Term Operations

These operations occur when securities that are not paid off cash, but in an agreed term. Basically, there are two types of term operations: those that follow the Latin or French system, and those who are based on the North American margin system. The two systems are very different from each other.

The French system consists in term operations in which the contractors may differ the fulfillment of their obligations. All the operations done during a determined period of time are all liquidated during a determined day, usually at the end of the month.

However, the North American system consists in cash operations in which the agents loans the money to the buyer or the securities to the salesman, in a way that the vendor always receives the sum of its sales and the buyer its securities immediately after the contracting-

These ways of operating are not admitted in all the countries, due that they involve risks and in the past there has been negative experience. For example, in Spain, the stock exchange societies and financial institutions, among others have the possibility of supplying operations that follow the North American margin system. In these cases, the intermediaries that are usually specialized banks, perceive an opening commission and an interest for the deferred payment. Also, the intermediaries usually demand from the borrowers some guarantees that will reduce the risks of operations.

The average value of these demanded guarantees are usually of a 50%, although they can fluctuate in between  a 35% and a 135% of the cost of the contract, depending on the market you work with.

For example, if a person wishes to contract on credit some securities valued in 10,000 monetary units and the guarantee to deposit is 50%, the person must deposit 5,000 monetary units as a concept of guarantee.

Not all the securities may be contracted by credit due that the only securities that can be object to this way of contracting are those admitted by each market.

The authorized securities are those that register a greater contracting volume. To make operations on credit you have to contract a minimum number of securities (lot) that is fixed by the current established regulations. Because the buyer on credit asks for the funding to its intermediary, the other contracting person may not be informed that the operation is done on credit, due that he collects in cash.

The market on credit enlarges the volume of operations that can be done by the investors, because for example, the guarantees are of 40%, they can contract for a value of 2.5 times more than what is permitted in the cash markets. This enlargement is known as a stock exchange leverage. However, if the guarantees are of 50% you can contract the double of the sum. Depending on the measure in which the percentage of the guarantee increases the possibility of a leverage decrease.