Annex 2: Glossary

Actual/360: the day-count convention applied for the calculation of interest on a credit, implying that the interest is calculated over the actual number of calendar days over which the credit is extended, on the basis of a 360-day year. This day-count convention will be applied in ESCB monetary policy operations.

American auction: see multiple rate auction.

Averaging provision: a provision allowing counterparties to fulfil their reserve requirements on the basis of their average reserve holdings over the maintenance period. The averaging provision contributes to the stabilisation of money market interest rates by giving institutions an incentive to smooth the effects of temporary liquidity fluctuations. The ESCB's minimum reserves system allows for averaging.

Bilateral procedure: aprocedure whereby the central bank deals directly with only one or a few counterparties, without making use of tender procedures. Bilateral procedures include operations executed through stock exchanges or market agents.

Book-entry system: an accounting system that permits the transfer of claims (e.g. securities and other financial assets) without the physical movement of paper documents or certificates. See also dematerialisation.

Business day: any day other than a Saturday or Sunday on which the TARGET system is defined as being operational to effect payments.

Central securities depository (CSD): a facility for holding securities which enables securities transactions to be processed by book entry. Physical securities may be immobilised by the depository or securities may be dematerialised (i.e. so that they exist only as electronic records). In addition to safekeeping, a CSD may incorporate checking, clearing and settlement functions.

Collection of fixed-term deposits: a monetary policy instrument that may be used by the ESCB for fine-tuning purposes where the ESCB offers remuneration on counterparties' fixed-term deposits on accounts with the national central banks in order to absorb liquidity from the market.

Correspondent banking: an arrangement under which one bank provides payment and other services to another bank. Payments through correspondents are often executed through reciprocal accounts (so-called nostro and loro accounts), to which standing credit lines may be attached. Correspondent banking services are primarily provided across international boundaries.

Correspondent Central Banking Model (CCBM): a model established by the ESCB with the aim of enabling counterparties to use underlying assets in a cross-border context. In the Correspondent Central Banking Model, national central banks act as custodians for each other. This implies that each national central bank has a securities account in its securities administration for each of the other national central banks (and for the ECB). The ESCB may apply specific solutions for the cross-border use of non-marketable assets.

Counterparty: the opposite party in a financial transaction (e.g. in a transaction with the central bank).

Credit institution: refers in this document to an institution covered by the definition contained in Article 1 of the First Banking Co-ordination Directive (77/780/EEC), i.e. "an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credit for its own account".

Custodian: an institution that undertakes safekeeping and administration of securities and other financial assets on behalf of others.

Day-count convention: the convention regulating the number of days included in the calculation of interest on credits. The ESCB will apply the day-count convention Actual/360 in its monetary policy operations.

Delivery versus payment system (DVP): a mechanism in an exchange-for-value settlement system that ensures that the final transfer of an asset occurs if and only if the final transfer of another (other) asset(s) occurs.

Dematerialisation: the elimination of physical certificates or documents of title which represent ownership of financial assets so that the financial assets exist only as accounting records.

Deposit facility: a standing facility of the ESCB which counterparties may use to make overnight deposits remunerated at a pre-specified interest rate.

Depository: an agent with the primary role of recording securities either physically or electronically and keeping records of the ownership of the securities.

Dutch auction: see single rate auction.

EEA (European Economic Area) countries: the EU Member States and Iceland, Liechtenstein and Norway.

ECB time: the time of the place where the ECB is located.

End-of-day: the time of the business day (after the TARGET system has closed) at which the payments processed in the TARGET system are finalised for the day.

Equity price risk: the risk of loss due to movements in equity prices. The ESCB will be exposed to equity price risk in its monetary policy operations to the extent that equities are considered to be eligible as underlying assets.

Euro area: the area covering those EU Member States which have adopted the single currency in accordance with the Treaty.

European System of Central Banks (ESCB): refers in this document to the European Central Bank and the national central banks of the EU Member States which have adopted the single currency in accordance with the Treaty. (It should be noted that national central banks of Member States which have not adopted the single currency in accordance with the Treaty retain their powers in the field of monetary policy according to national law and are thus not involved in the conduct of the ESCB monetary policy.)

Final transfer: an irrevocable and unconditional transfer which effects a discharge of the obligation to make the transfer.

Fine-tuning operation: anon-regular open market operation executed by the central bank mainly in order to deal with unexpected liquidity fluctuations in the market.

Fixed rate tender: a tender procedure where the interest rate is specified in advance by the central bank and participating counterparties bid the amount of money they want to transact at the fixed interest rate.

Foreign exchange rate risk: the risk of loss due to movements in exchange rates. The ESCB will be exposed to foreign exchange rate risk in its monetary policy operations to the extent that assets denominated in foreign currencies are considered to be eligible as underlying assets.

Foreign exchange swap: simultaneous spot and forward transactions of one currency against another. The ESCB will execute open market monetary policy operations in the form of foreign exchange swaps where the national central banks (or the ECB) buy (or sell) euro spot against a foreign currency and at the same time sell (or buy) it back forward.

Haircut: see valuation haircut.

Initial margin: a risk control measure applied to underlying assets used in reverse transactions implying that the collateral required for a transaction is equal to the credit extended to the counterparty plus the value of the initial margin. The ESCB applies initial margins differentiated according to the ESCB's exposure time to the underlying asset.

Intraday credit: the credit extended and reimbursed within a period of less than one business day. The ESCB will extend intraday credit (based on underlying assets) to eligible counterparties for payment systems purposes.

Issuer: the entity which is obligated on a security or other financial instrument.

Longer-term refinancing operation: a regular open market operation to be executed by the ESCB in the form of a reverse transaction. Longer-term refinancing operations are executed through monthly standard tenders and have a maturity of three months.

Main refinancing operation: a regular open market operation executed by the ESCB in the form of a reverse transaction. Main refinancing operations are conducted through weekly standard tenders and have a maturity of two weeks.

Maintenance period: the period over which compliance with reserve requirements is calculated. The maintenance period for ESCB minimum reserves would be one month, starting on a fixed day of each month (e.g. the maintenance period may start on the 24th of each month and end on the 23rd of the following month).

Margin call: aprocedure related to the application of variation margins, implying that if the value, as regularly measured, of the underlying assets falls below a certain level, central banks may require counterparties to supply additional assets (or cash). Similarly, if the value of the underlying assets, following their revaluation, were to exceed the amount owed by the counterparties plus the variation margin, the central bank returns excess assets (or cash) to the counterparty.

Marginal interest rate: the interest rate at which the total tender allotment is exhausted.

Marginal lending facility: a standing facility of the ESCB which counterparties may use to receive overnight credit against a pre-specified interest rate.

Marginal swap point quotation: the swap point quotation at which the total tender allotment is exhausted.

Marking to market: see variation margin.

Maturity date: the date on which a monetary policy operation expires. In the case of a repurchase agreement or swap, the maturity date corresponds to the repurchase date.

Maximum bid limit: the limit on the largest acceptable bid from an individual counterparty in a tender operation. The ESCB may impose maximum bid limits in order to avoid disproportionately large bids from individual counterparties.

Member State: refers in this document to an EU Member State which has adopted the single currency in accordance with the Treaty.

Minimum allotment: the limit on the lowest amount to be allotted to counterparties in a tender operation. The ESCB may decide to allot a minimum amount to each counterparty in its tender operations.

Monetary Financial Institution: acredit institution or other financial institution the business of which is to receive deposits and/or close substitutes for deposits from the public and which, for its own account (at least in economic terms), grants credit and/or makes investments in securities.

Multiple rate auction (American auction): an auction at which the allotment interest rate (or price/swap point) equals the interest rate offered in each individual bid.

National central bank (NCB): refers in this document to a central bank of an EU Member State which has adopted the single currency in accordance with the Treaty.

Open market operation: an operation executed at the initiative of the central bank in the financial markets involving one of the following transactions: 1) buying or selling assets outright (spot or forward); 2) buying or selling assets under a repurchase agreement; 3) lending or borrowing against underlying assets as collateral; 4) issuance of central bank debt certificates; or 5) collection of deposits.

Outright transaction: atransaction where the central bank buys or sells (spot and forward) assets outright in the market.

Purchase date: the date on which the sale of purchased assets by the seller to the buyer becomes effective.

Purchase price: the price at which purchased assets are sold or are to be sold to the buyer by the seller.

Quick tender: the tender procedure used by the ESCB for fine-tuning operations when it is deemed desirable to have a rapid impact on the liquidity situation in the market. Quick tenders are executed within a time frame of one hour and are restricted to a limited set of counterparties.

Repo operation: a liquidity-providing reverse transaction based on a repurchase agreement.

Repurchase agreement: an arrangement whereby an asset is sold while the seller simultaneously obtains the right and obligation to repurchase it at a specific price on a future date or on demand. Such an agreement is similar to collateralised borrowing, except that the ownership of the securities is not retained by the seller. The ESCB will use repurchase agreements with a fixed maturity in its reverse transactions.

Repurchase date: the date on which the buyer is obliged to sell back assets to the seller in relation to a transaction under a repurchase agreement.

Repurchase price: the price at which the buyer is obliged to sell back assets to the seller in relation to a transaction under a repurchase agreement. The repurchase price equals the sum of the purchase price and the price differential corresponding to the interest of the extended liquidity over the maturity of the operation.

Reserve account: an account with the central bank on which a counterparty's reserve holdings are maintained. The counterparties' settlement accounts with the national central banks may be used as reserve accounts.

Reserve base: the sum of the eligible balance sheet items (in particular liabilities) which constitute the basis for calculating the reserve requirement of an institution.

Reserve holdings: counterparties' holdings on their reserve accounts which serve to fulfil reserve requirements.

Reserve ratio: the ratio defined by the central bank for each category of eligible balance sheet items included in the reserve base. The ratios are used to calculate reserve requirements.

Reserve requirement: the requirement for institutions to hold minimum reserves with the central bank. The reserve requirement of an institution is calculated by multiplying the reserve ratio for each category of items in the reserve base with the amount of those items in the institution's balance sheets.

Reverse transaction: an operation whereby the central bank buys or sells assets under a repurchase agreement or conducts credit operations against collateral.

RTGS (real-time gross settlement) system: a settlement system in which processing and settlement take place on an order-by-order basis (without netting) in real time (continuously). See also TARGET system.

Safe custody account: asecurities account managed by the central bank on which credit institutions can place securities deemed suitable to back central bank operations.

Settlement account: an account held by a direct participant in the national RTGS system with the central bank for the purpose of processing payments.

Settlement date: the date on which a transaction is settled. The settlement might take place on the same day as the trade (same-day settlement) or can occur one or several days after the trade (the value date is specified as T + the settlement lag).

Single rate auction (Dutch auction): an auction at which the allotment interest rate (or price/swap point) applied for all satisfied bids is equal to the marginal interest rate.

Solvency risk: the risk of loss due to the failure (bankruptcy) of an issuer of a financial asset or due to the insolvency of the counterparty.

Standard tender: a tender procedure to be used by the ESCB in its regular open market operations. Standard tenders are carried out within a time frame of 24 hours. All counterparties fulfilling the general eligibility criteria are entitled to submit bids in standard tenders.

Standing facility: a central bank facility available to counterparties at their own initiative. The ESCB will offer two overnight standing facilities: the marginal lending facility and the deposit facility.

Start date: the date on which the first leg of a monetary policy operation is settled. The start date corresponds to the purchase date for operations based on repurchase agreements and foreign exchange swaps.

Structural operation: an open market operation executed by the ESCB mainly in order to adjust the structural liquidity position of the financial sector vis-à-vis the ESCB.

Swap point: the difference between the exchange rate of the forward transaction and the exchange rate of the spot transaction in a foreign exchange swap.

TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) system: a payment system consisting of one real-time gross settlement (RTGS) system in each of the Member States participating in the euro area at the start of Stage Three of Economic and Monetary Union. The national RTGS systems will be interconnected via the Interlinking mechanism so as to enable same-day cross-border transfers throughout the euro area. RTGS systems of non-euro area EU Member States may also be connected to TARGET, provided that they are able to process euro.

Tier-one asset: a marketable asset fulfilling certain uniform euro area-wide eligibility criteria specified by the ECB. Among these criteria are the requirement to be denominated in euro, to be issued (or guaranteed) by entities located in the EEA, and to be located in a national central bank or CSD of the euro area.

Tier-two asset: a marketable or non-marketable asset for which specific eligibility criteria are established by the national central banks, subject to ECB approval.

Trade date (T): the date on which a trade (i.e. an agreement on a financial transaction between two counterparties) is struck. The trade date might coincide with the value date for the transaction (same-day settlement) or precede the value date by a specified number of business days (the value date is specified as T + the settlement lag).

Treaty: the Treaty establishing the European Community (or EC Treaty). It comprises the original EEC Treaty (Treaties of Rome) as amended by the Treaty on European Union (signed in Maastricht on 7 February 1992).

Trigger point: a prespecified level of the value of the underlying assets in relation to the outstanding credit at which a margin call is executed.

Valuation date: the date on which the assets underlying credit operations are valued.

Valuation haircut: a risk control measure applied to underlying assets used in reverse transactions, implying that the central bank calculates the value of underlying assets as the market value of the asset reduced by a certain percentage (haircut). The ESCB applies valuation haircuts reflecting features of the specific assets, such as the residual maturity.

Variable rate tender: a tender procedure whereby the counterparties bid both the amount of money they want to transact with the central bank and the interest rate at which they want to enter into the transaction.

Variation margin (or marking to market): the ESCB may require that a specified margin is maintained over time on the underlying assets used in its liquidity-providing reverse transactions. This implies that if the regularly measured market value of the underlying assets falls below a certain level, counterparties have to supply additional assets (or cash). Similarly, if the market value of the underlying assets, following their revaluation, were to exceed the amount owed by the counterparties plus the variation margin, the central bank would return excess assets (or cash) to the counterparty.

Volume tender: see fixed rate tender.

ECB - European Central Bank