Glosario

Clearing (the clearing of payments) is the process by which an intermediary entity acts to ensure a transaction is carried out, from the initial agreement between the two counterparties to the actual transfer of money from one bank account to another. The intermediary entity effectively adopts the role of both counterparties to carry out the transaction.In currency transactions, a bank, broker or FX provider completes the clearing process through a clearing department. Clearing speeds up the transactional delay between parties. Counterparties make payments directly to the clearing entity rather than the counterparty at the opposite end of the transaction.International clearing houses include: Clearing House Automated Payment System (CHAPS) in the UK, EBA Clearing in the Eurozone and Automated Clearing House in the United States.

Close-out netting is a netting method that reduces pre-settlement credit risk. It only applies to transactions between parties where there is a default.Advantages of close-out nettingIn close-out netting, the non-defaulting company is no longer subject to contractual obligations to a defaulting counterparty. The positive and negative values are then combined into either a net receivable or payable. As a result, credit exposure is reduced from gross to net exposure.If the combined values result in a net receivable, the non-defaulting party owns this debt, which is to be paid by the defaulting party. If the netting calculation results in a net payable; the defaulting party is owed this amount by the non-defaulting party.Close-out netting is designed to considerably reduce the impact of a transactional default. Without close-out netting, the non-defaulting party remains bound by the terms of the transaction contract, and has to pay the notional amount. It is then often complicated, expensive and time-consuming to recover the capital. And if the defaulting party has cash flow problems or declares bankruptcy, the chances of recovering the total amount are greatly reduced.

A closed forward contract is a contractual agreement to buy or sell a specified amount of one currency against payment in another currency at a specified date in the future known as the ‘value date’. By contrast, when both parties can exchange the funds before the value date, the forward contract is said to be ‘open’. Sometimes known as a ‘fixed’ or ‘standard’ contract, the “closed outright forward” is the simplest type of forward contract. For this reason, they are widely used by businesses to hedge against the risk of losses due to adverse exchange rate movements. However, hedging with closed outright forwards makes it impossible to benefit from advantageous exchange rate movements. Closed outright forwards also offer no flexibility about the date of settlement. Both parties are legally obliged to exchange the funds on the value date. Businesses that need more flexibility over payment terms may prefer open or “flexible” forward contracts.

Collateral is the security required from the borrower in all kinds of financial transactions. It protects lenders against the risk of a payment default. If a borrower fails to pay the amount owed on the due date, the lender can claim the collateral in order to minimise losses from the defaulted payment. Collateral is a crucial element in loans and other financial instruments like forward or futures contracts, as it lowers the risk of default and limits the negative impact of any default to a transaction as well as, more generally speaking, to international trade and the financial markets.

Constant currencies is a term that refers to a fixed exchange rate that eliminates fluctuations when calculating financial performance figures. Companies with significant operations in other countries often represent their earnings in constant currency terms since floating exchange rates can often mask true performance. Since the performance of a company is accurately depicted by its revenue and profit metrics, accounting for the same by fixing the exchange rate at the prevailing value or that of the previous year is often done to give a clearer picture to management, analysts and investors.

Constant currency measures reporting is an accounting technique used by companies to present financials year-over-year for comparative purposes without the effects of currency movements. For example, a company can calculate constant currency buy taking the last period’s exchange rates and applying them to this period’s results. Although it allows for year-over-year comparisons, constant currency measures reporting is not without some pitfalls. For example, when exchange rates not used in preparing accounting results are used to calculate constant currency reporting, the reporting contains rate impacts not experienced by the company.

Se conoce como contraparte a la «otra» parte de la operación financiera. Por tanto, se denomina contraparte a cada uno de los participantes involucrados en la operación.

Establecer un contrato con una contraparte entraña un riesgo de impago, que se conoce como “riesgo de contrapartida” que define el índice de probabilidades de que la contraparte no pueda cumplir con sus obligaciones contractuales en la fecha indicada, lo que imposibilitaría completar la transacción.

El riesgo de contraparte

Este riesgo a menudo puede evitarse mediante una cámara de compensación, que asume el riesgo de crédito de ambas partes implicadas en la operación e identifica los requisitos de cada parte para asegurar la transacción y, en caso necesario, cubre el riesgo de impago de las partes.

Cost centre treasury is a type of governance in which the costs of the treasury department can be charged to the various other departments/subsidiaries on some basis that is seen to fairly reflect the benefits the other department/subsidiary obtains from the treasury department and the use it makes of the treasury services. If it is not possible to allocate costs on a basis that is seen to be fair, the company may simply treat the costs as a head office expense. The alternative is to organise treasury operations as a profit centre. This can be done if revenues arising from treasury can be identified. Revenues could be properly recognised.

A counterparty clearing house is defined by the Bank for International Settlements as an entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts. Unlike currency forward markets, which are fairly unregulated or ‘Over-the-Counter’, currency futures markets depend on an exchange that acts as a counterparty clearing house to guarantee all trades. This is done in order to attract retail participation in markets and thereby increase liquidity, as no mutual credit checks amongst traders are required. Participants, however, are required to make an initial good-faith deposit on every single position.

Credit risk is the possibility that a person or organisation will default on their loan repayments. Defining credit risk is key to calculating the interest rate on a loan. The longer the repayment period and the lower the borrower’s credit rating, the more expensive the interest rate.Counterparty credit risk is the risk that the other party to an agreement, bond, investment or trade will be unable to repay their debt or comply with their obligations.In corporate FX management, credit risk is a relevant aspect for forward contracts when one of the companies involved applies hedge accounting standards, as the counterparty credit risk is one of the factors used to determine the fair value of the hedging instrument.

The critical terms match method is one of the qualitative techniques prescribed by the International Accounting Standards Board (IASB) to test the effectiveness of a hedging relationship. Critical terms matching is a qualitative method that does not require any calculations, unlike other methods like linear regression. Critical terms matching relies on a comparison between the terms of the hedged item and the terms of the hedging instrument: notional amounts, maturities, currencies and interest rates. It is used for simple transactions like a cash flow hedge with forward contracts.

Cross rates are exchange rates between two currencies that do not involve the most traded currencies: USD and EUR. Examples of well-known cross rates are GBP-JPY and AUD-NZD. As with currencies involving USD and EUR, the base currency is the first currency appearing in the pair quotation. Cross rates are linked by triangular arbitrage. If GBP-USD trades at 1.30 and USD-JPY trades at 105, then GBP-GBP must trade at or very close to 136.50 to make arbitrage impossible.