ACI Dealing Certificate key terms

An agreement to exchange one currency for another at a rate fixed now, with settlement normally two business days after the trade date. It is the simplest FX transaction and the base on which forwards and swaps are priced.

A binding agreement to exchange currencies on a future date at a rate agreed today. The forward rate reflects the spot rate adjusted for the interest rate difference between the two currencies, and it locks in a price rather than eliminating risk.

The date on which the two legs of a currency transaction are actually settled, meaning funds must be available in the receiving accounts. For spot FX it is usually T+2, and for many other instruments it follows the market's standard convention.

The difference between the forward rate and the spot rate, quoted in the last decimal places of the exchange rate. They arise from the interest rate differential between the two currencies and are added to or subtracted from spot.

The difference between the price at which a market maker will buy (bid) and the price at which it will sell (offer). It is the dealer's compensation for providing liquidity and taking risk, and it widens when markets are volatile or illiquid.

The principle that the forward exchange rate difference between two currencies equals the interest rate differential between them. If it did not hold, arbitrage could lock in riskless profit, so it anchors forward pricing in normal markets.

A strategy that borrows in one currency, converts at spot, invests in the other currency, and simultaneously sells the proceeds forward. Any profit reflects a misalignment between forward points and the interest rate differential.

Borrowing in a low-yielding currency to invest in a higher-yielding one, aiming to earn the interest differential. It is profitable only while exchange rates are stable and can suffer large losses if the funding currency strengthens sharply.

A firm or individual that continuously quotes two-way prices and stands ready to buy or sell a financial instrument. Market makers earn the spread and provide liquidity, but they carry inventory and adverse selection risk.

The ease with which an instrument can be bought or sold in size without moving its price much. Deep markets have many participants and tight spreads; thin markets have wide spreads and large price jumps.

The risk that a position cannot be closed quickly at a fair price, or that funding cannot be raised when needed. It has two forms: market liquidity risk, about trading out of positions, and funding liquidity risk, about meeting cash obligations.

The risk that one party delivers the currency or security it owes but the counterparty fails to deliver the other side. It is greatest when the two legs are not simultaneous, as in cross-border FX payments across time zones.

A form of settlement risk named after a bank that failed after receiving Deutschmarks but before paying dollars, leaving counterparties exposed. It describes the exposure created when the two legs of a currency trade settle in different time zones.

A multi-currency settlement system that pays both legs of an FX transaction simultaneously through a payment-versus-payment mechanism. It reduces settlement risk by ensuring a party is not left having paid out without receiving the counter-currency.

The risk that the other party to a transaction defaults before fulfilling its obligations. In derivatives it is measured as replacement cost plus potential future exposure, and it is managed through credit limits, collateral and netting agreements.

A maximum exposure a firm permits with a given counterparty, product or country, set by credit officers rather than traders. Dealers must check limits before trading, and breaches are treated as serious control failures.

An arrangement that offsets amounts owed in opposite directions between two parties so only a single net balance is settled. It reduces credit exposure and payment volumes, and close-out netting is central to derivatives documentation.

The standard bilateral contract framework used for over-the-counter derivatives, setting out payment, netting, default and termination terms. Individual trades are confirmed under it, and it is the backbone of legal certainty in OTC markets.

The document recording the economic and legal terms of a specific transaction, exchanged after the trade is agreed. Prompt matching of confirmations prevents disputes and is a core control in operations.

The date on which a transaction is agreed and its price fixed, as distinct from the value date when it settles. Booking errors, position limits and profit recognition all key off the trade date.

The part of a financial firm that deals directly with clients and markets, executing trades and managing positions. It is separated from the middle and back offices to prevent conflicts of interest in control and reporting.

The function that sits between dealing and settlement, handling risk measurement, limit monitoring, profit and loss attribution and trade validation. It provides independent oversight of front office activity without executing trades.

The operational area responsible for confirming, settling and reconciling transactions and maintaining records. Its independence from dealing is a fundamental control against unauthorised trading and fraud.

Information barriers that separate teams holding confidential or price-sensitive knowledge from those who could misuse it. They support ethical conduct and help prevent conflicts of interest and market abuse within a firm.

Trading, or encouraging others to trade, on the basis of material non-public information about an issuer or instrument. It is a criminal offence in most jurisdictions because it undermines fair and orderly markets.

A broad regulatory category covering insider dealing, market manipulation and unlawful disclosure of inside information. It harms market integrity, and firms must have surveillance and reporting arrangements to detect it.

Trading ahead of a known client or firm order to profit from the price impact that order is expected to cause. It is a form of market abuse and a breach of the duty to act in clients' best interests.

Placing orders with no intention of executing them in order to create a false impression of supply or demand, then cancelling before execution. It is a recognised form of market manipulation and is prohibited.

Entering a series of non-genuine orders at different prices to give a misleading picture of market depth, often to help a genuine order on the other side execute better. It is treated as manipulative conduct.

The obligation to take reasonable steps to obtain the best possible result for clients when executing their orders, considering price, cost, speed and likelihood of execution. It does not guarantee the best price on every trade.

The requirement to ensure a product or recommendation is appropriate for a client's knowledge, experience, financial situation and objectives. It protects clients from being sold instruments they do not understand or cannot bear.

The process of identifying clients, verifying their identity and understanding their business and source of funds. It supports anti-money-laundering rules and is a precondition for opening an account or dealing.

The process of disguising the origin of money obtained from crime so it appears legitimate, typically through placement, layering and integration. Firms must monitor transactions and report suspicious activity to the authorities.

An intermediary that executes orders on behalf of clients and charges commission, rather than dealing as principal against them. The distinction matters because it changes the disclosure and conflict-of-interest duties owed.

The single discount rate that equates a bond's future cash flows to its current price, assuming coupons are reinvested at that rate and the bond is held to redemption. It is the standard measure of bond return.

The quoted price of a bond excluding accrued interest since the last coupon date. The buyer actually pays the clean price plus accrued interest, known as the dirty price.

The coupon interest that has built up since the last payment date and belongs to the seller of the bond. It is calculated using the day-count convention and added to the clean price to give the amount settled.

The rule that determines how interest accrues over a period, such as actual/360 for money markets or actual/actual for many government bonds. It affects the cash amount payable and must be agreed in the contract.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years for Macaulay duration. Modified duration estimates the percentage price change for a one percentage point move in yield.

The curvature in the relationship between bond prices and yields, meaning duration changes as yields move. Positive convexity means price gains from falling yields exceed losses from equal rises, and it improves the duration estimate.

The risk that changes in interest rates reduce the value of a position or the income from it. It is managed by measuring duration and gaps, and by using swaps, futures or other hedging instruments.

A short-term loan of funds between banks or with a corporate client, typically from overnight to one year, quoted on an interest rate basis. It is unsecured unless collateral is specified, so it carries counterparty exposure.

The London Interbank Offered Rate, formerly the benchmark at which major banks could borrow unsecured from each other, published for several currencies and tenors. It was discontinued after manipulation and methodology flaws, replaced by risk-free rates.

The Secured Overnight Financing Rate, a US dollar risk-free benchmark based on overnight repurchase transactions. It replaced US dollar LIBOR and is published as a compounded or forward-looking rate for use in loans and derivatives.

An agreement between two parties to exchange interest payments, usually one fixed and one floating, calculated on a notional principal for a set period. It is used to hedge or take interest rate risk without exchanging the principal.

A swap in which one leg pays a fixed rate and the other pays the compounded overnight rate over the term. It is the standard tool for trading and hedging short-term interest rate expectations.

A graph of yields on bonds of similar credit quality against their maturities, showing the term structure of interest rates. Its shape informs expectations of future rates, growth and inflation, and is used to price other instruments.

The periodic interest payment a bond issuer makes to holders, usually expressed as an annual percentage of the face value. It may be fixed or floating and is paid on scheduled dates until maturity.

A trading venue where prices are set by dealers quoting bid and offer levels, and trades occur against those quotes. It contrasts with order-driven markets, where buyers and sellers are matched in a central order book.

Trading conducted directly between two parties rather than through an exchange, with terms negotiated bilaterally. OTC markets are flexible but carry greater counterparty and transparency concerns, managed through documentation and collateral.

The automated flow of trade data from execution through confirmation, clearing and settlement without manual re-entry. It reduces operational risk, errors and delays, and is a key operations objective for dealers.