Finance Terms

Variable Interest Entity (VIE) A Variable Interest Entity (VIE) is a company or legal structure where control is not based on owning a majority of voting shares. Instead, someone might control it through contracts, financial arrangements, or other means. This concept is especially important in accounting and financial reporting. How VIEs Work In a typical company, the person or group with the most voting shares makes the decisions. But with a VIE, someone else might actually control the company’s key activities, even if they don't have the most votes. This often happens when the company has: Too little equity to operate without outside help Investors who don’t control major decisions Returns or losses that don’t match typical ownership rights Real-World Example: Securitization Trusts Banks often use VIEs to bundle loans like mortgages or credit card debts into securitization trusts. These trusts then sell securities backed by the loan payments. This helps ban...

GENIUS Act The GENIUS Act, short for Guiding and Establishing National Innovation for U.S. Stablecoins Act, is a U.S. law that creates clear rules for stablecoins, a type of cryptocurrency designed to keep a steady value, usually pegged to the U.S. dollar. Signed into law on July 18, 2025, the GENIUS Act aims to boost public trust in digital currencies by requiring stablecoin issuers to follow strict guidelines. These include: 1:1 Reserve Requirements : Issuers must hold a matching amount of real assets (like U.S. dollars or Treasury bills) for every stablecoin they issue. Regular Audits and Disclosures : Reserves must be kept in separate accounts and reviewed by outside auditors, with monthly reports shared publicly. Ban on Algorithmic Stablecoins : The Act prohibits stablecoins that rely on algorithms instead of actual reserves to maintain their value. Dual Oversight : Both federal and state regulators oversee stablecoin issuers, ensuring accountability. AML/C...

Back to Basics: Federal Reserve System vs. Federal Reserve Board vs. Federal Reserve Banks When people mention “the Fed” , they’re often referring to the powerful entity that sets U.S. interest rates and guides the economy. But what exactly is “the Fed”? Is it a single institution? A government agency? A network of banks? Let’s clear up the confusion by breaking down the three core components of the Federal Reserve: 1. Federal Reserve System – The Whole Central Banking Framework The Federal Reserve System is the official name of the U.S. central bank , created in 1913 by Congress to promote a stable monetary and financial system. It consists of: The Board of Governors in Washington, D.C. 12 Regional Federal Reserve Banks The Federal Open Market Committee (FOMC) It is a public-private hybrid : part of it is a government agency, and part of it operates like a private corporation. The System’s purpose is to manage inflation, supervise banks, maintain financi...

Repo Margin A repo margin , also known as a haircut , is the difference between the market value of collateral and the amount of cash loaned in a repurchase agreement (or "repo"). This margin helps protect the lender if the value of the collateral falls during the term of the agreement. In a repo, one party sells securities to another with an agreement to buy them back later at a set price. The lender provides cash, and the borrower provides collateral—usually bonds or other securities. But since markets fluctuate, lenders want a cushion in case the collateral loses value. Example: Suppose a borrower pledges $105,000 worth of Treasury bonds in exchange for a $100,000 loan. The $5,000 difference (or 4.76%) is the repo margin. If the value of the bonds drops slightly, the lender is still covered. The size of the repo margin depends on: Collateral quality: High-quality assets like government bonds usually have lower margins. Riskier assets need higher margins. ...

Repurchase and Reverse Repurchase Agreements Repurchase agreements (repos) and reverse repurchase agreements (reverse repos) are short-term financial transactions used by banks, financial institutions, and central banks to manage cash and liquidity. In a repurchase agreement , one party sells securities (like government bonds) to another party with a promise to buy them back at a later date and at a slightly higher price. This is a way to borrow money using the securities as collateral. In a reverse repurchase agreement , the buyer of the securities is on the other side of the deal. They agree to buy the securities and then sell them back later. This is effectively a short-term loan from the buyer's point of view, secured by those same securities. Example: A bank needs cash for a few days. It enters into a repo with the central bank, selling a Treasury bond and agreeing to repurchase it in three days. The central bank sees this as a reverse repo. This transaction helps ...

Economic Hedge vs. Accounting Hedge When financial institutions manage risk, they often use derivatives and other tools to protect themselves from market movements. Two key concepts in this area are economic hedges and accounting hedges . While they both aim to reduce risk, they differ significantly in how they are treated on financial statements. Economic Hedge Definition: An economic hedge is a real-world strategy to reduce risk, regardless of whether it qualifies for special accounting treatment. Key Traits: Risk reduction is real: The institution is actively managing exposure, such as to interest rate changes. No special accounting designation needed: Even without hedge accounting treatment, the strategy serves its purpose economically. P&L volatility possible: Since the derivative’s fair value changes go through earnings, while the hedged item may not (or its fair value changes aren't recognized concurrently), volatility can arise on the income st...