GLOSSARY

Accrual accounting

The accounting process of recording flows at the time when economic value is created, transformed, exchanged, transferred or extinguished. This means that financial flows which imply a change of ownership are entered when ownership passes.

Arm’s length

Balances and transactions between unrelated entities negotiated solely on normal commercial criteria. For example, loans to private non-financial corporations from banks are arm's length borrowings for the purpose of Tables 1 and 2; but loans from members of the same enterprise group are not.

Asset-backed security

A debt security which is backed by specific assets (such as mortgages over real estate) rather than the general credit-worthiness of the issuing entity.

Bearer securities

Debt securities for which the issuer does not maintain a register of current holders. Settlement of transactions (trades) may be effected by delivery.

Capital account

An account within the national income and expenditure accounts which shows the funds accumulated during the period by each of the sectors for the purchase of assets (Gross saving and capital transfers) together with estimates of expenditure on capital accumulation and the balance of the positive or negative account (Total net capital accumulation and net lending/net borrowing).

Central borrowing authority

A statutory body - often called a Treasury Corporation - established by a State or Territory government to borrow on its behalf and on behalf of its trading enterprises, and to on-lend the funds raised to those bodies. Most borrowing authorities also manage liquid assets on behalf of government bodies.

Common fund

An investment fund established by a trustee company to accept monies it holds in trust and other monies invested by the public. Cash common funds are similar to cash management trusts except that they do not issue units nor do they necessarily issue prospectuses.

Consolidation

The accounting process of adding together transactions or balance sheet items after excluding those between entities in the same subsector, company group, or level of government. For example, a loan from one private non-financial corporation to another is eliminated from the consolidated total of assets and liabilities of the subsector because, in such cases, there is no asset or liability held with an entity outside the private non-financial corporations subsector.

Conventional credit markets

Credit markets which are reasonably open to all potential borrowers. Excluded, for example, are loans arranged between related entities. This concept is important for an understanding of Tables 1 and 2 in this publication.

Conventional financial instruments

These instruments consist of:

• Currency
• Deposits
• Bills of exchange
• One name paper
• Bonds etc
• Derivatives
• Loans
• Equity

Counterparting

The process of taking the asset record of a sector and using it as the liability record of the counterparty sector, or vice versa. For a market transaction to occur there must be a willing buyer and a willing seller. To the buyer, the seller is the counterparty, and vice versa.

Debt security

A financial instrument that evidences the issuer’s promise to repay the principal at face value on maturity. It may be issued to investors at a discount, and/or the issuer may promise to pay interest (usually at six monthly intervals) to the holders. Unlike shares, debt securities do not confer on the holders ownership rights in the issuing entity.

Derivative instrument

A special type of financial instrument whose value depends on the value of an underlying asset, an index or a reference rate. Examples are swaps, forwards, futures and options.

Discount securities

Debt securities which are issued to investors for less than the value appearing on the face of the security. Holders are not paid interest but rather receive capital gains (the difference between the purchase price and the face value of the security).

Economically significant prices

Prices that have a significant influence on the amounts that producers are willing to supply or on the amounts that purchasers wish to buy (sometimes called ‘market prices’).

Face value

The value that appears on the face of a debt security being the amount that the issuing entity promises to pay to the holder when the security matures. Also known as the nominal or par value.

Financial asset

An asset which has a counterpart liability in the books of another accounting entity.

Financial transactions account

The account which shows transactions in financial claims between institutional sectors.

Forwards

Forwards or forward rate agreements are arrangements in which two parties, in order to protect themselves against interest rate changes, agree on an interest rate to be paid, at a specified settlement date, on a notional amount of principal that is never exchanged. The only payment that takes place is related to the difference between the agreed forward rate and the prevailing market rate at the time of settlement.

Friendly societies

These are mutual organisations whose members originally came from specific crafts or religions. They aim to provide their members with a wide range of cradle-to-grave services. Examples of these are: life, health, disability, funeral, and general insurances; investment services; financial services similar to those provided by credit unions; and retirement and travel services.

Futures

A futures contract is an agreement to buy/sell a standard quantity of a commodity - such as gold, $US or bank bills of exchange - on a specific future date at an agreed price determined at the time the contract is traded on the futures exchange.

Inscribed stock

Debt securities whose issuer maintains a register of current holders. Accordingly, settlement of transactions (trades) in these securities is effected by assignment (marked transfer), not delivery.

Institutional sectors

Transactor units are grouped into four broad domestic institutional sectors: non-financial corporations, financial corporations, general government, and households. In addition to these, all non-residents which currently have financial transactions or positions with Australian residents are grouped together in the rest-of-the-world sector.

Monetary gold

Monetary gold constitutes gold owned by the Reserve Bank and other institutions subject to the Reserve Bank’s effective control and held as a financial asset and as a component of foreign reserves.

Net lending (+)/net borrowing (-)

The residual item in the capital account which shows each sector's net acquisition of financial assets. It is calculated as Gross saving and capital transfers less Total capital accumulation. In concept it is the same as the item Net change in financial position in the financial account.

Novation

The transfer of an entity’s rights and obligations under a contract to a new counterparty.

One name paper

One name paper includes promissory notes, treasury notes and certificate of deposits issued by banks.

Options

Options are contracts that give the purchaser the right, but not the obligation, to buy (a ‘call’ option) or to sell (a ‘put’ option) a particular financial instrument or commodity at a predetermined price (the ‘strike’ price) within a given time span (American option) or on a given date (European option).

Primary and secondary markets

Investors which purchase securities from the issuer (or from a member of the issuer’s dealer panel) are said to buy in the primary market. If these securities are subsequently sold by those investors, the sales are said to occur in the secondary market.

Professional funds manager

An agent which invests monies on behalf of clients in return for fees. The assets managed by a professional funds manager are not on its balance sheet.

Public unit trust

A trust which issues units to the general public within Australia for the purpose of investing the pooled monies. A public unit trust must have registered a prospectus with the Australian Securities and Investments Commission and be governed by a trust deed between its management company and a trustee company. The units may or may not be listed on the Australian Stock Exchange.

Residents of Australia

Residents are those entities that have a closer association with the territory of Australia than with any other territory. Examples are: general government bodies; financial and trading enterprises and non-profit bodies producing goods or services or both within the territory of Australia; and persons whose centre of interest is considered to lie in Australia. (For a precise definition see Balance of Payments and International Investment Position, Australia: Concepts, Sources and Methods (Cat. no. 5331.0) paragraphs 2.10 to 2.11.) Any entity which is not determined to be a resident of Australia is classified as a resident of the rest of the world.

Special Drawing Rights (SDRs)

SDRs are international reserve assets created by the IMF and allocated to its members to supplement existing reserve assets. Transactions in SDRs are recorded in the financial accounts of the Central bank subsector and the rest of the world sector. SDR allocations are recorded in the accounts of the National General Government and the rest of the world sector.

Short selling

Short selling refers to the practice of selling securities one does not have. To settle the trade, securities need to be purchased or borrowed.

Stock lending

The terms securities lending or stock lending are used in securities markets to describe arrangements whereby issuers or asset-holders or both (called stock lenders) provide securities to other market participants (called stock borrowers) in return for a fee.

Subordinated debt

Debt that is not repayable until other specified liabilities have been settled. For example, the subordinated debt of banks (also called second-tier capital) is not repayable until the demands of depositors for repayment have been satisfied.

Swaps

Swaps are contractual arrangements between two parties who agree to exchange, according to predetermined rules, streams of payment on the same amount of indebtedness over time. The two most prevalent varieties are interest rate swaps and currency swaps. For example, an interest rate swap involves an exchange of interest payments of different character, such as fixed rates for floating rate, two different floating rates, fixed rate in one currency and floating rate in another etc.

Synthetic instrument

A tailored financial product which combines a primary financial instrument (such as a parcel of bills of exchange) with a derivative instrument (such as a forward rate agreement).

Term to maturity

In these statistics, debt securities are classified into short term (equal to or less than one year) or long term (greater than one year) according to their original term to maturity (sometimes called tenor) rather than the time remaining until maturity. The original term to maturity is the time period from the issue of a security until the principal becomes due for repayment.

Transaction (financial)

Active dealing in a financial instrument; for example, a sale of bonds.

Wholesale trusts

Usually they are only open to institutional investors (e.g. life insurance companies, superannuation trusts, public unit trusts) and high net worth individuals due to high entry levels. However some are open to the public via distribution channels such as platforms. They may issue a prospectus but more commonly issue only an information memorandum.