What Does Counter Check Mean?

They are called counter checks because they are normally placed at the cashier’s desk (counter) and they are filled and presented to the teller in order to withdraw the money. These checks are normally simple forms, they don’t have all the complex security measures that personal or corporate checks have, because they will be received by an authorized bank representative in the actual physical presence of the account holder.

Normally, the cashier will check the signature, the account data and a personal photograph of the holder, to make sure the person that is making the withdrawal is the actual proprietor. Under normal circumstances, these withdrawals can’t be processed for a third party, since there are many fraud risks involved in doing so.

The term counter check is also employed in modern days to refer to a personal check printed individually by the teller with all the client’s account information, to be used as a regular check in the scenario that the customer ran out of checks or lost his checkbook. In some cases, counter checks require a small fee to be paid by the holder, since it is not a usual service.

Example

Mr. Michael is buying a used car for his son. He negotiated a 2010 Ford Focus that a friend currently owns and they negotiated $3,500 for the car. Mr. Michael needs to pay his friend as soon as possible since his son’s birthday is tomorrow and in order to do so he went to a local branch of his bank to get a counter check.

This check contains all Mr. Michael’s account information and since his friend trusts him he doesn’t have a problem to accept this particular form of payment. His friend can now go to his bank to either deposit his check or he can just cash it at any other branch of Mr. Michael’s bank.

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What Does Letter of Indemnity Mean?

This type of letters are similar to insurance policies in the sense that they cover for potential losses experienced by one of the parties involved in a certain agreement. A regular contract has two parties that agree to certain provisions. Letters of indemnity are requested by one of the parties to guarantee the other that there will be no potential uncovered losses he might suffer due to contractual stipulations breaches.

The issuer of these letters is often a financial institution, either an insurance company or a bank, and they serve as a guarantor for the transaction being executed. In business, these letters are employed often in big contractual agreements, where high sums of money are involved, in bidding processes for contracts in the public and private sector or in shipping operations.

Example

Swiss Chocolate LLC and Rocker Cocoa Co. are two global companies and key players of the cocoa industry. Swiss Chocolate has unveiled his intention to buy Rocker Cocoa a few weeks ago and they already sent a letter of intention with their initial offering. Rocker Cocoa’s Board of Directors reviewed the letter and asked for a letter of indemnity to move further with the process, since normally takeover procedures are not always completed and many resources are employed during the process to make sure the deal is done properly.

Swiss Chocolate agreed to this condition and hired Manhattan First Bank to issue the letter. This letter states that in the event that the deal is not properly completed, Swiss Chocolate will have to pay for all legal and operational expenses caused by the failed takeover process and if they don’t comply with the payment, Manhattan First Bank has the responsibility to take charge and cover for them.

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What Does Clayton Antitrust Act Mean?

The Clayton Antitrust Act was created to reinforce the Sherman Antitrust Act, approved by Congress in 1890. The idea behind Clayton’s Act is to promote fair competition, by establishing clear and enforceable rules against practices such as monopolies, price discrimination and price fixing. With the development of this new Act, companies with vast influence in different industries were forced to limit their reach to avoid abuses. The large holding companies that were created in the 20^th century were suffocating small businesses by creating an unfair business environment that reduced the chances these businesses had to be sustainable.

There were important modifications made to the Sherman Act through this new antitrust legislation, such as the rights granted to unions and other labor associations to protect the fairness of the relationship between the company and its workers. Also, new rules were established for mergers and acquisitions. Finally, the U.S. Congress designated two institutions to oversee and enforce this act. These institutions are the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.

Clayton Antitrust Act Example Explained

Worldwide Tires Co. is a recently formed consortium between the three largest global tire companies. The consortium controls 75% of the global market and almost 95% of the U.S. tire market. This formal alliance was formed without the previous approval of U.S. authorities and that caused an investigation from the Federal Trade Commission. This investigation concluded that the newly formed holding company jeopardizes the fairness of the U.S. tire market and it breaches the Clayton Act.

The merger must have been authorized previously by both the Commission and the Department of Justice. Given that this procedure was not followed in the first place, the Commission ordered the immediate dissolution of the consortium and in the case that the three companies were still interested in pursuing this alliance; they must submit a proposal to the institutions mentioned previously in order to get their consent before the consortium is formed.

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What Does Trust Account Mean?

Trust accounts are set up by banks or trust companies for their clients or someone related to them. The purpose of this account has to be established when the account is opened and it is normally associated with a particular payment or the fulfillment of a given condition. These accounts are held by a trustee, normally a financial institution, which have a fiduciary duty towards the ultimate beneficiary and the trust holder of the account.

Some of the most common purposes to open a trust account are: a college trust, which is an account set up for a child on its early years to be dispensed when the person attends a university; a tax-bill trust, where money is set aside to meet future tax payments; a real-estate trust, an account set up for a future real estate purchase; a child’s trust, which is set up for minors and redeemed, usually, when they reach legal age.

These are some of the main reasons for a trust account to be opened and maintained; nevertheless, purposes may vary according to the needs of each individual.

Example

Mr. Armstrong is a 35 years old business man living in the city of San Francisco. He has a wife and two kids and an awesome tech business that have been growing profitably for the last 10 years. Mr. Armstrong is currently reviewing his financial plans and goals and as part of his family plan he wants to set up a trust account for each of his kids. After meeting with his banker he decided to set up two trust accounts for each child.

One account will be a wealth trust, which is an account set up to be disbursed when each child reach 25 years old or graduate from college, whichever happens first, to set them up for their new adult life. The other account will be a college trust that will serve as payment for all their university-level studies. He established the condition that the money must be paid directly for educational institutions only. These two accounts will cover what Mr. Armstrong considers as priorities to prepare his children for adulthood.

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What Does Letter of Intent Mean?

Letters of intent are usual in formal business transactions. They are regularly used when the operation is big enough to require advanced legal procedures. When a company is looking for potential corporate buyers or a government agency or entity is bidding a project, letters of intent are normally required to become a participant in the business operation. The letter will describe the conditions being offered for the deal and it normally includes clauses of protection in case the transaction is not completed.

It also transmits in detail the benefits of closing the deal with the party issuing the letter. These letters are regularly the initial step of the business transaction and by no means can they be considered as the actual contract or agreement. The initial conditions might be negotiated by the parties and the letter of intent might become obsolete if new conditions emerge as part of this negotiation process.

Example

A company called Fruit Beverages Co. is looking to buy a fruit supplier called California Lemons Co. The latter is a company that grows and distributes lemons to the entire U.S. West Coast and they have been looking for a buyer for a few months since the company has been struggling financially.

Fruit Beverages Co. recently issued a letter of intent directed to California Lemon’s Board of Directors. The letter stated their interest in buying 60% of the outstanding voting shares at $3 a share. The company also stated in its letter that they will re-structure the company in order to sanitize its debt burden and that will include the incorporation of some new key staff.

Since Fruit Beverages Co. is a big retail producer of fruit juices the deal will benefit California Lemon’s shareholders considerably and this is the reason why the Board is happy with the possibility of completing this deal with them.

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What Does Retail Banking Mean?

What is the definition of retail banking? Retail banking includes a wide range of banking services that belong to similar categories, such as savings accounts, checking accounts, consumer lending, credit cards, debit cards, mortgages, e-banking services, phone-banking services, insurance, investment and fund management.

Consumers use local branches that have the capacity to deliver all these services to retail customers. In fact, retail-banking keeps the money circulating as the Fed allows only 10% of deposits on hand. So, the retail banks have to circulate the remaining 90% either in the form of loans or in the form of investment products.

Let’s look at an example.

Example

Mary wants to open a savings account. So, she visits the local branch of a large commercial bank at the corner of her house. She deposits $3,000 into the new account, and she asks the bank representative to deposit her paycheck of $2,500 in her existing checking account. After the deposit is made, Mary maintains a checking account with a balance of $10,000 and a savings account with a balance of $3,000.

The bank representative asks Mary is she would be interested in investing $2,000 in collateralized debt options (CDOs) for a spread of 0.55% in senior debt, 0.48% in mezzanine debt, and 0.25% in junior debt. Under this structure, Mary will pay an interest of $65.50, and she will receive $136.50. So, for $2,000, her profit will be $136.50 – $65.50 = $71.

As Mary is not so familiar with investment products, the bank representative suggests that she could contribute to a retirement plan for herself, or open a savings account for her children. Or even both.

Therefore, Mary leaves the bank with information on different retail products that she was offered at the local branch.

Summary Definition

Define Retail Banking: Consumer banking means financial services offered to non-institutional customers by a financial institute.

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What Does Reserve Requirement Mean?

What is the definition of reserve requirement? A cash requirement is a default risk management policy, employed by the Federal Reserve Bank in the context of its monetary policy to ensure that a strict fraction of customer deposits and notes are held on reserve in the Fed’s vaults.

The Federal Reserve is responsible for determining the percentage of a reserve requirement, and lends its customers based on this percentage, holding a certain amount of money available in cash to cover for customer withdrawals or anticipate a massive withdrawal of deposits that may cause prevent a bank run, thus panicking the rest of the depositors.

Let’s look at an example.

Example

The manager of the General Commercial Bank asks his assistant to prepare a breakdown of the cash requirement to ensure that the bank meets the legal reserve requirements. The assistant finds that at the close of business on September 13, General Commercial Bank has $528,196,740 in deposits, $862,887 in cash and $75,258,732 in the Federal Reserve vault.

Following the reserve requirement of the Federal Reserve, the bank allows a strict percentage of 12% of its deposits to be withdrawn. Therefore, the General Commercial Bank should keep at least $528,196,740 x 12% = $63,383,609 in a Federal Reserve account and not use this amount of money for lending.

Since the General Commercial Bank has $75,258,732 in the Federal Reserve vault it meets the legal reserve requirements.

In fact, the reserve requirement is a policy to ensure the solvency of the financial institutions. To that end, the Federal Reserve determines the percentage of cash reserves and ensures that the banks will have cash available to anticipate a bank run or to prevent it. In the case that a commercial bank cannot meet its legal requirement, the Federal Reserve lends the amount needed to cover the discrepancy.

Summary Definition

Define Reserve Requirement: A bank requirement to reserve cash is mandated by the government to protect depositors from the bank loaning out too much of its deposited funds.

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What Does Proprietary Trading Mean?

What is the definition of proprietary trading? Prop trading takes place when an investment bank or a brokerage firm trades assets for the firm’s own profit, instead of trading assets for a commission from its clients.

Prop trading does not involve a client; hence proprietary trades are, usually, separated from the bank’s trading floor, accounting for a small percentage of the bank’s total revenues. In general, firms and banks that employ prop trading may have a competitive advantage in terms of returns, but this is not always the case.

Let’s look at an example.

Example

Company A is a proptrading firm headquartered in New York, NY. The firm specializes in the equity index, derivatives trading (futures and options), and commodity trading. In addition, it acts as a market maker, assuming the risk of holding certain securities to facilitate their trading.

The company has a user-friendly platform where it offers market-making guidance as well as tools and insights about trading in the most efficient way. The platform uses high-speed data transfer technology and offers sophisticated financial services that support prop trading.

The firm’s traders are adjusting their trade to assume the increasing trading costs, thereby lowering the costs for the firm. Through the use of sophisticated trading strategies, they seek to optimize the trading performance of the traded securities, while leveraging risk.

At the same time, they are focusing on certain core markets, seeking to act as market makers in a smaller group of securities, thereby reducing the time spent on trading and realizing a higher profit for the firm.

Finally, they monitor market activity, seeking to capitalize on the opportunities of liquid markets through the use of the most liquid investment vehicles, which, in effect, prompt them to limit the trading costs.

Summary Definition

Define Proprietary Trading: Prop trading means an investment company invests its own funds to generate profits for itself.

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What Does Private Equity Mean?

What is the definition of private equity? This funding also has a different meaning that addresses the equity investments made by private equity firms to raise capital. In these cases, the fundraising takes place by offering a prospectus to investors who are interested in funding the business.

Once the funds are exhausted, the private equity fund can raise a second round of capital funding, or it can have several funds going on at the same time. PE firms are not the same as venture capital firms because they are not investing in public firms, but they invest solely in private firms, even if they are already established and globally known. Also, PE firms may finance their investments with debt and participate in a leveraged buyout.

Let’s look at an example.

Example

Mike is an investment manager, and he works for a prominent PE firm. The firm is seeking for strong companies with established growth, but also for younger companies with the potential to rally over the next months due to their strong fundamentals. Mike has reviewed a lot of business plans and has met with several entrepreneurs and company managers, and he is intrigued by one technology company, which, he believes has a great potential.

The technology company is on request of $250,000 in exchange for 15% of the company. The $250,000 will go to equipment and software installations to be able to fulfill the customer orders. Mike sees an opportunity in this company, so he performs due diligence and offers an exit strategy. Therefore, Mike undertakes an active management role, and he provides his managerial expertise to the company. Furthermore, the exit strategy seeks to reap the proceeds from the 15% investment in the technology company in 10 years.

The president of the PE firm, satisfied with the new deal, is offering Mark a great bonus as an incentive to aggressively pursue the financing of the project and seek to improve the margins of the company through the generation of strong cash flows.

Summary Definition

Define Private Equity: Private equity means non-public investors who fund private companies or purchase public companies.

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What Does Prime Brokerage Mean?

What is the definition of prime brokerage? Prime brokerage involves services such as securities lending, risk management, cash management, leverage buyouts, and more, which are offered to qualified customers, i.e. bulge bracket banks like Morgan Stanley or Goldman Sachs.

A brokerage firm may also provide leveraged financing and custodian services to individual investors. The financial crisis of 2008 led several brokerage firms to restructure. JP Morgan absorbed Bear Stearns; Barclays and Nomura acquired Lehman Brothers; Bank of America acquired Merrill Lynch. On the other hand, Goldman Sachs and Morgan Stanley remained untouched, although they had greater exposure to risk.

Let’s look at an example.

Example

Company XYZ offers prime services to a range of institutional clients and large-scale investors, and it facilitates leveraged financing by undertaking the risk of secured, long position loans. In case the price of the underlying asset drops below the face value of the loan, the prime broker covers the long position.

In addition, Company XYZ offers securities lending services by acting as an intermediary between the institutional investors that lend the securities and the commercial banks that borrow the securities with money available for margin loans. Also, the company acts as a custodian of the assets of several hedge funds and has assets readily available that can be used as collateral, thereby allowing the prime broker to provide higher leveraging funds to a borrower than the funds they would receive from a traditional bank loan.

Qualified customers are provided with a sophisticated database of resources. In doing so, large financial institutions outsource their investment activities to the brokerage firm and focus on their investment strategy. Also, the company has built a prime brokerage platform to offer its custodian services.

Summary Definition

Define Prime Brokerages: A prime brokerage means a set of financial services sold to specific high-end or wealthy clients.

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