay tranches price, 73 Weighted risk assets, 300
creation. See Support tranche quotes, 29“32 When-issued market, 29
maturity, 169 purchase, 35 When-issued yields, 28
principal paydown, 169 sale, 26, 35 Whole Loan Prepayment Vec-
Tranching, 180. See also Credit tax exemption, 75 tors model. See Bear
Transamerica Occidental Life, 99 types, 23“24 Stearns
Travelers, 99 usage, 17 Whole loan repo, 135
Treasury transactions, 280 value, 42“43 Whole-loan CMOs, 180
Tri-party repo, 127, 140 yields, 12, 74, 102 Window dressing. See Balance
Tullet & Tokyo, 139 behavior, 35“39 sheet
Forex International, 227 idiosyncratic variability, 35 Winner™s curse (problem), 27
Tullett & Tokyo Securities Inc., LIBOR, relationship, 36 Wired Amount, 137
34 U.S. Treasury bonds, 16, 31 Withdrawals. See Deposits
Two-sided prepayment protec- U.S. Treasury coupon securities, Working capital, needs, 67
tion, 172 155 Writer, 264
Two-way repo rates, 139 U.S. Treasury dealers, 33“35
U.S. Treasury notes, 16, 31, 119“ Yamaichi Securities, 305
121
UBS group, 139 Yankee CD, 86
10-year, 133
UK gilts, 134
328 Index


Yield. See Annualized yield; CD yield conversion. See Sim- Yield Analysis (YA), 10, 61, 64,
Bank discount; Bond- ple yield 73, 108, 111
equivalent yield; CD curve, 188, 286. See also Yield Calculations, 62
equivalent yield; Com- Money markets
mercial paper; Current riding, 41“42 Zero-coupon bonds, 14, 168
yield; Interest-bearing usage, 39“42 Zero-coupon discount factor,
securities; Stop yield spreads, 51, 75 267“268
behavior. See U.S. Treasury margin, 111 Zero-coupon swap, 259“260
bills usage, 39 Zimmerman, Thomas, 192

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