Glossary: Regulatory and Operational Terms

This glossary provides definitions for key regulatory and operational terms used in derivatives trading and compliance. Terms are organized alphabetically for quick reference.

A-C

AML (Anti-Money Laundering): Laws, regulations, and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income.

ASC 815: The FASB Accounting Standards Codification topic covering derivatives and hedging, establishing requirements for recognition, measurement, and disclosure.

Beneficial Owner: A natural person who ultimately owns or controls 25% or more of a legal entity, or who exercises significant control over the entity.

BSA (Bank Secrecy Act): US law requiring financial institutions to assist government agencies in detecting and preventing money laundering.

CCP (Central Counterparty): An entity that interposes itself between counterparties to contracts, becoming the buyer to every seller and the seller to every buyer.

CFTC (Commodity Futures Trading Commission): US federal agency that regulates commodity futures, options, and swaps markets.

CIP (Customer Identification Program): Procedures financial institutions must implement to verify the identity of customers opening accounts.

Clearing: The process by which a clearinghouse becomes the counterparty to both sides of a trade, guaranteeing performance.

Compliance: Adherence to laws, regulations, and internal policies governing business activities.

Confirmation: A document exchanged between counterparties to verify the terms of a trade.

CSA (Credit Support Annex): An ISDA document specifying collateral arrangements between derivatives counterparties.

D-F

DCM (Designated Contract Market): An exchange registered with the CFTC to trade futures and options.

Dodd-Frank Act: US legislation enacted in 2010 that significantly reformed financial regulation, including derivatives markets.

EDD (Enhanced Due Diligence): Additional investigation required for higher-risk customers beyond standard due diligence.

EMIR (European Market Infrastructure Regulation): EU regulation governing OTC derivatives, central counterparties, and trade repositories.

FCM (Futures Commission Merchant): An entity that solicits or accepts orders for futures or options and accepts money to margin such trades.

FinCEN (Financial Crimes Enforcement Network): US Treasury bureau that collects and analyzes financial transaction data to combat money laundering.

FINRA (Financial Industry Regulatory Authority): A self-regulatory organization overseeing broker-dealers in the United States.

Form 204: CFTC form for reporting large trader positions and claiming position limit exemptions.

G-K

Hedge Accounting: Accounting treatment that matches the timing of gains and losses on hedging instruments with the hedged items.

ISDA (International Swaps and Derivatives Association): Trade organization that has developed standard documentation for derivatives transactions.

ISDA Master Agreement: Standard contract governing OTC derivative transactions between counterparties.

KYC (Know Your Customer): Regulatory requirement for financial institutions to verify the identity and assess the risk of their customers.

L-O

LEI (Legal Entity Identifier): A 20-character alphanumeric code that uniquely identifies legal entities participating in financial transactions.

MAT (Made Available to Trade): CFTC determination that a swap must be executed on a SEF or DCM.

MiFID II (Markets in Financial Instruments Directive II): EU directive regulating investment services and trading venues.

MTM (Mark-to-Market): Valuing positions at current market prices rather than historical cost.

Novation: The process by which a CCP becomes the counterparty to both sides of a trade, replacing the original bilateral relationship.

OCC (Options Clearing Corporation): The clearinghouse for US exchange-traded options.

OFAC (Office of Foreign Assets Control): US Treasury office administering economic sanctions programs.

OTC (Over-the-Counter): Trades executed directly between counterparties rather than on an exchange.

P-R

PEP (Politically Exposed Person): An individual who holds or has held a prominent public position, subject to enhanced due diligence.

Position Limit: A regulatory restriction on the number of contracts a person or entity may hold in a particular product.

Reconciliation: The process of comparing records between parties to identify and resolve discrepancies.

Reg BI (Regulation Best Interest): SEC rule requiring broker-dealers to act in the best interest of retail customers.

RTO (Recovery Time Objective): The maximum acceptable time to restore operations after a disruption.

RPO (Recovery Point Objective): The maximum acceptable amount of data loss measured in time.

S-U

SAR (Suspicious Activity Report): Report filed by financial institutions when they detect potentially suspicious transactions.

SDR (Swap Data Repository): An entity that collects and maintains swap transaction data for regulatory reporting.

SEC (Securities and Exchange Commission): US federal agency regulating securities markets.

SEF (Swap Execution Facility): A trading platform for swaps registered with the CFTC.

Segregation: Requirement to hold customer funds separately from firm funds.

Settlement: The process of completing a transaction through exchange of payment and securities or cash flows.

SIMM (Standard Initial Margin Model): ISDA methodology for calculating initial margin on non-cleared derivatives.

SOC 2: An audit report evaluating a service organization's controls related to security, availability, and confidentiality.

SR 11-7: Federal Reserve guidance on model risk management.

STP (Straight-Through Processing): Automated processing of transactions without manual intervention.

Swap Dealer: An entity registered with the CFTC that deals in swaps as a regular business activity.

TIMS (Theoretical Intermarket Margin System): OCC's risk-based margin methodology.

Trade Repository: An entity that centrally collects and maintains records of derivative transactions.

UTI (Unique Trade Identifier): A code that uniquely identifies each reportable transaction.

V-Z

Valuation: The process of determining the fair value of a position or portfolio.

VM (Variation Margin): Collateral exchanged daily to cover changes in the mark-to-market value of positions.

WORM (Write Once, Read Many): Storage technology that prevents alteration of recorded data, required for regulatory records.

Abbreviations

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This glossary is updated periodically. For detailed explanations and examples, see the related articles linked below.

Related articles:

• For trade lifecycle, see Derivative Trade Lifecycle from Order to Settlement
• For clearinghouses, see Role of Clearinghouses and the OCC