Financial Terms related to Securities This document is part of the valuable contents available at www.ftpall.com, a free online glossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor. SECURITIES Asset backed securities • Is a security backed by notes or receivables against assets other than real estate. Some examples are autos, credit cards, and royalties. Book entry securities • The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the Fed in the names of member banks, which, in turn, keep records of the securities they own as well as those they are holding for customers. In the case of other securities for which there is a book- entry system, engraved securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are usually kept in a central clearinghouse or by another agent. www.ftpall.com 2|Page • The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the Fed in the names of member banks, which in turn keep records of the securities they own as well as those they are holding for customers. In the case of other securities where a book-entry has developed, engraved securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are usually kept in a central clearinghouse or by another agent. Contingent securities Find thousands of financial terms at www.ftpall.com • Convertibles, warrants, and stock options. Their presence affects the reporting of a firm's earnings per share (EPS). Convertible securities hedge funds • Generally look to purchase the bonds or preferred securities and sell common shares against these long positions. The intent is to hedge interest or dividend paying securities with low or no dividend common shares. In the event of a default the bonds and other securities have priority to the common shares. Also, the bonds or preferred stocks usually generate positive cash flows whereas the short positions are generally not responsible for dividend payments. Therefore the fund should have a positive cash flow and protected by relative seniority position in corporate securities. These funds also use warrants and options as portfolio instruments. Debt securities • IOUs created through loan-type transactions commercial paper, bank CDs, bills, bonds, and other instruments. • IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and other instruments. Discount securities • Non-interest bearing money market instruments that are issued a discount and www.ftpall.com 3|Page redeemed at maturity for full face value, e.g., U.S. Treasury Bills. • Non-interest-bearing money market instruments that are issued at a discount and redeemed at maturity for full face value; for example, U.S. Treasury bills. • Non-interest-bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g. U.S. Treasury bills. Distressed securities • Refer to issues in bankruptcy or other severely impaired securities which have very Find thousands of financial terms at www.ftpall.com low credit ratings. Exempt securities • Instruments exempt from the registration requirements of the Securities Act of 1933 or the margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis, commercial paper, and private placements. • Instruments exempt from the registration requirements of the Securities Act of 1933 or the margin requirements of the Securities and Exchange Act of 1934. Such securities include governments, agencies, municipal securities, commercial paper, and private placements. • Are issues which are not bound by the filing provisions of the Securities Act of 1933. Exempt securities include treasury and municipal notes and bonds, bank securities, and nonprofit organization securities. Federal agency securities • Securities issued by corporations and agencies created by the U.S. government, such as the Federal Home Loan Bank Board and Ginnie Mae. General securities registered representative license • See Series 7. Government securities www.ftpall.com 4|Page • Negotiable U.S. Treasury securities. Manufactured housing securities • Abbreviated MHSs. Loans on manufactured homes -that is, factory-built or prefabricated housing, including mobile homes. Market premium convertible securities • The amount by which the market value exceeds the straight or conversion value of a convertible security. Find thousands of financial terms at www.ftpall.com Marketable securities • Short-term debt instruments, such as Government of Canada treasury bills, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions, respectively. Mortgage backed securities • The pass-throughs issued by Ginnie Mae are referred to as Mortgage Backed Securities. • Securities backed by a pool of mortgage loans. • Is a broad term which encompasses both generic and pool specific securities predicated on real property. The term also refers to private label or agency securities, pass-throughs, or derivatives such as Collateralized Mortgage Obligations. It can refer to the Over the-Counter options on mortgage backed securities as well. These mortgage backed securities are viewed as either plain vanilla or exotic. Some of the more common issues are: Accrual or Accretion Bond, ARMs, Companion or Support, Constant Maturity Treasury (CMT), www.ftpall.com 5|Page Floaters, Gnomes, Gold, Inverse Floaters or Reverse Floaters, IO or Interest Only, IO-ette or IOette, Jump Bonds, Find thousands of financial terms at www.ftpall.com Jump Z, Mega, PAC PO, Pass Throughs, Planned Amortization Class, PO or Principal Only, Reverse TAC, Scheduled Bonds, Stripped Mortgage Backed Securities, Super Floater, Super PAC, Super PO, Support, Targeted Amortization Class, VADM www.ftpall.com 6|Page Z Bond, and Z PAC. There are other types and the list is growing because of the unique nature of these instruments. Mortgage backed securities clearing corporation • A wholly owned subsidiary of the Midwest Stock Exchange that operates a clearing service for the comparison, netting, and margining of agency-guaranteed MBSs Find thousands of financial terms at www.ftpall.com transacted for forward delivery. Mortgage backed securities hedge funds • Generally focus on being long the actual mortgage backed securities and short some proxy such as TBAs (To Be Announced), futures, Treasuries or derivatives. These funds typically purchase highly rated agency paper, CMOs, or REMICs and finance the positions in the repo market. This financing can often result in gross asset, principal or market values of $10 billion for an initial cash/equity position of $1 billion dollars. In some respects it is comparable to buying a house with borrowed money. It is the borrowing which magnifies the performance. If the market quickly jumps 10 percent higher, then the buyer doubled his investment. Here, it would be 10 percent of $10 billion or a $1billion profit against an initial capitalization of $1 billion. However, if the market declines by 10 percent, then the original investor is out. If the market went down 25 percent, then the original investor is gone but the lending institution (bank or brokerage firm) is on the-hook for $1.5 billion. Effectively, this is what has been recently occurring in the financial industry. The lenders are becoming defacto new investors, holding losing positions, because of defaults. Mortgage pass through securities • A securitized participation in the interest and principal cash flows from a specified pool of mortgages. Principal and interest payments made on the mortgages are www.ftpall.com 7|Page passed through to the holder of the security. National association of securities dealers automated quotation system • See NASDAQ. National association of securities dealers, inc. • See NASD. Organized securities exchanges • Tangible organizations that act as secondary markets in which outstanding Find thousands of financial terms at www.ftpall.com securities are resold. Pass through securities • A pool of fixed-income securities backed by a package of assets (i.e. mortgages) where the holder receives the principal and interest payments. Related: mortgage pass-through security Project loan securities • Securities backed by a variety of FHA-insured loan types -primarily multi-family apartment buildings, hospitals, and nursing homes. Public securities administration • Abbreviated PSA. The trade association for primary dealers in U.S. government securities, including MBSs. Registered general securities person • See Account Executive. This person is Securities Series 7 licensed. Registered securities principal • Is a supervisor of Series 7 or specialty licensed brokers other than options. These principals supervise and review employees in the Front Office, Middle Office, and Back Office. For options supervision, see Compliance Registered Options Principal, www.ftpall.com 8|Page Registered Options Principal, and Senior Registered Options Principal. A Registered Securities Principal is Series 24 licensed. Securities • Investment instruments such as stocks or bonds issued by corporations, governmental units, or other entities that offer investors ownership shares or creditor relationships. Securities act of 1933 Find thousands of financial terms at www.ftpall.com • Is the Federal Law which covers new issues of securities. It requires full-disclosure of material information related to the offering. Some securities such as U.S. Treasuries are exempt from the provisions. Securities analysts • Related: financial analysts Securities and exchange commission • A federal government agency comprised of five commissioners appointed by the President and approved by the Senate. The SEC was established to protect the individual investor from fraud and malpractice in the marketplace. The Commission oversees and regulates the activities of registered investment advisers, stock and bond markets, broker/dealers, and mutual funds. • The federal regulatory body that governs the sale and listing of securities in the United States. In Canada, securities regulation is a provincial responsibility. • Abbreviated SEC. Commission created by Congress to regulate the securities markets and protect investors. It is composed of five commissioners appointed by the president of the United States and approved by the Senate. The SEC enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. The statutes administered by the SEC are www.ftpall.com 9|Page designed to promote full public disclosure and protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce or through the mails must be registered with the SEC. • The SEC is a federal agency that regulates the U.S. financial markets. Securities and exchange commission sec • Agency created by Congress to protect investors in securities transactions by administering securities legislation. Find thousands of financial terms at www.ftpall.com Securities exchange act of 1934 • Is the Federal Law which covers brokers and dealers (B/Ds) and secondary market activities. This compares to the Securities Act of 1933 which focuses on new issues. Securities exchanges • The secondary marketplace that allows for the subsequent trading of financial securities created in the primary market. Securities investor protection corporation • Abbreviated SIPC. A nonprofit membership corporation created by an act of Congress to protect clients of brokerage firms that are forced into bankruptcy. Membership is composed of all brokers and dealers registered under the Securities Exchange Act of 1934, all members of national securities exchanges and most NASD members. SIPC provides customers of these firms up to $500,000 coverage for cash and securities held by the firms (although coverage of cash is limited to $100,000). Securities registration • Is the compliance procedure whereby an individual is registered according to function, supervisory level, and type of customer contact. Also, firms must be registered with the appropriate regulatory bodies. See Account Executive and Series www.ftpall.com 10 | P a g e 7. Securities Registration also refers to the process whereby the corporation or its representative applies to the appropriate Federal or State Agency to have the securities registered. This registration is not a sign of approval by the Agency but rather a notification by the corporation to the agency of its intent to sell securities. Stripped mortgage backed securities • Are securities which are constructed from MBS pass-throughs. Essentially, these securities strip the cash flow stream into a separate interest only (IO) and principal only (PO) securities. Find thousands of financial terms at www.ftpall.com Stripped mortgage backed securities smbss • Securities that redistribute the cash flows from the underlying generic MBS collateral into the principal and interest components of the MBS to enhance their use in meeting special needs of investors. Treasury securities • Securities issued by the U.S. Department of the Treasury.