Average Aggregate Notional Amount. Under the CFTC’s and Prudential Regulators’ uncleared swaps margin rules, AANA is the amount used to determine whether a financial end user has “material swaps exposure,” and also to determine the applicable compliance date under the rules. In both cases, it includes the amount of uncleared swaps, security-based swaps, foreign exchange forwards, and foreign exchange swaps for an entity and its affiliates.
Asset-backed commercial paper. ABCP is commercial paper (short-term unsecured debt) that is issued by an SPE sponsored by a financial institution or other issuer and may often be collateralized by the assets of the SPE. During the financial crisis, the off-balance sheet obligations of ABCP vehicles were assumed by their financial institution issuers.
Asset-backed securities. ABS are bonds, notes or certificates backed by pools of financial assets, such as auto loans, credit card receivables, student loans, and trade receivables. Depending on the context, the term “ABS” may be used to encompass such securities backed by all types of financial assets, including mortgage loans, or it may be used (particularly in US securitization industry parlance) to refer to such securities backed by financial assets other than first lien residential mortgage loans, commercial mortgage loans, and corporate bonds or loans.
Accredited investors are a category of sophisticated investors under US securities laws. Accredited investors generally include: (i) entities with total assets in excess of $5 million not formed for the specific purpose of acquiring the securities offered; (ii) private business development companies; (iii) directors, executive officers, general partners and knowledgeable employees of the issuer of the applicable securities or a parent of such issuer; (iv) natural persons with an individual net worth, or joint net with their spouse or spousal equivalent in excess of $1 million; (v) natural persons with an individual net income in excess of $200,000 or joint income with their spouse or spousal equivalent of $300,000 in each of the two most recent years with the reasonable expectation of the same individual or joint income level in the current year; (vi) state or SEC-registered investment advisers; (vii) natural persons regardless of net worth or net income having certain securities licenses; (viii) family offices and family clients; and (ix) any entity in which all the equity owners are accredited investors. The full definition of accredited investor can be found under Section 501 of Regulation D.
This refers to securities with an average daily trading volume of at least $1.0 million of an issuer that has common equity securities with a public float of at least $150 million (these securities are generally referred to as “actively-traded securities” for purposes of Regulation M, which is an anti-market manipulation rule, which applies to securities distributions).
ADTV is used in the context of Regulation M and refers to the worldwide average daily trading volume during the two full calendar months immediately preceding, or any 60 consecutive calendar days ending within the ten calendar days preceding, the filing of the registration statement; or, if there is no registration statement or if the distribution involves the sale of securities on a delayed basis pursuant to a shelf registration statement, two full calendar months immediately preceding, or any consecutive 60 calendar days ending within the ten calendar days preceding, the determination of the offering price.
This refers to a securities offering in which the financial intermediary, or investment bank, is acting as a placement agent, on a best efforts basis, introducing the issuer to potential investors, and not purchasing the offered securities as principal for resale to investors.
AHYDO refers to the “applicable high yield discount obligation.” The AHYDO tax rules limit the deductibility of interest expense on certain instruments that do not provide for current-pay interest. If the AHYDO rules apply, then these rules have the effect of disallowing interest deductions attributable to yield on the instrument in excess of the “applicable federal rate” plus six percentage points and, second, deferring deductions for the balance of the interest accruals on the applicable instrument until actually paid. The AHYDO rules apply to an instrument that: (1) is issued by a corporation, (2) has a term to maturity of more than five years, (3) has a yield to maturity that is five percentage points or more in excess of the relevant applicable federal rate in effect on the issue date, and (4) that has “significant original issue discount.”
Alternative Investment Fund Managers Directive (2011/61/EU). The AIFMD introduces a harmonized regulatory framework for managers of AIFs (being funds other than UCITS funds) managing or marketing such funds in the EEA. The AIFMD covers areas such as the marketing of investment funds to investors, reporting, and compliance standards.
In a securities distribution, the investment banks that are part of the underwriting syndicate will give an all sold order to the lead manager, indicating that all of the securities that they were allocated to sell have been sold so that the distribution can be deemed completed for Regulation M purposes and the securities can be released to trade.
In connection with a securities offering, the lead underwriter will allocate (or apportion) to the other members of the underwriting syndicate the securities that they may offer and sell. The underwriters will then allocate securities to particular customer accounts following a book building process in which they have sought indications of interest from investors. Generally, investment banks will have policies or principles that they will apply in respect of allocating securities to client accounts that are designed to comply with applicable regulations and avoid conflicts of interest.
Anti-Money Laundering. A set of procedures, laws, or regulations designed to stop the practice of generating income through illegal actions. From a regulatory perspective, the Financial Action Task Force develops and promotes international cooperation to seek to combat money laundering. In the EU, Directive 2005/60/EC introduced measures that seek to prevent the use of the financial system for the purpose of money laundering and terrorist financing. An example of AML regulations is one that requires institutions issuing credit to complete a number of due diligence procedures to ensure that these institutions are not aiding in money-laundering activities. The onus to perform these procedures is on the institutions, not the criminals or the government.
Refers to one or more, generally, institutional investors that have, in the context of a private placement, agreed to subscribe for a meaningful percentage of the offering; and in the case of a public offering, refers to an investor (often an existing stockholder or insider) that has indicated interest in participating in the public offering and bringing a significant percentage of the offered securities.
Accumulated other comprehensive income. The U.S. bank capital rules eliminate the “AOCI filter” for advanced approaches banks, which lets banks reverse fair value adjustments to shareholders’ equity in their capital calculations. Non-advanced approaches banks can make a one-time election to opt out of the provisions removing the AOCI filter.
Auction rate preferred stock. ARPs and ARS (auction rate securities, which may be in the form of notes) have dividend or interest rate payments that are reset at frequent intervals through auctions, which typically occur every 7, 14, 28, or 35 days. The auctions also provide the primary source of liquidity to ARS investors who wish to sell their investment. Closed end funds, municipalities, and other types of issuers relied on ARPs and ARS for funding purposes. The auctions for ARPs failed during the financial crisis, rendering the securities illiquid.
Generally refers to the investment bank that has been retained by an issuer to assist the issuer in establishing a medium-term note or other continuous offering program and which will also act as a dealer or manager with respect to the program. Arranger also may refer to the commercial bank that helps an issuer (as borrower) to negotiate and arrange a credit facility.
Available stable funding. Under the Net Stable Funding Ratio (NSFR), a bank must have available stable funding for a one-year time period. Available stable funding includes regulatory capital, retail and SME deposits, operational deposits, liabilities having a maturity of over one year, and certain other funding.
An at-the-market offering is a type of follow-on offering pursuant to which an issuer offers shares of its equity securities, usually common stock, into an existing trading market at prices related to the then-market price of the stock to or through one or more investment banks acting on a principal or agency basis.
Additional Tier 1 capital. AT1 is one of the two components of Tier 1 capital, the highest quality capital under the Basel framework, with the other being common equity Tier 1 (or CET1). In order for an instrument to constitute AT1, it must meet the prescriptive criteria identified in the final Basel III framework, such as an ability to absorb losses, subordination, fully discretionary non-cumulative dividend payments, no incentive to repay or redeem, etc. AT1 also may be referred to as “non-core” Tier 1. AT1 is subordinate to depositors, general creditors, and subordinated debt of the bank.
A “baby bond” refers to a series of bonds or notes, generally offered pursuant to an effective registration statement, by the issuer and having a small denomination of $25 or $100 per bond (unlike most bonds, which are issued in $1000 minimum denominations). A baby bond generally will be listed and traded on a national securities exchange, and may bear a CUSIP number typically associated with an equity security. It is designed to be marketed and sold to retail investors.
An issuer is eligible to file a shelf registration statement on Form S-3 (or Form F-3 for foreign private issuers) for primary offerings even if they have less than $75 million in public float, if the issuer: meets the general eligibility conditions for the use of Form S-3 or F-3; has a class of common equity securities that is listed and registered on a national securities exchange; has not sold securities valued at more than one-third of its public float in certain primary offerings over the previous twelve calendar months; and is not a shell company and has not been a shell company for at least twelve calendar months. The Form S-3 Instruction 1.B.6(a) that limits the amount that the issuer can offer to up to one-third of the market value in any trailing twelve-month period often is referred to as the “baby shelf rule,” and the shelf registration statements filed by issuers that have less than $75 million in public float and are subject to this limitation, are referred to as “baby shelves.”
Backward-looking rates are known after the beginning of an interest period. This is by contrast to LIBOR, which is a forward-looking rate and is known at the beginning of the interest period.
Eligibility to rely on the offering exemptions is dependent upon, among other things, the absence of any “bad actor,” including among the issuer, the issuer’s directors and officers, certain significant shareholders of the issuer, and any person who has received or will receive direct or indirect compensation for solicitation of purchasers in connection with such offering, among others. The disqualifying events, or bad acts, include certain criminal convictions, restraining orders, and regulatory proceedings in connection with the purchase or sale of a security involving false statements.
A set of international banking regulations published by the BCBS in 1988, referred to as the “Basel Accord,” that set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets. Basel I has now been superseded by Basel II and Basel III, which provide more sophisticated mechanics for calculating risk weighted assets.
Basel II updates the Basel I Accord published by the BCBS. It was initially published in 2004 and provides a more sophisticated measure of calculating risk-weighted assets. Whereas the Basel I focus was mainly on credit risk, Basel II set out a comprehensive “three pillars” approach, comprising (i) minimum capital requirements, (ii) supervisory review, and (iii) market discipline including disclosure.
Basel III is a regulatory banking standard agreed to in 2010 by members of the BCBS. It is expected that its implementation is a lengthy process. Basel III aims to strengthen the regulation, supervision and risk management of the banking sector. Basel III addresses such matters as capital requirements, bank leverage, and required liquidity.
Basel Committee on Banking Supervision. The BCBS was established in 1974 and is made up of representatives of the central banks and banking supervisory authorities of various countries. The BCBS was designed as a form for regular cooperation between its member countries on banking supervisory matters. It aims to enhance financial stability by improving supervisory know-how and the quality of banking supervision globally. Decisions of the BCBS have no legal force, but the BCBS provides guidelines and recommendations of best practices aimed at national authorities.
Business development company. BDCs are closed-end management investment companies that elect to be subject to the provisions of Section 55 through 65 of the 1940 Act. Investment companies that elect to be regulated as BDCs are subject to some, but not all, of the regulatory restrictions imposed by the 1940 Act. BDCs may be publicly traded or privately offered, invest primarily in small companies in the initial stages of development, and must offer significant managerial assistance to their portfolio companies.
Regulation 2016/1011 of the European Parliament, in respect of indices used as benchmarks in financial instruments and contracts. The Regulation’s aim is to improve the governance and controls applicable to financial benchmarks. The Regulation imposes various obligations on benchmark administrators, contributors and users. Benchmark administrators in the EU are subject to authorization and supervision by their home competent authority.
Agreements often will contain standard of performance, such as a “best efforts,” “reasonable best efforts,” “commercially reasonable efforts,” or other similar formulation. The standard may be used in the context of an acquisition or merger transaction, or in connection with covenants contained in engagement letters, placement, or underwriting agreements.
Bank for International Settlements. The BIS was established in 1930 and is an international organization that serves as a bank for central banks around the world. Its functions include promoting discussion and collaboration amongst central banks, supporting dialogue with authorities responsible for financial stability, and acting as a prime counterparty to central banks in their financial transactions.
Blank check preferred stock refers to authorized but unissued preferred stock; the terms of which have not been set out in the issuer’s articles of incorporation or certificate of incorporation but may be determined by the issuer’s board of directors. An issuer’s articles or certificate of incorporation would authorize a specified maximum number of shares of preferred stock that the issuer may issue from time to time and grant the issuer’s board of directors the authority to set the terms of any series of preferred stock, including, but not limited to, the voting rights, the preferences, and any rights associated with the securities and these would be set out in a certificate of designations or in articles supplementary.
A block trade may refer to a large order, such as, for example, an order that consists of 10,000 shares of a given stock or that consists of at least total market value of $200,000 or more. However, colloquially, “block trade” may be used to refer to a large trade that may be executed by a financial intermediary on a principal or on an agency basis, usually on behalf of an institutional investor. It may refer to a block executed pursuant to a registered basis or in reliance on Rule 144.
A blood letter refers to a letter from the underwriters (or the initial purchasers) to the issuer setting out the information that the underwriters have furnished for inclusion in the offering materials and the underwriters agree to indemnify the issuer in connection with losses arising out of misstatements or omissions relating to this information. Usually, the information that is provided by the underwriters is quite limited and references only a few sentences or paragraphs in the “Plan of Distribution” or the “Underwriting” section of the offering materials.
Federal Reserve Board of Governors. Central governmental agency of the Federal Reserve System, located in Washington, DC, and composed of seven members who are appointed by the President and confirmed by the Senate. The Board is responsible for domestic and international economic analysis with other components of the System; for the conduct of monetary policy; for supervision and regulation of certain banking organizations; for operation of much of the nation’s payments system; and for administration of most of the nation’s laws that protect consumers in credit transactions.
In an underwritten public offering. The issuer will appoint one or more of the underwriters participating in the offering and comprising the underwriting syndicate as the bookrunner. The bookrunner, which is usually the lead underwriter, has additional responsibilities relating to the book-building process (deciding on the allocation of orders, pricing, etc.). Other underwriters, referred to as co-managers, may take a more passive role. Often, some are referred to as passive or co-managers. The bookrunner may receive additional compensation.
In the United States, broker-dealers (“BDs”) are required to register with the SEC, and also to become a member of an SRO, which is FINRA. Title IX of the DFA required that the SEC consider whether BDs should be subject to a fiduciary duty (akin to the duty owed by a registered investment adviser to a client). Previously, BDs were subject to a suitability standard. Following adoption of Regulation Best Interest (“Reg BI”), BDs are now subject, in their interactions with retail clients, to a heightened standard of care, though not a fiduciary standard.
Bank Recovery and Resolution Directive. The BRRD came into force in July 2014 in the EU and provides authorities with comprehensive arrangements to deal with failing banks at a national level, as well as cooperation arrangements to tackle cross-border banking failures. These include preparation of recovery plans, bail-in powers, and other early intervention measures.
Bank Secrecy Act. The BSA was passed in 1970. It is also known as the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act. Among other things, it requires financial institutions to maintain records of currency transactions, file Currency Transaction Reports for each transaction over $10,000, and report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
Business development companies (“BDCs”) are closed-end management investment companies that elect to be subject to the provisions of Section 55 through 65 of the Investment Company Act, or 1940 Act. Investment companies that elect to be regulated as BDCs are subject to some, but not all, of the regulatory restrictions imposed by the 1940 Act. BDCs may be publicly traded or privately offered, invest primarily in small companies in the initial stages of development, and must offer significant managerial assistance to their portfolio companies.
Capital, Assets, Management, Earnings, Liquidity, Market Sensitivity (Regulatory Bank Ratings). The CAMELS rating system (from 1 to 5) is a supervisory system for U.S. banks to evaluate the bank’s condition. A CAMEL 1 rating is the strongest and a CAMEL 4 or 5 indicates serious concerns. These ratings are not published.
The amount of capital a bank must hold to act as a cushion to absorb unanticipated losses and declines in asset values that could otherwise cause a bank to fail. Banking regulators require banks to hold more high-quality, or Tier 1, capital against total risk-weighted assets under the Basel III international accord. U.S. banks are classified as well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized based on regulators’ capital and leverage calculations.
Credit Card Accountability Responsibility and Disclosure Act. The CARD Act was passed in 2009. Among other things, the Act prohibited card issuers from raising interest rates on existing balances, required that late fees and other penalties be “reasonable and proportional,” and altered credit card statements to include new information including how long it will take for a consumer to pay off a balance and the total amount of interest charged.
Regulation S Category 1 securities, as to which there is minimal risk of flow back into the United States of securities sold offshore and, which accordingly, are subject to the fewest restrictions under Regulation S. Regulation S Category 1 includes securities of foreign issuers for which there is no SUSMI that are sold in overseas directed offerings and foreign government securities. The full definition of Regulation S Category 1 can be found under Section 903 of Regulation S.
Regulation S Category 2 securities are securities of foreign issuers that do not qualify for Regulation S Category 1, including equity securities of reporting foreign issuers and debt securities of foreign issuers (reporting and non-reporting). Regulation S Category 2 securities are subject to more restrictions under Regulation S, including a distribution compliance period, as a result of the greater danger of flow back into the United States. The full definition of Regulation S Category 2 can be found under Section 903 of Regulation S.
Regulation S Category 3 securities are securities that do not qualify for Regulation S Category 1 or Regulation S Category 2. Regulation S Category 3 securities are subject to the most significant restrictions under Regulation S, including a distribution compliance period and legending and purchaser certification requirements, as a result of the greater danger of flow back into the United States of securities sold offshore. The full definition of Regulation S Category 3 can be found under Section 903 of Regulation S.
Comprehensive Capital Analysis and Review. The CCAR is an annual exercise by the Federal Reserve to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks and sufficient capital to continue operations throughout times of economic and financial stress. As part of the CCAR, the Federal Reserve evaluates institutions’ capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions, such as dividend payments or stock repurchases. The CCAR includes a supervisory stress test to support the Federal Reserve’s analysis of the adequacy of the firms’ capital.
Chief Compliance Officer. The CFTC’s business conduct rules require SDs (and MSPs) to appoint a CCO, and similar SEC business conduct rules likewise require SBSDs and MSBSPs to appoint a CCO. The SEC also requires registered investment advisers, registered funds, and registered BDs to designate a CCO. The CCO’s responsibilities differ depending upon the regulatory regime under which an entity operates, but they may include, among others, designing and maintaining a program to ensure compliance with applicable statutory and regulatory requirements; conducting periodic reviews of such compliance program; preparing periodic reports (which may be provided to a regulator, an SRO, or a board of directors); and assessing the extent of the entity’s compliance with such requirements. CFTC rules also require that CCOs be appointed for FCMs, DCOs, SEFs, and SDRs.
Central counterparty. When a swap is cleared, the CCP becomes the party facing both parties to the original swap, whose obligations (in the U.S. model) are guaranteed by their respective FCMs. In the European style principal to principal model, the Clearing Member does not guarantee the relevant counterparty obligations under the cleared swap. The DFA and regulations thereunder (in the U.S.) and EMIR in Europe, require the clearing of many swaps formerly traded OTC.
Consumer Credit Protection Act. The CCPA was passed in 1968. It is comprised of several specific acts designed to protect consumers, including the Truth in Lending Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, and the Electronic Fund Transfer Act.
Credit default swap. A CDS provides protection against certain credit-related risks associated with an entity referenced in the CDS. The buyer of credit protection under the CDS makes periodic payments to the seller of protection, in return for which the seller is required to make a payment if the relevant entity defaults (or is otherwise subject to a credit event) under the debt obligations specified in the CDS.
Current exposure method. The CEM is an approach to measuring exposures arising under derivatives contracts. In this calculation, the current exposure (which is the greater of the sum of the current mark-to-market values or zero) is added to the potential future exposure under the contract, and the market value of any posted collateral is then subtracted.
Common equity Tier 1 capital. Tier 1 capital, the highest quality capital under the Basel framework, has two components, common equity Tier 1 capital, which the BCBS has resolved should be the predominant form of bank capital, and additional Tier 1 (AT1) capital. CET1 consists essentially of common shares, retained earnings, and other reserves.
Commercial agreements may include “change of control” provisions, such that upon the occurrence of a change of control of one the parties to the agreement, the agreement may terminate, or approval may be required prior to a transfer to a successor or assign. Securities also may include change of control provisions. A change of control may trigger a redemption. Certain financing transactions by public companies that would result in a change of control may require a shareholder vote.
There is no uniform definition of a “change of control.” A change of control may include a sale of all or substantially all of a company’s assets, a merger with another company, the transfer of a certain percentage of the company’s issued and outstanding shares to an acquirer, as well as circumstances that result in more than 50% of the board members changing or a change in shareholders who have the right to elect more than 50% of the board.
As part of the process of requesting a comfort letter from an issuer’s auditors, underwriters’ counsel will produce a “circle up,” circling or identifying the financial information included in the prospectus or offering document and in any documents incorporated by reference that the underwriters’ counsel request the auditors address in their comfort letter.
Collateralized loan obligation. A form of CDO backed by corporate loans. A CLO issuer is a special purpose vehicle (SPV) with securitization payments in the form of different tranches. Financial institutions back this security with receivables from a portfolio of loan obligations. Collateralized loan obligations are the same as collateralized mortgage obligations (CMOs), except for the assets securing the obligation. Banks have historically used CLOs to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios through a CLO structure.
A closed end fund is an entity that is registered under the Investment Company Act, or 1940 Act, and that is a management investment company. Unlike an open-end, or mutual fund, a closed end fund does not continuously offer its shares at a price based on the fund’s net asset value. Instead, a closed end fund typically issues a fixed number of shares that are listed on a stock exchange.
The EU’s Capital Markets Union project. In September 2015, the EU Commission published its CMU Action Plan in response to concerns that, compared with the US and other jurisdictions, capital markets-based financing in Europe is fragmented and underdeveloped, with significant reliance on banks to provide sources of funding.
Contingent Convertible. A CoCo is a form of hybrid security that converts from a debt security into an equity security of the issuer upon the breach of a regulatory capital trigger. Discussion concerning contingent capital securities started shortly after the financial crisis as market participants and academics began to consider how to avoid the too-big-to-fail problem. The objective is for these securities to provide a “buffer” for their financial institution issuers during a stress scenario when it may become difficult for the issuers to raise capital.
As part of establishing its diligence defense in connection with potential securities claims, among other things, the underwriter will seek to have delivered to them a comfort letter in connection with a securities offering. The comfort letter will generally include a statement regarding the auditors’ independence, a statement regarding the compliance of the issuer’s audited financial statements with applicable SEC requirements, statements regarding the accountants’ review of interim unaudited financial statements, a negative assurance statement relating to the unaudited comparative stub period financial statements included in the registration statements, identification of changes in key line items during the period after the date of the latest financial statements in the registration statement, and comments on the additional procedures performed on the financial information identified in the registration statement and incorporated documents (tick and tying back to the financial statements or to schedules to the financial statements).
Communications that appear to create interest in, or that seem intended to generate interest in, a forthcoming offering may be referred to as conditioning the market for the offering and may be impermissible communications. In some cases, these types of conditioning communications may constitute gun jumping or a general solicitation.
Title XV of the DFA addresses a variety of matters unrelated to the financial crisis. For example, Section 1502 of the DFA requires U.S. public companies to disclose annually whether they use certain minerals (columbite-tantalite (also known as coltan), cassiterite, gold, wolframite, or their derivatives, tantalum, tin, and tungsten) which originate in the Democratic Republic of the Congo.
In a consent solicitation, the issuer of a security seeks the consent of holders to amend the terms of the security. Usually, a consent solicitation will be undertaken in the context of a debt securities. An issuer will seek t