Glossary of the types of financial instruments analysed by the Bank of Italy within the scope of its intervention power

Additional tier 1 subordinated bonds

(AT1, also known as contingent convertibles, CoCo)

Subordinated debt securities eligible as Additional Tier 1 capital, as defined in Regulation EU/2013/575, as amended by Regulation EU/2019/876. These are hybrid financial instruments that, under certain trigger events, allow losses to be absorbed in a bank's business-as-usual situation by converting into equity, reducing all or part of the nominal value (write-down) or cancellation of one or more coupons.

Bonds

Debt securities which give the investor (bondholder) the right to receive, at predefined maturities, the repayment of the subscribed principal and a remuneration in the form of interest (the coupon). For the issuing entity, which may be a state or other public sector entity, a supranational institution, a bank or other corporation, the obligation is a debt. Some bonds give the holder the right to convert them into shares of the issuing company or other companies in accordance with the pre-agreed terms and procedures. For many bonds, there is a secondary market on which they are traded.

Certificates

Debt securities that include a derivative component and that are negotiable on the capital market. The certificates are divided into four main types: (a) fully or partially protected capital certificates, less risky products similar to structured bonds; (b) yield enhancement certificates, uncovered capital products that aim to generate a higher return than bond yields, with a risk comparable to the underlying assets in the event of adverse market conditions; (c) certificates of participation, unsecured capital products that replicate the performance of one or more underlying assets, they may present conditional protection in the event of adverse market conditions or leverage under favourable conditions; (d) leverage certificates, leveraged products used predominantly with speculative and short-term investment perspectives.

Commercial papers

Short-term financing instruments, generally of less than or equal to one year.

Contracts for difference

Contracts for difference (CFDs) are derivative instruments (other than options, futures and swaps) whereby the buyer and the seller exchange the difference between the current value of a given underlying and the value of the same underlying when the contract was opened. Upon entering the contract, the buyer pays only a part of the amount needed to invest in the underlying (‘margin’) and, if necessary, this margin is increased based on the performance of the underlying. CFDs are complex, leveraged, over-the-counter products typically used for speculative purposes.

Covered bonds

Asset-backed bonds intended, in the event of the issuer's insolvency, to have priority over bondholders' rights. Although the rules differ from country to country, these instruments are characterized by the dual level of protection of the collateral portfolio and the redemption obligation of the issuer. The operational framework envisages the transfer of high credit quality assets (mortgage and general government loans) from a bank to a special purpose vehicle (SPV) and the issuance by a bank, including other than the originator, of covered bonds backed by the SPV based on the assets purchased and comprising a separate asset.

Covered warrants

Debt securities ('securitized' derivatives) that include a derivative component and are negotiable on the capital market. The value of these securities is linked to one or more underlying assets. They are issued by entities other than the issuers of the assets to which the derivatives component refers. They can therefore also refer to assets such as commodities or indices.

Credit default swaps (CDS)

Swap-type derivative contracts that give the party making periodic payments the right to sell a bond at nominal value if a credit event occurs for the issuer.

Credit-linked notes

Structured bonds whose derivative component is a credit derivative.

Equities

Financial instruments representing a fraction of a company's share capital and giving the investor the status of a shareholder, its associated payment rights (e.g. profit participation) and/or control rights (e.g. voting right in meetings). The return on the shares is linked to the financial performance of the issuing company. Shares may be traded on regulated markets.

Exchange-traded commodities (ETC)

Debt securities issued against the direct investment by the issuer in commodity or commodity derivatives contracts.

Exchange-traded funds (ETF)

Investment funds that replicate the performance of a given stock market index; unit certificates shall be admitted to trading on a regulated market.

Exchange-traded notes (ETN)

Debt securities traded on the capital market.

Foreign government securities

Debt securities issued by foreign states.

Forwards

Derivatives contracts that are generally not standardized, similar to futures but traded over the counter.

Forward rate agreements (FRA)

Forward contracts, usually traded on over-the-counter markets, with which the parties agree to receive (pay) the difference between the value calculated by applying a predetermined interest rate to the transaction amount and the value obtained on the basis of the level of a reference rate chosen by the parties.

Futures

Standardized contracts whereby the parties agree to exchange at a predetermined price on a future date, currencies, securities or commodities. They are traded on trading venues where their execution is ensured.

Interest rate swaps (IRS)

Derivatives contracts to exchange fixed rate and variable rate interest calculated on the basis of the same notional principal.

Investment funds

Entities in the form of stand-alone assets raised by a variety of investors, divided into units, established and managed by a fund manager.

Italian government securities

Debt securities issued by the Italian Treasury. Currently they comprise loans from the Republic, issued on foreign markets, and the following types of securities issued on the domestic market: BOT, BTP, CCT and CTZ.

Other credit derivatives

Derivatives contracts other than credit default swaps, the final value of which depends on the creditworthiness of one or more entities.

Other derivatives contracts

Derivatives contracts other than those described elsewhere herein.

Other options

Options other than other types described elsewhere herein.

Other swaps

Swap-type derivative contracts other than those described elsewhere herein.

Plain vanilla options

Derivative contracts that give the right, but do not impose the obligation, to buy or sell a financial instrument at a specified price or at a specified future date.

Securitizations

Transactions whereby a corporation (the originator) transforms non-marketable financial or real assets (e.g. loans granted by a bank) into marketable debt securities. The transaction takes place either by selling the assets to a special purpose vehicle (SPV) or through the use of financial derivatives. The payment to be paid by the SPV to the originator is obtained by issuing debt securities. The assets owned by the SPV (e.g. loans acquired by the originator) are intended exclusively for the realization of the rights and interests of security holders. In Italy, this is mainly governed by Law No 130/1999.

Self-securitizations

Securitizations issued by the special purpose vehicle (SPV) and bought back by the originator.

Spread bets

Spread bets are leveraged derivative instruments, similar to contracts for difference, whereby the buyer bets on the direction of future market movements.

Subscription rights

Shareholders' rights to subscribe new shares at a certain price on the occasion of a capital increase. They are negotiable on the capital market.

Structured bonds

Bonds that include a derivative component, which allows investors to receive a return linked to the performance of one or more underlying assets (e.g. shares, indices, commodities, currencies).

Subordinated bonds

Bonds that, in the event of the liquidation or bankruptcy of the issuer, are redeemed after the ordinary creditors are repaid.

Swaptions

Swaptions are options on swaps whereby the buyer has the right, but not the obligation, to enter into a given swap contract on a certain future date.