Investment Banking Terminology in China


Glossary of commonly used Chinese Financial Terms

Accrued interest; The interest due on a fixed-income security since the last interest payment.
Active management strategy: An investment management strategy that seeks to outperform
the market by applying various research and techniques.
Aftermarket: The public market for a security after the initial public offering.
American depositary receipt: Certificate representing shares of a foreign company that trades
in the United States.
A shares: A class of Chinese stock that is reserved for Chinese residents and has denominations
in Chinese local currency. Only certain qualified foreign investors can purchase A shares.
Asset allocation: Diversification of investments in various asset classes to achieve a return
that is consistent with the investor’s financial goals.
Asset-backed security: Securities backed by nonmortgage assets such as installment loans,
leases, receivables, tax liens, revolving credit, commercial loans, and high-yield bonds.
Asset management company: A type of company established by the Chinese government to
assume and manage the nonperforming assets of state-owned commercial banks.
Asset securitization: The issuance of securities using a pool of similar assets as collateral.
Basis point: One one-hundredth of 1 percent.
Best efforts underwriting: An underwriting arrangement in which underwriters agree to use
their best efforts to sell the shares on the issuer’s behalf.
Bid-asked spread: The difference between the price at which a dealer sells a security and the
price at which the dealer buys it.
Bid-to-cover ratio: The ratio of the bids received to the amount awarded in a Treasury security
auction. Payments by the acquisition target to the first accepted bidder if the target accepted
another offer.
Bulge bracket firm Major underwriter in a syndicate.
B shares Shares in Chinese stocks that were exclusively for foreign investors.
Buyout fund Investment firms that invest in leveraged buyouts (LBOs).
Callable bond Bonds that grant the issuer the right to pay off the debt before maturity.
Capital Asset Pricing Model (CAPM) Provides a linkage between the risk of a stock and
the required rate of return investors demand.
Capital market line Shows the trade off between expected return and total risk of a portfolio
consisting of money in riskless asset and risky market portfolio.
Carry The difference between interest income and interest expense.
China Banking Regulatory Commission (CBRC) Chinese government entity responsible
for regulating banks.
China Insurance Regulatory Commission (CIRC) Chinese government body that regulates
insurance companies.
China Securities Regulatory Commission (CSRC) Chinese government body that regulates
securities business.
Chinese wall The safeguards, also called firewall, that ensure that various units of an investment
banking firm do not receive any inappropriate or inside information.
Clearing The processing of a trade and the establishment of what the parties to the trade
owe to each other.
Closed-end mutual fund One type of investment companies that offers a fixed number of
shares and the shares trade on an exchange.
Closer Economic Partnership Agreement An agreement between China and Hong Kong
Special Administrative Region that grants companies in Hong Kong special access to China.
Collateral buyer The counterparty that takes in securities and lends out funds in a repurchase
Collateralized bond obligation Securities backed by high-yield bonds.
Collateralized loan obligation Securities backed by commercial loans.
Collateralized mortgage obligation A type of mortgage-backed securities that separates the
securities into tranches.
Collateral seller The party that lends securities in exchange for cash in a repurchase agreement
Comfort letter A letter from accountant expressing assurance on any unaudited interim financial
statements included in the prospectus.
Commercial paper An unsecured promissory note with a maturity of no more than 270 days.
Commodity swap In a commodity swap agreement, each counterparty promises to make a
series of payments to the other, and of which a commodity price or index determines at least
one set of the payments.
Competitive bid Bid that specifies both the amount and the price the bidder is willing to
Constant growth model Assumes that the dividend growth rate is constant over time.
Convertible arbitrage Trading involves the purchase of convertible bonds or preferred
stocks and then hedging that investment by selling short the underlying equity. Another type
of strategy involves additional trading of an interest rate swap, a credit default swap, and an
options contract to hedge risks and lock in a certain spread.
Convertible bond Bonds that grant the holder the right to convert the par amount of the
bond into a certain number of shares of the issuer’s common stock.
Cooling-off period A period following the filing of the registration statement with the
SEC, prior to the issue’s offering.
Coupon pass-through The collateral holder in a repurchase transaction has to pass over to
the cash borrower any coupon received from the collateral.
Coupon roll A coupon roll trade combines two trades in which a dealer purchases from
a customer an on-the-run coupon security for next day settlement and simultaneously
sells to that customer the same amount of the recently announced new security for forward
Coupon stripping Strips interest payment coupons from a coupon Treasury and treats each
of the component coupons and the principal as a separate security.
Credit default swap A synthetic instrument in which counterparty pays a premium in return
for a contingent payment triggered by the default of the reference credits.
Credit derivative A derivative security with payoffs linked to a credit-related event.
Credit linked note A structured note in which the instrument has an embedded option that
allows the issuer to reduce the security’s payments if a specified credit variable deteriorates.
Credit spread contract The payoffs of the contract depend on the yield differential between
a credit sensitive instrument and the reference security.
Currency swap In a currency swap contract, the two counterparties agree to exchange certain
amounts of currencies on scheduled dates.
Daylight overdraft The amount a financial institution has overdrawn on the Fedwire during
the day.
Deliverable repo A type of repurchase agreement under which the underlying securities are
delivered against payment; at maturity, the collateral is returned and the loan plus interest is
Delivery versus payment Funds and securities are transferred at the same time.
Deposit agreement An agreement that sets forth the terms of an American Depositary Receipt
Depositary bank A custodian to safekeep underlying shares in an issuer’s home market.
Depositary receipt A negotiable certificate that represents ownership of shares in a foreign
Derivative security A contract with its value derived from an asset of an index.
Discounted cash flow A valuation approach that uses a discount rate to calculate the present
value of future cash flows from a company.
Due diligence Obligation of the underwriter to investigate and assure that there are no misstatements
or omissions in the registration statement.
Dutch auction This is a single-price auction; both competitive and noncompetitive bidders
are awarded securities at the price that results from the high yield.
DV01 The change in the price of a bond resulting from a one-basis point change in its yield.
Dynamic asset allocation A strategy used to ensure the value of the portfolio does not fall
below a certain level to avoid large losses and to secure favorable market moves.
Effective When the registration statement has been approved by the Securities and Exchange
Commission (SEC) and the security can be sold to investors.
Effective date Date when an offering is declared effective by the SEC. The issue can then be
sold to the public.
Efficient frontier A portfolio on the efficient frontier is one that has the highest return for a
given a mount of risk or the lowest risk for a given level of return.
Efficient market hypothesis A security price fully reflects all available information so as to
offer a rate of return consistent with its level of risk.
Electronic communications network A computerized trading system that matches buyers
and sellers of securities.
Emerging market The securities market of a developing country.
Equity swap An equity swap involves an investor receiving capital gains plus dividends in a target
market and in turn paying to the swap dealer LIBOR and any decrease in the market index.
Exchange-traded fund An index fund or trust listed on an exchange and can trade like a
listed stock during trading hours.
Exempt securities Securities that are exempt from SEC registration requirements.
Fail A trade fails to settle on the settlement date.
Federal funds market The market for bank reserves.
Federal funds rate The interest rate on federal funds.
Federal Open Market Committee (FOMC) A major component of the Federal Reserve
Board (Fed); it consists of the seven members of the board and five of the 12 Federal Reserve
Bank presidents.
Fedwire A Fed communications and settlement system that enables financial institutions to
transfer funds and book-entry securities.
Feng shui A Chinese practice that configures office or home environment in ways that promote
health, happiness, and prosperity.
Filing date The day the underwriter turns in the registration statement with the regulator.
Financial engineering The development of new financial instruments such as derivative
contracts using sophisticated mathematical and statistical models and computer technology.
Firm commitment A type of underwriting agreement in which investment bankers risk
their own capital by purchasing the whole block of new securities from the issuer and then resell
them to the public.
First-price auction A Treasury auction technique in which each accepted bidder pays his
bid price for the security awarded. This is no longer in use in the United States. The U.S. Treasury
has changed the auction mechanism to Dutch auction.
Flight to liquidity When investors use the foreign money that flows into the United States,
as a result of flight to quality, to purchase the most recently auctioned Treasury securities
which generally provide a higher level of liquidity.
Flight to quality The purchase of U.S. Treasury securities by foreigners whenever there is a
financial or political crisis overseas.
Floater A security with interest rate tied to LIBOR or T-bill rate.
Floating risk Consists of waiting risk, pricing risk, and marketing risk during the underwriting
of a security.
Flotation cost The total costs of issuing securities.
Foreign direct investment A long-term investment by a foreign direct investor.
Foreign exchange reserve Foreign currency deposits, often as a result of international trade
surplus, held by a central bank or a monetary authority.
Foreign invested enterprise A company that receives funds or capital from a foreign company.
Front-end load The amount that purchasers of mutual funds pay when they buy the fund
Fundamental analysis A technique that bases a stock price on corporate and economic
General obligation bond Municipal securities with the full faith and credit of the issuer
backing the scheduled payments of principal and interest.
Glass-Steagall Act of 1933 Separates commercial and investment banking activities.
Global depositary receipt (GDR) The underlying shares are held with a local custodian
and the depositary issues certificates, GDRs, to foreign markets.
Gramm-Leach-Bliley Act of 1999 Removed restrictions that had been imposed on the financial
services industry by the Glass-Steagall Act. The Gramm-Leach-Bliley Act permits affiliation
of banks, investment banks, and insurance companies.
Green shoe option An option allowing investment bankers to purchase up to a specified
number of additional shares, typically 15 percent of the issue, from the issuer in the event they
sell more than agreed in the underwriting agreement.
Gross settlement Transactions are settled on a bilateral, trade-for-trade basis.
Gross spread The difference between the price offered to the public and the price the underwriter
pays to the issuer.
Growth investing An investment style that focuses on companies with higher than average
growth rate in the industry.
Guanxi Relationship or connection.
Haipai Shanghai style, meaning hospitality and generosity.
Haircut A margin required when borrowing money in the repurchase agreement market.
Hedge fund A private investment fund that employs investment strategies in various types
of securities in various markets and whose offering memorandum allows for the fund to take
both long and short positions, use leverage and derivatives.
H share A Chinese company stock listed in Hong Kong.
Impact cost The cost of buying liquidity.
Implied repo rate The calculated return in a short sell in a fixed-income security.
Implied volatility The variability in an underlying security implied by the current option
Indenture A bond contract that sets forth the legal obligations of the issuer and names a
trustee representing the interests of the bondholders.
Indication of interest Investor’s interest in purchasing a new security that is still in registration.
This is not a formal commitment to buy.
Indirect quotation The amount of foreign currency per unit of domestic currency.
Initial public offering A company’s first equity issue in the public markets.
Interest rate swap A contract between two parties in which each party agrees to make a series
of interest payments to the other on scheduled dates.
Inverse floater A floating rate security whose interest rate moves inversely with a specified
reference rate. A fixed-rate bond can be separated into a floater and a reverse floater.
Investment adviser A person who engages in the business of providing advice or issuing reports
about securities to clients for compensation.
Investment Advisors Act of 1940 Requires registration of investment advisers and compliance
with statutory standards.
Investment banking Underwriting and distribution of new issues of securities, as well as
financial advice and execution of mergers and acquisitions, divestures, and restructurings.
Investment Company Act of 1940 Governs the activities of investment companies.
Issuer safe harbor A safe harbor that addresses offers and sales by issuers, their affiliates, and
securities professionals involved in the initial offerings of securities.
Junk bond High-yield debt instruments with credit ratings below investment grade.
Lead manager The investment bank that acts on behalf of the entire syndicate.
Level I ADR The easiest and least expensive way for a foreign company to gauge interest in
its securities and to begin building a presence in the United States.
Level II ADR Listed on one of the national exchanges and must comply with the SEC’s full
registration and reporting requirements.
Level III ADR Similar to Level II ADRs except that the issuer is allowed to make a public
Leveraged buyout A buyout of a company with a large portion of the purchase price financed
by debt.
LIBOR London Interbank Offered Rate.
Limit order An order to trade at the specified price or better.
Managing underwriter Lead investment bank of an underwriting syndicate.
Market impact Market impact is the difference between the price at which a stock trade is
executed and the average of that stock’s high, low, opening, and closing of the day.
Market order An order to trade at the market price.
Merchant banking An investment bank commits its own capital on a long term basis by
taking an equity interest or creditor position in companies.
Monetary Policy Committee (MPC) The main policy body in the making of monetary
policy and macroeconomic management in China.
Mortgage pass-throughs Securities backed by pools of mortgage obligations in which payments
of the underlying mortgages are passed over to the security holders.
Mutual fund An investment management company that pools funds from investors who
have similar investment objectives.
Net asset value The total value of a fund portfolio divided by the number of shares issued to
Official statement A document provides material information to investors on a new issue of
municipal securities. An official statement describes the issue, the issuer, and the legal opinions.
Open-end mutual fund A type of mutual fund structure that continuously offers new
shares to the public and accepts redemption based on the net asset value of the fund.
Open repo An arrangement in a repurchase transaction in which the repo is rolled over until
terminated by either party.
Portfolio company After a venture capital sourcing a perspective deal, satisfactory due diligence
leads to an investment, the invested company then becomes a portfolio company.
Preliminary prospectus The preliminary prospectus is filed with the SEC and provided by
underwriters to prospective purchasers. It does not disclose the offering price, underwriting
spread, or net proceeds. This is the red herring.
Primary dealers Banks and securities broker-dealers that bid at the auction and trade government
securities with the Federal Reserve Bank of New York.
Prime brokerage A suit of services providing hedge funds with custody, clearance, financing,
and securities lending.
Private equity fund A fund established to invest in private equity, including venture capital
and buyouts.
Private placement The sale of new securities to a few qualified investors instead of through
a public offering. Privately placed securities do not have to be registered with the SEC.
Prospectus Part I of the registration statement is the prospectus that contains detailed information
on the issue and on the issuer’s condition and prospects. This is distributed to the public
as an offering document. Before the final prospectus is completed, securities firms generally
distribute to perspective investors the preliminary prospectus.
Quiet period Begins with the signing of the letter of intent and ends 25 days after the effective
date if the security is listed on an exchange or quoted on NASDAQ. During this period,
the company is subject to SEC guidelines on publication of information outside of the
Qualified foreign institutional investor A foreign financial institution that meets certain
requirements and has received permission to invest and conduct permitted businesses in China.
Qualified institutional buyer An institution that has at met certain requirements to trade
privately placed securities.
Real estate investment trust A trust that pools capital from investors to acquire or to provide
financing for real estate.
Real estate swap The property owner agrees to pay the counterparty a rate of return linked
to the performance of the real estate market. In exchange, the counterparty pays the property
owner another type of return.
Red herring The preliminary prospectus.
Registration statement The document companies use to register with the SEC new issues
of securities. Disclosed in the registration statement are various kinds of important information
for investors when making investment decisions, including the business of the issuer, purpose
of funds, description of the security, risk factors, and the background of the management.
Regulation S Provides two types of safe harbor exemptions for securities offered overseas
without registration and it applies to global depositary receipts.
Renminbi (RMB) Chinese currency.
Renqing Personal favor.
Repo rate The interest rate the collateral buyer demands for this type of loan.
Repurchase agreement A financing tool in which a dealer sells the collateral for cash and simultaneously
contracts to repurchase the same securities at a future date at a higher price that
reflects the financing rate.
Resale safe harbor A safe harbor under Regulation S that addresses re-sales by securities
professionals such as brokers.
Restricted securities Securities purchased in a private placement directly from an issuer are
subject to a one-year holding period restriction. Restricted securities frequently will have a legend
printed on the back of the certificate stating that the shares cannot be sold or disposed of
without registration.
Right of substitution The rights of the collateral seller in a repo transaction to take back the
security and substitute other collateral of equal value and quality for it.
Road show The meetings in a various cities during an underwriting period for the purpose
of increasing interest in the offering.
Rule 144 Governs the sale of restricted securities acquired in a private placement.
Rule 144A Addresses private sales of restricted securities among qualified institutional buyers.
Rule 415 A shelf registration rule that allows an issuer to file a single registration document
indicating that it intends to sell a certain amount of securities at one or more times within the
next two years thus minimizing the floating risk.
Sarbanes-Oxley Act of 2002 Imposes duties and penalties for noncompliance on public
companies. The act prohibits an auditor from performing specified nonaudit services
contemporaneously with an audit. In corporate responsibility, the act requires the chief
executive officer and the chief financial officer to certify various issues in periodic financial
reports. The act also requires every public company to include in its annual report an internal
control report. The issuer’s auditor shall attest to and report on the assessment of
such internal control structure and procedures. This is often referred to as the Section 404
Secondary offering A public offering of shares owned by existing shareholders.
Second-price auction A Dutch auction used by the Department of Treasury to sell its securities
in which all accepted bids pay the same price, the lowest price (highest yield) accepted.
Securities Act of 1933 Requires registration of a new security issue unless an exemption is
available, also known as “truth in securities” law.
Securities Exchange Act This 1934 Act requires timely and accurate disclosure of material
information, prohibits sales practice abuses and insider trading.
Securities investment fund A mutual fund.
Settlement The transfer of money and securities between parties to the trade so the transaction
is completed.
Shelf registration An issuer files a single registration document indicating that it intends
to sell a certain amount of securities at one or more times within the next two years. This is
Rule 415.
Short sale The sale of securities not owned by the seller in the expectation of falling price or
as part of an arbitrage.
Short squeeze Traders and arbitrageurs who short ahead of the auction are forced to pay a
sharply higher price to buy or accept a special repo rate to reverse in the security in order to
make good delivery.
Special economic zone A geographic area in China established to increase foreign investment
and to bring in foreign management expertise and technology.
Special purpose vehicle A bankruptcy remote legal entity established for a securitization
Specials When government securities trade at a lower rate than the general collateral in the
repo market, these securities are called specials.
State Administration of Foreign Exchange Chinese government entity that regulates the
foreign exchange market.
State-owned commercial bank A bank owned by the Chinese government.
State-owned enterprise A large corporation owned by the Chinese government.
Stop order An order to trade when the price reaches the specified level to stop large losses.
Stop yield The highest yield that is accepted at the Treasury securities auction.
Strategic asset allocation A value-oriented technique seeking to increase exposure to the
market when recent market performance is poor and to reduce exposure when recent market
performance has been strong.
Structured note Debt securities with interest and at times principal payments depending on
formulas and terms specific to the security.
Sunshine policy Policy in China putting all major activities of government officials under
the scrutiny of the public to curb corruption.
Systematic risk The component of risk of a security that moves with the market and cannot
be diversified away.
Tail The tail of an auction is the difference between the average yield of all accepted bids and
the stop yield.
Technical analysis Attempts to forecast a security price by using techniques analyzing past
prices and trading volumes.
Total return swap The counterparty exchanges the returns of the underlying assets for a
floating rate of interest.
Treasury auction This is the method used to issue government securities.
Triparty repo A custodian bank maintains accounts for both parties in a repo transaction
and hence the actual delivery of securities and cash can be reduced to just credit and debit
transfers within the bank.
Underwriter An investment banking firm that purchases securities directly from an issuer
and resells them to investors.
Underwriter spread The difference between the price the underwriters pay to the issuer and
the price they receive from resale of the securities.
Underwriting agreement The contract that establishes the relationship between the corporate
issuer and the underwriting syndicate. It includes the type of underwriting, the underwriters’
remuneration, the offering price, and the number of shares.
Underwriting discount The percentage of discount from the offering price that the underwriter
obtains from the issuer.
Underwriting syndicate Each member in the underwriting syndicate is committed to buying
a portion of the new security. There is also the selling group that helps sell the issue but accepts
no risk.
Unit investment trust An investment company that purchases and holds a relatively fixed
portfolio of securities.
Value investing An investment technique that focuses on a company’s ability to generate
stable earnings.
Venture capital A type of private equity that invests in new, growing businesses.
When-issued trading The when-issued trades of Treasury securities begin right after the
auction announcement and until the new issue settlement date.
Wholly foreign-owned enterprise (WFOE) A company doing business in China that is
wholly owned by a foreign entity.
World Trade Organization (WTO) An international organization dealing with rules of
trade between nations.
Yield to maturity The rate that discounts all future periodic coupons and principal at maturity
to the current asked price.
Yuan Reminbi, the Chinese currency.


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