Banking and Stock Glossary
This is the major monetary policy instrument of the European Central Bank (ECB). Via interest rates and money supply made available, the central bank uses this instrument to influence consumption and investment levels, which in turn have an impact on the overall economic situation. As part of the main refinancing operations (open market operations) commercial banks borrow money from the central bank against the deposit of collateral with the central bank.
Management body that manages and represents a joint stock company. The management board usually comprises several persons elected by the supervisory board for a maximum of five years.
See leveraged buy-out.
The takeover of a company by managers who already work for the company. This is often the case with companies that are experiencing difficulties and the previous owners are not willing to make further commitments. If management's takeover is financed primarily through debt financing, this is also called a leveraged management buy-out. As a result, the company retains management's know-how.
Collateral payments (performance bond) to the clearing and settlement agent for futures and forward contracts. See risk-based margin, variation margining.
In order to group a portfolio's futures and options contracts with similar risks, they are bundled according to their underlying instruments in what are called margin classes (e.g. one margin class for DAX® products). Potential profits and losses on contracts in the same margin class are offset against each other. This procedure is known as cross-margining. It saves liquidity, as the offsetting of risks that cancel each other out leads to a much lower overall performance bond (margin payment) than if the sum of all individual margins had to be paid. If two or more margin classes whose underlying instruments are similar in terms of their risk structure are combined, this is called a margin group. Cross-margining, i.e. the offsetting of risks that counteract each other, is also possible within a margin group.
A standing facility of the European Central Bank (ECB) which commercial banks in the euro area can use to obtain short-term (overnight) liquidity by pledging collateral (securities) eligble for rediscount by central banks at a pre-specified interest rate.
Established trade or business practices among market traders designed to facilitate the conduct of business. Today, these market practices are generally set out in writing and have been largely standardized.
Participants in the market who provide binding offer and bid price quotes (e.g. for shares, bonds, foreign currencies, options) and who thus ensure market liquidity. At the FWB (Frankfurt Stock Exchange) market makers are known as designated sponsors.
Price making and trading by specialized traders. In the warrants market, this is often carried out by the issuers themselves, although in this context price smoothing plays a big role ("fair" price making, narrow bid/ask spreads).
In contrast to limit orders, market orders are executed immediately at the current market prices.
See Exchange Supervisory Office.
Mark-to-market means measuring the value of financial assets at their market value. This method plays an important role in the valuation of postions on the futures market.
The term maturity is used in various contexts, e.g:
(1) Period between the disbursal of a loan and its specified repayment
(2) For fixed-interest securities, the time between the issue of a security and its redemption
(3) In forward transactions (e.g. options, warrants and futures), the time between concluding the forward contract or issue up to the maturity or expiry date
Abbreviation for management buy-out
Deutsche Börse's MDAX® (mid-cap index) covers the liquid securities of the "second level". It comprises the 50 largest companies from classic sectors in the Prime Standard segment of FWB (Frankfurt Stock Exchange) that rank below the DAX® shares in terms of market capitalization and trading volume. The base date for the index is December 30, 1987 = 1,000 points. The criteria for including a share in the MDAX® are trading volume and market capitalization on the basis of the number of shares in free float as well as a representative postion in the sector. The composition of the index is reviewed on a semi-annual basis and adjusted in March and September. Decisions on changes to the MDAX® are taken by the Executive Board of Deutsche Börse AG based on proposals of the Working Committee for Stock Indices.
Fixed-interest rate bonds issued by public sector authorities and banks with a maximum term of four years.
Medium-term notes are bearer bonds that can be issued on a revolving basis within the framework of a program unrestricted by time (issued on an ongoing basis ). The notes have minimum maturities of 2 years and are sold in small tranches by banks appointed as agents through private placements with institutional investors.
Mergers and acquisitions comprise all of the activities in connection with the takeover of companies or parts of companies by another company or the merger of such units. Investment banks offer agency and advisory services to the acquiring or target company.
Mezzanine capital is a heading for a variety of hybrid financing instruments that are between pure equity capital and pure debt capital. Mezzanine capital financings have a great deal of flexibility regarding their features and can therefore be adjusted to the individual requirements of those seeking capital. This means that mezzanine capital financing instruments can be constructed as both equity and debt mezzanine capital. Equity mezzanine capital includes mezzanine financings that place the provider of capital in a position similar to that of a shareholder, primarily through dormant participations or participatory rights. Debt mezzanine capital comprises corresponding financings that place the provider of capital in a position similar to that of a lender, primarily through subordinated loans.
The minimum reserve is an interest-free minimum deposit that commercial banks are obliged to maintain with the central bank. The minium reserve is a monetary policy instrument that central banks have to control the commercial banks' demand for central bank money. It is specified as a percentage of the customers' deposits at the respective commercial bank. The money deposited with the central bank within the framework of the minimum reserve rate cannot be lent.
Pieces of metal that are minted at the instruction of the state and that serve or have served as legal tender.
The ECB has a number of monetary policy tools at its disposal designed to help reach its primary objective of price level stability. These include, above all, open market operations and standing facilities.
Monetary stability means keeping the purchasing power of money as constant as possible, i.e. price stability, adjusted for external influences.
Money is a generally accepted payment medium which all market participants use to buy goods and services. State governments declare a certain currency to be the official means of payment, i.e. all nationals are obliged to accept it as payment for goods or services. In its capacity as a unit of account or measure of value, money enables consumers to compare products on the basis of their price, expressed in terms of monetary units. In other words, for something to be money, it must serve as:
(1) unit of account, measure of value and store of value as well as
(2) medium of exchange and legal currency.
Apart from overnight money and time deposits, a type of interbank money market trading. Term referring to short-term loans on the money market repayable at the end of the month without prior termination.
The introduction of criminal proceeds into the financial and economic system to disguise their illegal origin. Pursuant to Section 261 of the German Penal Code, money laundering is a criminal offense. Accoding to the Money Laundering Act banks and their employees are obliged to establish the identity of customers when entering into a business relationship intended to operate on a lasting basis, establish whether there are any economic beneficiaries, such as third-party trust companies, to identify the parties involved in suspicious transactions and report such activities to the law enforcement authorities, and to take internal safeguards against money laundering. Records of all such investigations are to be kept. Data collected may be used solely in connection with the prosecution of money launderers. If criminal investigation proceedings are instituted, the fiscal authorities will be duly informed if this is deemed relevant in connection with taxation procedures or tax offences.
Unlike the capital market, the money market is a marketplace for short-term borrowing and capital investment. Central bank funds are taken up and lent by banks, and money market instruments issued by central banks are sold to banks and repurchased. The money market helps banks manage their liquidity positions and enables the European Central Bank to coordinate its monetary policy targets.
An open-end mutual fund which invests solely or primarily in money market instruments and liquid paper with very short maturities. Money market instruments include time deposits, borrower's note loans (Schuldscheindarlehen), bonds with short remaining maturities as well as commercial papers and deposits with banks (certificates of deposit). The main advantage over time deposits or savings deposits is that the funds are available at any time, not just at previously arranged intervals of 30, 60 or 90 days.
Trading in overnight money and time deposits, conducted by telephone or electronically, between institutional investors (banks, insurance companies, mutual funds, major companies, as well as government institutions).
The term money supply is sometimes used to refer to the overall money volume (cash in circulation), but may also refer to the central bank money supply. The European Central Bank (ECB) distinguishes three money supply categories:
M1 is a narrow monetary aggregate that comprises currency in circulation (without banks' cash deposits) and overnight deposits of domestic non-banks.
M2 is a somewhat broader monetary aggregate that comprises M1 plus deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months.
M3 is a broad monetary aggregate that comprises M2 plus shares in money market funds, repurchase agreements, money market instruments as well as debt securities with a maturity of up to two years.
Much like the Deutsche Bundesbank used to do, the European Central Bank bases its monetary policy decisions on M3.
Property and land put up as loan collateral, to which the creditor may resort in case of mortgagor's failure to fulfil payment obligations. This entitlement is entered in the Land Register. It constitutes a lien on real estate to safeguard the creditors' interests. A first mortgage signifies a first-ranking charge entered in the Land Registry, which is the most secure (vested) right as no other charge take priority.
Joint-stock bank primarily engaged in mortgage and public-sector lending business. There are also public-sector mortgage banks whose main objective is the financing of residential construction and public investments. Capital is raised by the sale of mortgage bonds (Pfandbriefe) and public-sector debentures (Kommunalobligationen). Banks operating in this field of business are subject to the German Pfandbrief Act.
Mortgage banks focus on the long-term loans business and raise funds on the capital markets by issuing mortgage-backed securities.
The Mortgage Banks Act (Hypothekenbankgesetz) governed the rights and obligations of mortgage banks in Germany. This Act, which was superseded on July 19, 2005 by the Pfandbrief Act, only remains valid in context with transitional provisions. It regulates the organization and business activities of private mortgage banks as well as their supervision by the state. It stipulates that mortgage banks must restrict their activities to the extension of mortgage loans, public-sector debentures (Kommunaldarlehen) and the issue of 'Pfandbriefe', all of which are subject to constant supervision by a government authority. Secondary business is permitted to a limited extent.
A fixed-income security (debt instrument) placed by a private mortgage bank, a ship mortgage bank or a public sector bank to procure capital for the issuer. The capital is allocated in exchange for the assignment of mortgages as loans, in particular, for home financing. A trustee ensures that the mortgage bonds (Pfandbriefe) are always backed by mortgages of the same amount carrying at least the same interest rate. Mortgage bonds (Pfandbriefe) are traded on the exchanges. Use of the term "Pfandbrief" is regulated by law. Mortgage bonds (Pfandbriefe) usually offer a somewhat higher return than government bonds, but in their ratings the issues are considered to be equivalently secure. Mortgage bonds (Pfandbriefe) are eligible as investments of ward money, as collateral for lombard loans and as premium reserve fund investments.
A loan secured by a mortgage entered in the Land Register.
See medium-term note.
Investment funds offered to investors in the public on a broad scale.
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