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Tuesday, June 8, 1999

English Banking Dialect

by joemiranda@mindspring.com

Georgia Governor Roy Barnes declared last April as "Community Banking Month." In keeping with the objective to heighten public awareness, I thought it was fitting to concentrate some of my reading on the topic of banking.

Reading through the latest annual report of a leading U.S. banking institution, I stumbled onto the conveniently included one-page "Glossary of Terms." How considerate, I thought, not being intimately familiar with banking except for the occasional ATM and checkbook balancing experiences.

The term that quickly caught my eye was "Swaptions." Rather than guess at the meaning, I read on to discover the following definition: Swaptions are "Options on Interest Rate Swaps." Humph! Interesting English Banking dialect, I thought. Sort of like inventing a term for Options on Contracts -- as Contractions! Not being familiar with either term, I searched the glossary and discovered definitions for Options and Swaps.

"Option: An agreement that allows, but does not require, a holder to buy (or sell) a financial instrument at a predetermined price for a specified time." I found no definition of "Financial Instruments," for which I assume, we as casual readers with a minimal familiarity with the Financial English language are expected to have preexisting knowledge. I guess if you're not sure, you can call your banker or your economics teacher. Do we still have bankers or economics teachers?

On with the definitions... "Interest Rate Swaps: A contractual arrangement between two parties in which each agrees to exchange interest rate payments for a specified period of time. These payments are calculated on a "Notional Equivalent" and no exchange of principal occurs. Interest rate swaps are commonly used to manage the asset or liability sensitivity of a balance sheet by converting fixed rate assets or liabilities to floating rates, or vice versa." Are we discussing banking or boating here?!

As you may surmise, I'm reluctant to reveal which bank this may be, lest they revoke my ATM card. Not to be discouraged, I plodded through the glossary. The next challenge? The definition of "Notional Equivalent."

Notional Equivalent is defined as: "The principal amount of a financial instrument on which a derivative transaction is based. In an interest rate swap, for example, the "notional amount" is used to calculate the interest rate cash flows to be exchanged. No exchange of principal occurs."

At this point, it becomes apparent that my understanding of this subject matter is retreating. Not to be deterred, though, I press on, like a kitten unraveling the yarn ball in order to get at the core.

"Derivatives: A term used to include a broad base of financial instruments that are, for the most part, "derived" from underlying securities trades in the cash markets. Examples are interest rate swaps, swaptions, options and futures contracts."

Wow! Have we come full circle and are now back to Swaptions? I went back and retraced my steps through this glossarial maze and sure enough, the original terms are used to define themselves. I was tempted to see if "futures contracts" was defined, but finding a headache remedy was the more important priority at this point.

But this is not a critique of the authors of this text. This is a plea for help! This company offers shares of its common stock to the public. I always thought that annual reports were public relations documents directed at stockholders and other interested parties, intended to encourage public support for the business.

Please do not even try to explain "Swaptions" to me. Just tell me that you have passed a competency test in English or Reading Comprehension, you are fundamentally literate, and that this makes no sense at all to you either. In other words, "the King has no clothes at all!"


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