EU IPO REPORT: GLOSSARY OF CAPITAL MARKET TERMS 20 FEBRUARY 2015

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1 EU IPO REPORT: GLOSSARY OF CAPITAL MARKET TERMS 20 FEBRUARY 2015 ACTIVE INVESTMENT is where the investor chooses to buy individual company shares, after researching the companies. The fees are usually higher because of the investment in time and research, but the idea is to pick the best companies and thus to outperform the market over the longer-term. The best known example of this investment style is Warren Buffett. See also PASSIVE INVESTMENT. AIFMD Alternative Investment Fund Managers Directive, which covers the management, administration and marketing of alternative investment funds. Its focus is on regulating the fund manager, rather than the fund itself. ANALYST A person who prepares reports on company shares. Some analysts are paid by the company, some by the stock exchange and some by investors. They may work in-house for a fund manager (buyside), or for an investment bank (sellside) or an independent research firm. ANCHOR INVESTOR refers to the initial institutional investor, who will take an initial stake and thereby give confidence to other investors. ASSET MANAGER is a person or firm who invests into the capital markets on behalf of clients, also known as a FUND MANAGER; represented in Europe by EFAMA; ASSET SERVICING administration services provided by a central securities depository (CSD) or custodian in connection with the custody and/or safekeeping of financial instruments (e.g. the processing of corporate events or the handling of taxes). AUTHORISED ADVISERS are corporate finance advisers for NewConnect companies in Poland, similar to the UK NOMAD model. See also SPONSOR REGIME. BANK-ENTRY SYSTEM a system which enables transfers of securities and other financial assets which do not involve the physical movement of paper document or certificates (e.g. the electronic transfer of securities). BETTER REGULATION also known as SMART REGULATION: policy analysis designed to ensure regulation is fit for purpose; often subject to principles of Proportionality, Accountability, Consistency, Transparency and Targeting. BID-OFFER SPREAD The difference between the selling price and the purchase price for investments. Market makers, who act like wholesalers in the stock market, make their profit from the spread buying shares at the bid price and selling them at the offer price. BID/ASK SPREAD The amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. BLOCK TRADE large privately negotiated trades; private rather than public to avoid affecting supply and demand because of the size of trade. BOOK BUILDING refers to the process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO), or other securities during their issuance process, in order to ensure that the issue is priced correctly. 1

2 BONDS A debt investment in which an investor loans money to a company that borrows the funds for a set time at a fixed interest rate. BROKER An intermediary between a buyer and seller. The main EU regulation for brokers is MIFIR. There are three types of service on offer: discretionary, advisory and execution-only. With the first option, the broker has general discretion as to how he manages your portfolio although you can narrow the discretion by giving the broker guidelines. With the second option, the broker will contact you to suggest changes in the composition of your portfolio, but he does not have the authority to trade on a completely discretionary basis, so that the broker can provide a suitable service. With the last option, execution-only, the broker s primary function is to execute the buy/sell instructions which you give him. He does not give advice either proactively or at your request. BUSINESS ANGELS Business angels are individual investors, usually with business experience, who provide capital for start-up firms. They are an important source of equity for small firms with growth potential in their early stages of development, long before they become attractive for venture capital funds. See also VENTURE CAPITAL. BUYSIDE Institutional investors i.e. fund managers in AIFM and UCITS, pension funds, and the investment part of insurance companies. CASH SETTLEMENT AGENT the entity whose assets or liabilities are used to settle the payment obligations arising from funds transfer system or from securities transfers within a central securities depository (CSD). Commercial bank and central banks are typical cash settlement agents. CENTRAL SECURITIES DEPOSITORY (CSD) an entity that: 1) enable securities transactions to be processed and settled by book entry; 2) provides custodian services (e.g. the administration of corporate actions and redemptions); 3) plays an active role in ensuring the integrity of securities issues. Securities can be held in a physical (but immobilised) from or in a dematerialised form (whereby they exist only as electronic record). CSDs in Europe are represented by ECSDA. CERTIFIED ADVISERS are corporate finance advisers approved by NASDAQ, whose role is to help companies to list and to abide by the ongoing rules and regulations. See also SPONSOR REGIME. CLEARING the process of transmitting, reconciling and, in some cases, confirming transfer orders prior to settlement, potentially including the netting of orders and the establishment of final positions for settlement. Sometimes this term is also used (imprecisely) to cover settlement. For the clearing of futures and options, this term also refers to the daily balancing of profits and losses and the daily calculation of collateral requirement. CLEARING SYSTEM a set of rules and procedures whereby financial institutions present and exchange data and/or documents relating to transfer of funds or securities to other financial institutions at a single location (e.g. a clearing house). These procedures often include a mechanism for calculating participants mutual positions, potentially on a net basis, with a view to facilitating the settlement of their obligations in a settlement system. COMMISSION A service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security. CONTINUING/CONTINOUS DISCLOSURE REQUIREMENT consists of important information about a municipal security that arises after the initial issuance of the bond. CORPORATE ACTION (CORPORATE EVENT) an action or event decided by the issuer of a security which has an impact on the holders of that security. This may be optional, in which case those holders have a choice (for example, they may have the right to purchase more shares, subject to conditions specified by the issuer). Alternatively, it may be mandatory, whereby those holders have no choice (e.g. in the case of a dividends or bonuses) or the registration of rights (subscription rights, partial rights, splits, mergers, etc.). CORPORATE ACCESS refers to any service of arranging or bringing about contact between an investment manager and an issuer or potential issuer. CORPORATE GOVERNANCE CODES Traditionally market best practice for how companies are directed has been laid down in soft law, allowing companies to comply or explain against the code 2

3 recommendations; in recent years many of the recommendations have become hard regulation and the number of codes has proliferated. See also STEWARDSHIP CODES. CROWDFUNDING is an alternative source of financing. It refers to open calls to the public, generally via the internet, to finance a project through a donation, a monetary contribution in exchange for a reward, product pre-ordering, lending, or an investment. CUSTODIAN is an entity, often a credit institution, which provides securities custody services to its customers. CUSTODIAN BANK a firm that is responsible for safeguarding assets such as shares on behalf of investors and settling trades in those shares. CUSTODY RISK is the risk of a loss being incurred on securities in custody as a result of a custodian s insolvency, negligence, misuse of assets, fraud, poor administration or inadequate record-keeping. DEBENTURES/DEBENTURE STOCK A type of long-term bond (loan) taken out by a company, which it agrees to repay at a specified future date. The company will usually pay a fixed rate of interest to debenture holders each year until maturity, and if it fails to pay either the interest or the principal amount of the loan when the time comes, the debenture holders can force the company into liquidation and recover their money from a sale of its assets. DEBT See BONDS for capital market debt. DEFAULT an event stipulated in an agreement as constituting a default. Generally, such events relate to failure to complete a transfer of funds or securities in accordance with the terms and rules of the system in question. A failure to pay or deliver on the due date, a breach of agreement and the opening of insolvency proceedings all constitute such events. DEMATERIALISATION is the elimination of physical certificates or documents of title indicating ownership of financial assets, such that the financial assets exist only as accounting records. DEPOSITORY is an agent with the primary role of recording (direct or indirect) holdings of securities. A depository may also act as a registrar. DEPOSITORY RECEIPTS A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. A depository receipt trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares. Depository receipts can be sponsored or unsponsored depending on whether the company that issued the shares enters into an agreement with the custodian bank that issues the depository receipt. DIVIDEND A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. EIS the Enterprise Investment Scheme is a UK tax incentive scheme designed to encourage investors to invest in unquoted companies. The benefits are income tax relief at 20%, Capital Gains Tax relief, tax relief on losses and rollover relief (if you use the proceeds from selling shares in Company A to invest in Company B, provided Company B is an EIS-qualifying company). ELITE programme ELITE is a platform of Borsa Italiana / London Stock Exchange to facilitate longterm structured engagement between private businesses, industry experts, corporate advisers and investors (venture, private equity and institutions), helping to prepare and structure these businesses for further growth and external investment. For more information, see ELITE Italy and ELITE UK. END INVESTOR (FINAL INVESTOR) the ultimate recipient of rights in securities held on a securities account (e.g. ownership rights, voting rights or dividends). ESMA, the European Securities and Markets Authority EUROPEANISSUERS is a pan-european organisation representing publicly quoted companies in Europe. Their aim is to persuade policymakers to create a favourable EU regulatory environment for financial markets that serves the needs of their end users, being companies and investors. For more information, please see EQUITY is the risk-bearing part of the company s capital and contrasts with debt capital which is usually secured in some way and which has priority over shareholders if the company becomes insolvent and its assets are distributed. For most companies there are two types of equity: ordinary 3

4 shares, which have voting rights and preference shares which do not. Owners of preference shares rank ahead of ordinary shareholders in a liquidation. EVCA European Private Equity & Venture Capital Association. The EVCA is the voice of European private equity. Their membership covers the full range of private equity activity, from early-stage venture capital to the largest private equity firms, and funds investing in infrastructure. We also represent institutional investors such as pension funds and insurance companies, who are a key source of long-term financing in Europe and invest in private equity, venture capital and infrastructure funds. See EXECUTION-ONLY TRADES see BROKER. FESE The Federation of European Securities Exchanges (FESE) represents 37 exchanges in equities, bonds, derivatives and commodities through 19 full members from 30 countries, as well as 1 Affiliate Member and 1 Observer Member. FESE is a keen defender of the Internal Market and many of its members have become multi-jurisdictional exchanges, providing market access across multiple investor communities. FESE represents public Regulated Markets. Regulated Markets provide both institutional and retail investors with transparent and neutral price-formation. Securities admitted to trading on our markets have to comply with stringent initial and ongoing disclosure requirements and accounting and auditing standards imposed by EU laws. See FINAL INVESTOR see also END INVESTOR. FREE FLOAT represents the portion of shares of a corporation that are in the hands of public investors as opposed to locked-in stock held by promoters, company officers, controlling-interest investors, or government. FSAP, the EU Financial Sector Action Plans and , intended to create a single market for financial services in Europe. Originally designed to create financial markets to serve issuers and investors in 1998, this aim was lost in implementation as the focus was more on the creation of cross-border markets as en end in themselves, and on regulating the intermediaries, rather than on serving the needs of the end users. FUND MANAGER see ASSET MANAGER FUNDAMENTAL ANALYSIS the process of valuation that seeks the intrinsic value of a share by investigating the company, including the human and business factors. GEARING the relative importance of loans in the capital structure of a firm. The components which form a company s capital are ordinary shares, preference shares, debentures and loan stock. Equity gearing is the ratio of borrowings to equity capital. Capital gearing is the ratio of bank borrowing and other debt to net tangible assets. GLOBAL CUSTODIAN a custodian that provides its customers with custody services in respect of securities traded and settled in several countries around the world. IASB International Accounting Standards Board; sets international financial reporting standards (IFRS) IBO Initial Bond Offering is when a company offers its bonds to the public via securities exchanges. IFRS International Financial Reporting Standards, adopted for use on European Regulated Markets from 1 January 2005 via IAS Regulation (EC) No 1606/2002. IFRS for SMEs is a reduced set of standards for smaller companies, given the complexity of full IFRS. The IASB does not recommend their use for listed companies and financial institutions, but adoption is a matter for individual jurisdictions such as the European Union to decide. INDUCEMENTS In the law of contracts, the inducement is a pledge or promise that causes an individual to enter into a particular agreement. INSTITUTIONAL INVESTOR An organisation, as opposed to an individual, which invests funds arising from its receipts from the sale of securities from deposits and other sources i.e. insurance companies, investment trusts, unit trusts, pension funds and trustees. INTEGRITY OF A SECURITIES ISSUE the result of legal requirements and securities accounting procedures ensuring that the number of securities issued, is at all times equal to the total number of securities in circulation (i.e. validity booked in investor s accounts). 4

5 INTEREST-RATE SWAPS An arrangement in which two parties agree to exchange periodic interest payments, at agreed intervals, over an agreed period, but without any principal being paid. The most common and simplest deal involves one party paying a fixed rate of interest and the other paying a floating rate. IRSs are used for hedging, speculation or arbitrage. INTEREST REGISTER is a register for companies that want to attend meeting with private banking and other high net worth clients. INVESTOR CSD a term used in the context of central securities depository (CSD) links. An investor CSD or a third party acting on behalf of the investor CSD opens an account in another CSD (the issuer CSD) so as to enable the cross-system settlement of securities transactions. IOSCO International Organisation of Securities Commissions - international association of securities authorities, including members of ESMA. IPO Initial Public Offering is when a company offers its shares to members of the public via securities exchanges for the first time. At this stage, the company is accessing the primary markets and is transformed from a private company into a public company. ISSUER An entity that sells securities (shares, bonds) to the public. ISSUER CSD (issuing CSD) a central securities depository (CSD) in which securities are issued (or immobilised). The issuer CSD opens accounts allowing investors (in a direct holding system) and/or intermediaries (including investor CSD) to hold these securities. INVESTOR CSD a central securities depositary which opens an account in another CSD (the issuer CSD) so as to enable the cross-system settlement of securities transactions on behalf of the underlying investor (who usually holds cross-border shares indirectly via custodian and subcustodian banks in the investment chain). LEGAL RISK the risk of a loss being incurred on account of the unexpected application of a law or regulation, or because a contract cannot be enforced. LEI or Legal Entity Identifier an identification system to track all parties involved in a financial security transaction including: buyer, seller and issuing (or underlying) companies. LIQUIDITY The degree to which an asset can be quickly and cheaply turned into money, which is by definition, completely liquid. In the stock market, the ease with which shares can be bought and sold without significantly moving the price of the share. LIQUIDITY PROVIDER aims to facilitate trading in securities and other financial instruments by providing a pool of shares (which they own), so that buyers and sellers can trade easily without having to locate and deal with other individual traders. In other words, they make securities "liquid" or easily converted to cash. However, they provide liquidity as a service, not an obligation, and so may leave the market in times of stress, unlike MARKET MAKERS. LIQUIDITY RISK the risk that counterparty will not settle an obligation in full when it becomes due. Liquidity risk does not imply that a counterparty or participant is insolvent, since it may be able to effect the required settlement at some unspecified time thereafter. LISTED COMPANY see QUOTED COMPANY. LISTING refers to the company's shares being on the list (or board) of stock that are officially traded on a stock exchange. LISTING AUTHORITY The body that decides on the rules for the listing of public companies, reviews and approves the prospectuses of companies that want to list, enforces those rules. MAR Market Abuse Regulation EU legislation covering insider trading and market manipulation in capital markets. MARKET CAPITALISATION The market value of a company s issued share capital. This is the quoted price of the company s shares multiplied by the number of shares issued. MARKET INFRASTRUCTURE is a system used for the trading, clearing and settlement of payments, securities or derivatives. MARKET MAKER Market makers are banks and brokerages which display buy and sell quotations for a guaranteed number of shares, thus competing for customers. The difference between the price at which a market maker is willing to buy a security and the price at which the firm is willing to sell it is 5

6 called the market maker spread. Market makers who have committed to market making schemes operated by certain trading venues are thereby obliged to provide liquidity (i.e. a minimum number of shares) even in times of stress, unlike LIQUIDITY PROVIDERS. However, EU regulation uses several different definitions for market makers in different pieces of legislation, which do not recognise this difference. MARKET RISK (private risk) the risk of losses (in both on and off-balance sheet positions) arising from movements in market process. MARKING TO MARKET the practice of revaluing securities and financial instruments using current market prices. MIFID / MIFIR Markets in Financial Instruments Directive / Regulation EU legislation covering the provision of investment services by banks and investment firms, as well as the operation of securities exchanges. MTF Multilateral Trading Facility A trading system that facilitates the exchange of financial instruments between multiple parties. Multilateral trading facilities allow eligible contract participants to gather and transfer a variety of securities, especially instruments that may not have an official market. These facilities are often electronic systems controlled by approved market operators or larger investment banks. Traders will usually submit orders electronically, where a matching software engine is used to pair buyers with sellers. Primary market MTFs in Europe are exchange-regulated markets, rather than regulated by the financial services authorities. This enables them to tailor their shape to the local markets, to be more flexible, and to respond more quickly to market developments than the main markets. The main primary market MTFs in Europe which operate thus are: - AIM, the Alternative Investment Market, and AIM Italia, are a primary market MTFs of the London Stock Exchange / Borsa Italiana, allowing smaller growth companies to float shares with a more flexible regulatory system than is applicable to the main (RM) market. - Alternativa is a French MTF for smaller companies. - Dritte Markt is part of the Wiener Börse in Austria. - Enternext (formerly Alternext) is an equity trading market that was opened May 17, 2005 by its parent institution Euronext (covering Belgium, France, the Netherlands & Portugal) for small to medium sized firms that were anticipated to desire easier access to an equity market. - Enterprise Securities Market is a market of the Irish Stock Exchange for smaller growth companies. - First North is a division of NASDAQ OMX and an alternative stock exchange for smaller companies in the Nordic Countries. - ISDX, formerly OFEX then PLUS Markets, is an independent UK public market, dedicated to smaller companies, and based on a quote-driven trading platform. - MAB, the Mercado Alternativo Bursátil is a sub-market of the Spanish stock exchange Bolsas y Mercados Españoles (BME). - NewConnect is an alternative share market allowing smaller companies to float shares run by the Warsaw Stock Exchange. The exchange is conducted outside the regulated market as a multilateral trading facility. Compared to the main market of Warsaw Stock Exchange, NewConnect offers lower costs for floated companies, simplified entrance criteria and limited reporting requirements. NewConnect was modelled on the basis of AIM and First North. NETTING in the context of clearing or settlement systems, the agreed offsetting of mutual obligations by participants in a system. This process involves the calculation of net settlement positions and their legal reduction to a (bilateral or multilateral) net amount. NOMAD or Nominated Adviser: adviser to companies joining the AIM market. The advisers (not the exchange and not the FSA) are responsible for deciding whether or not a company is suitable for admission to the market and for keeping the company up to date with its ongoing obligations. (Most companies on AIM are too small to have a department to keep up with financial regulatory obligations themselves.) Trade in a company s stock is suspended if the company loses its NOMAD. See also SPONSOR REGIME. 6

7 NOMINEE a person or entity named by another to act on its behalf. Nominees are commonly used in securities transactions to register and obtain legal ownership of securities. OECD Organisation for Economic Co-operation and Department, with membership from representatives of national governments. ORDER-DRIVEN TRADING is trading where the orders of both buyers and sellers are displayed, detailing the price at which they are willing to buy or sell a security and the amount of the security that they are willing to buy or sell at that price. Different from QUOTE-DRIVEN TRADING. OPERATIONAL RISK the risk that deficiencies in information system or internal controls, human error or management failures will result in unexpected losses. This relates to both internal and external events. PASSIVE INVESTMENT is a strategy used by investors who do not want to research individual company shares or forecasts. The idea is to minimize investing fees and to follow the movements of the market overall. Retail investors typically do this by buying one or more 'index funds'. See also SHARE INDICES. PD see PROSPECTUS. PLATFORM / FUND SUPERMARKET an online portal that gives investors the choice of and direct access to many different funds and / or shares from different fund management groups. PRE-EMPTION RIGHTS Rights given to shareholders, which entitle them to buy additional shares in a new issue before it is offered to the general public. PRE VETTING is a requirement to have documents checked before publication. Pre the FSAP, this was done by exchanges or by advisers. After the introduction of the Prospectus Directive, national regulators started vetting documents for regulated markets. However, the documents for exchangeregulated markets are mostly still approved by exchanges or advisers (often faster). PRICE DISCOVERY is the process by which the price of an asset in the marketplace is decided through the interactions of buyers and sellers. The price that buyers are willing to pay may vary based on various factors, including fundamental valuation, demand in terms of the number of other buyers and sellers, the point in the economic cycle, costs of trading, etc. PRICE-EARNINGS RATIO The quoted price of an ordinary share divided by the most recent year s earnings per share. The P/E ratio is a measure of the price that has to be paid for a given income from an equity share. PRIMARY MARKET is when the company issues shares directly to its shareholders, at the time of the IPO. Thereafter, the shareholders may trade with each other see SECONDARY MARKET. PRINCIPAL RISK the risk that the seller of a financial asset (e.g. securities or currency) will deliver, but not receive payment, or the risk that the buyer will pay, but not receive delivery. In such a situation, the full value of the securities or funds transferred is at risk. PRIVATE EQUITY Investment in private companies (not yet traded on the stock exchange). An important exit strategy for private equity investors is to take the company public and to sell the shares. However, in recent years trade sales have been more prevalent. PROSPECTUS A prospectus is a disclosure document published by companies when seeking to raise capital from investors via public markets, containing information about the company s business, financial statements, directors, etc. PROSPECTUS DIRECTIVE (PD) EU legislation requiring the implementation of a set of common standards for prospectuses into the national law of all member states of the European Union. QUANTITATIVE ANALYSIS a more sophisticated version of RELATIVE ANALYSIS, by which fund managers use past prices to predict future price movements. QUOTED COMPANY any company whose shares are listed on the official Stock Exchange. Only public companies fulfilling certain requirements designed to safeguard the investing public are granted a quotation. QUOTE-DRIVEN TRADING is trading which only displays the bid and ask offers of designated market makers, dealers or specialists. These market makers will post the bid and ask price that they are willing to accept at that time. Different from ORDER-DRIVEN TRADING. 7

8 RECONCILIATION a procedure to verify that two sets of records issued by two different entities match. REGISTRATION the documenting of the ownership of securities in the records of the issuer, in a registry on in a central securities depository (CSD). REGISTRY (registrar or issuer agent) an entity that records the ownership of securities on behalf of the issuer. REGULATED MARKET (RM) EU regulation provides a common set of rules for applications to list on Regulated Markets across the EU. These rules include: preparing a prospectus for approval by a national regulator, applying the rules of disclosure; and financial reporting standards. See also IFRS, MTFs, PROSPECTUS. REGULATORY NEWS SERVICE (RNS) The London Stock Exchange s service which ensures that pricesensitive information (information which, if made public, is likely to have a significant effect on the price of a company s securities) from listed and AIM companies, and certain other bodies, is disseminated to all RNS subscribers at the same time. RELATED PARTY TRANSACTION is a business deal or arrangement between two parties who are joined by a special relationship prior to the deal. RELATIVE ANALYSIS the process by which fund managers compare the market prices of assets. RESEARCH ANALYST See ANALYST. RETAIL INVESTOR a private investor who buys shares or bonds or other financial instruments through a stockbroker for their private portfolio. SECONDARY MARKET After the IPO, when the company issues shares directly to investors, those investors can trade with each other via the stock exchange. This is known as the secondary market. See also IPO and PRIMARY MARKET. SELLSIDE usually investment banks involved with the creation, promotion, analysis and sale of securities to investors. They act as intermediaries between the issuers and the investors, via analysts who perform stock research and make ratings, and the market makers who provide liquidity in the market. SETTLEMENT is the completion of a transaction or of processing with the aim of discharging participants obligations through the transfer of funds and/or securities. A settlement may be final or provisional. SETTLEMENT RISK the risk that settlement in a transfer system will not take place as expected, usually owing to a party defaulting on one or more settlement obligations. This risk includes, in particular, operational risks, credit risks and liquidity risks. SHARES See EQUITY. SHARE INDICES well-known EU indices include: Eurostoxx50 - a stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Börse Group and SIX Group. According to STOXX, its goal is "to provide a blue-chip representation of Supersector leaders in the Eurozone". It is made up of fifty of the largest and most liquid stocks. FTSE a weighted average of the 100 largest UK quoted companies by market capitalisation, launched in January 1984, and reviewed quarterly. SHARE SAVINGS ACCOUNTS (examples: investeringssparkonto in Sweden, ISA or Individual Savings Account in the UK). SHAREHOLDER VALUE is the value delivered to shareholders because of management's ability to grow earnings, dividends and share price. SMART REGULATION see BETTER REGULATION SPONSOR REGIME provides expert guidance and carry out independent checks to ensure issuers comply with key parts of the listing rules and to ensure an appropriate level of consumer protection and market integrity in the premium listings. Examples of such regimes include: AUTHORISED ADVISERS in Poland, CERTIFIED ADVISERS for NASDAQ markets, NOMADs for the UK AIM market. 8

9 SOLVENCY II is an EU Directive that codifies and harmonises the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. STEWARDSHIP CODES National codes of best practice for institutional investors as to how they engage with investee companies. See also CORPORATE GOVERNANCE CODES. STRAIGHT-THROUGH PROCESSING (STP) the automated end-to-end processing of trades/payment transfers including, where relevant, the automated completion of confirmation, matching, generation, clearing and settlement of orders. SYSTEMIC RISK the risk that the inability of one participant to meet its obligations in a system will cause other participants to be unable to meet their obligations when they become due, potentially with spillover effects (e.g. significant liquidity or credit problems) threatening the stability of or confidence in the financial system. That inability to meet obligations can be caused by operational or financial problems. T2S or TARGET 2 SECURITIES the Eurosystem s single technical platform enabling central securities depositories (CSDs) and national central banks to provide core, borderless and neutral securities settlement services in central bank money in Europe. TECHNICAL ANALYSIS a process of valuation in which fund managers use past stock price movements to predict the future. See also QUANTITATIVE ANALYSIS. TOD Transparency Obligation Directive EU legislation which changed company reporting requirements in Europe from company law to securities law. Also includes provisions on shareholder reporting requirements for shares held in public markets. TRACKER FUND a fund which aims to achieve the same returns as a chosen share index, and which does this by investing in all the companies in the index according to a market value weighting. Mathematically, this ensures that the fund achieves its aims. Critics of tracker funds argue that they are unsuitable for investors who want superior returns. They also argue that because of their internal rules, tracker funds which track an index like the FTSE 100 always have to buy into new entrants to the index at a top price, and sell shares of companies exiting the index at the bottom. TURNOVER The total sales revenue of a business. TURNOVER VELOCITY A measure of the liquidity in a company s shares. It measures the speed with which shares are bought and sold on the market. UCITS The Undertakings for Collective Investment in Transferable Securities, investment funds regulated at EU level. UNBUNDLING A process by which a large company with several different lines of business retains one or more core businesses and sells off the remaining assets, product/service lines, divisions or subsidiaries. UNDERLYING ASSET the asset (i.e. the financial instrument or security) upon which a derivatives contract is based. UNDERWRITER During an IPO, the banks underwrite the transaction, which means that they have taken on the risk of distributing the securities. If they cannot find enough investors, they will have to hold some securities themselves. They make money from the price difference between what they pay to the issuer and what they collect from investors. US JOBS ACT or Jumpstart Our Business Startups Act is US legislation that eases regulatory restrictions for new businesses, to make it easier for start-ups to get established. VENTURE CAPITAL capital invested into small and young companies in return for equity ownership. Generally speaking, venture capitalists (VCs) supply capital to companies that are small, may be start-ups, are high risk, and which could not get the funds by listing on the stock market or borrowing from banks. If the venture capital is provided by private investors known as business angels, then it will usually be for seed capital for young and new enterprises. Corporate venturing refers to the involvement investors may well have in the micro-management of the company. In return for taking the extra risk, the VCs look for substantial equity, a seat on the board, and possibly the ratcheting up of their equity stake if performance targets are not met. Sometimes, they provide 9

10 management and financial support to their investee companies, as well as just money. They will look for an exit through a trade sale or a flotation of the company within 2-5 years. 10