A
Adequacy of insurance to value
Possible underestimation of the insurer’s exposure related to the inadequacy of the insured values compared to amounts payable, for instance, due to the undervalued rebuilding cost from insurers.
Asset-backed commercial paper (ABCP)
An investment contract with an original maturity of one year or less that is backed by bankruptcy-remote assets.
Attachment point (A)
The threshold at which losses within an underlying asset pool would first be allocated to the securitization exposure.
Available stable funding
The portion of capital and liabilities expected to be reliable over a maximum time horizon of one year.
B
Basis risk
The risk that the relationship between the prices of two similar, but not identical, instruments will change.
Basket
A set of related instruments whose prices or rates are used to create other composite instruments.
Blanket coverage
Coverage providing a unique and overall amount corresponding to the sum of the coverage amount for the building, detached private structure (outbuildings), contents and the additional living expenses. Some coverage may be limited or excluded in the event of an earthquake requiring the division of coverage amounts and some adjustments.
Board of directors
A body of elected or appointed individuals ultimately responsible for the governance and oversight of a financial institution.
Building-block approach
A method for analyzing risk that disaggregates risk specific to a security based on the risk to its issuer and on general market risk.
Business continuity
The capability of an organization to continue delivering products or services at acceptable predefined levels following a disruptive incident.
Business continuity plan
A written action plan that sets out the procedures and resources required for the continuity and resumption of an institution’s operations.
Business interruption
Coverage that pays for losses suffered by a company during the reconstruction of facilities following the interruption of business operations. These losses could be significant in the event of a major catastrophe.
C
Capital fungibility
Refers to the interchangeable nature of assets held.
Central counterparty
A clearing house that interposes itself between the counterparties, becoming the buyer to every seller and the seller to every buyer.
Claim
A financial asset that has a counterpart liability.
Claims handling expenses
Expenses related to internal or external claims handling such as the costs for claims adjusters which could increase substantially in the event of a major catastrophe.
Clearing member
A member of, or direct participant in, a central counterparty that is entitled to enter into a transaction with that central counterparty for its own hedging, investment or speculative purposes or as a financial intermediary on behalf of other market participants.
Competency
An appropriate level of expertise, professional qualifications, knowledge or relevant experience in the financial industry.
Compliance culture
The set of norms, values, attitudes and behaviours that characterizes the way in which a financial institution conducts its activities related to compliance with the laws, regulations and guidelines to which they are subject.
Compliance function
The independent control function whose purpose is to identify, assess and manage compliance risk resulting from non-compliance with laws, regulations, guidelines or the financial institution’s internal rules.
Concentration risk
Refers to an exposure with the potential to produce losses large enough to threaten a financial institution’s financial health or ability to maintain its core operations.
Conditional tail expectation
The average value of the results above a certain threshold for a given distribution.
Contagion risk
The risk that an event, whether internal or external, has a negative impact on one legal entity or part of a group and spreads to other legal entities or parts of the group.
Contracting out
The delegation of an activity and its management to an outside service provider.
Convertible bond
A bond which gives the investor the option to switch into equity at a fixed conversion price.
Corporate culture
Refers to the common values and standards that define a business and influence its mindset, conduct and the actions of its entire staff.
Counterparty
An entity that takes the opposite side of a financial contract or a transaction.
Counterparty risk
The risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows.
Coverage extensions (excluding debris removal)
Extensions providing coverage for specific additional risks in the event of an earthquake. They may encompass several coverages. Here are some examples:
- Repair or replacement cost for certain part of the property or the undamaged insured premises that must be removed or pulled out in order to repair the damage caused by an insured risk;
- Loss or damage caused to trees, shreds, outdoor plants and grass on the insured premises;
- Fees charged for the fire department intervention aiming to save and protect the insured goods against loss or damage;
- Loss or damage to food in a fridge or a freezer located on the insured premises.
Covered bond
A bond subject to special public supervision designed to protect bond holders.
Credit enhancement
An arrangement provided to a special purpose entity to cover the losses associated with a pool of assets due to negative cashflows.
Credit risk mitigation
A technique used to reduce credit risk, in particular using first priority (senior collateral) claims, third-party guarantees, etc.
Critical activities
The activities of an institutional whose disruption, slow down or interruption over a certain period of time would have a material impact on the institution’s operations
Currency mismatch
Occurs where credit protection is denominated in a currency that is different from that of the underlying credit exposure.
Customers
A financial institution’s existing and potential clients, including beneficiaries.
Cyber risks
Operational risks that may affect information systems and the integrity, confidentiality and availability of the information those systems contain.
Cyberincident
An event, whether resulting from malicious activity or not, that may (i) jeopardize the security of an information system or the information the system processes, stores or transmits; or (ii) that violates the security policies, security procedures or acceptable use policies.
D
Damage insurer
An insurer authorized to carry on business in a class of insurance that protects an insured against the consequences of an event that may adversely affect his patrimony.
Debris removal
Coverage extension that compensates for the costs incurred for the debris removal and the site clean-up before the rebuilding in the event of a major catastrophe.
Decision-making bodies
The board of directors, senior management and persons in charge of oversight functions.
Delta
The expected change of an option’s price as a proportion of a change in the price of the underlying instrument.
Demand surge
Increase in the cost of repairs and services following the strong demand for construction materials and labor in the event of a major catastrophe.
Detachment point (D)
The threshold at which losses within an underlying asset pool result in a total loss of principal for the tranche in which the securitization exposure resides.
Director
Person indicated as a director in the firm’s declaration in the Québec Enterprise Register.
Duration
The number of years after which bond profitability is no longer affected by interest rate changes.
E
Economic capital
The capital needed by a financial institution to satisfy its risk tolerance and support its business plan and which is determined from an economic assessment of the financial institution’s risks, the relationship between them and the risk mitigations in place.
Enterprise architecture
A high-level view of an organization whose components include the organization of various system elements (software and/or hardware and/or human and/or informational), their interrelationships and the business strategy.
Excess capital
The available capital maintained by a financial institution that is above its internal capital target.
Exotic asset
A financial asset with features that make it more complex than a simpler asset (unusual underlying asset, complex performance structure, etc.).
Exposure growth
Exposure growth that could arise between the date on which the data were coded in the insurer’s systems and the end of the relevant exposure period being assessed.
F
Fair treatment of customers
The obligation of regulated entities to act with due skill, care and diligence when dealing with customers throughout all phases of the financial product cycle.
Financial group
Refers to any group of legal persons composed of a parent company (financial institution or holding company) and legal persons affiliated therewith.
Financial haven
A country or jurisdiction where banking secrecy prevails.
Financial instrument
A contract that gives rise to a financial asset or a financial liability.
Financial intermediation
An activity in which an institutional unit incurs liabilities on its own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. The role of financial intermediaries is to channel funds from lenders to borrowers by intermediating between them.
Financial services cooperative
A legal person in which persons with common economic needs unite to form a deposit and financial services institution to meet those needs.
G
Governance framework
The means through which a financial institution implements its corporate governance.
Guaranteed replacement cost
Coverage available through an endorsement that indemnifies according to the effective repair or rebuilding costs without considering the applicable amount of coverage. Generally, some conditions must be met for this coverage to be applicable. For instance, the amount of coverage must be 80% or 100% of the replacement value recognized by the insurer as well as the rebuilding must be made at the same location with materials of similar quality and within reasonable delays after the loss.
Guarantor
The counterparty who is providing the protection against a potential default or taking on the risk of an asset they do not own.
Guideline
A document that describes the steps that financial institutions can take to satisfy their legal obligation to follow sound and prudent management practices and sound commercial practices.
H
Hedging
A technique used to protect the income generated by a financial institution by reducing its exposure to market risk by establishing symmetrical positions. Usually, a gain or loss arising from mismatching can be offset by a hedging gain or loss.
High-quality liquid assets
Low-risk assets that can be valued easily and with certainty, have a low correlation with risky assets and are listed on a developed and recognized exchange.
Holistic approach
Based on an overall, integrated view, a management approach emphasizing the importance of all risks of a financial institution, while taking account of the interdependence between them.
I
Illiquid asset
An asset that cannot easily be converted to cash and that therefore cannot be sold quickly without losing some of its value.
Incentive
Used in its broad sense, it may includes bonuses, commissions, salaries, premiums and fees in compensation programs, and other benefits from sales contests, promotions, perks or gifts.
Increased seismicity after a large event
Increase in the risk of having subsequent seismic tremors following a major earthquake.
Incremental levels of capital
Refers to the various capital levels that a financial institution is required to maintain to ensure sound and prudent management. These include minimum regulatory capital, the intervention target level, the internal capital target and excess capital.
Informational assets
All of a company’s or organization’s information resources, excluding human resources.
Inherent risk
The risk existing in the absence of any action or measure that could reduce the risk’s likelihood or impact.
Integrated risk management
A set of practices and processes, supported by a risk-aware culture and enabling technologies, that improves decision making and performance through a holistic view of a financial institution’s set of risks.
Integrity
The quality that an individual has of being honest and having strong moral principles that he or she refuses to change. It is demonstrated through the individual’s actions and through the conduct of the his or her personal and professional business.
Interest rate risk
The risk that an institution’s exposure to interest rate movements might adversely affect its financial condition.
Interest rate risk
Refers to the exposure of a financial institution to adverse movements in interest rates.
Interested party
Any person or organization that may be affected by a decision or activity of another party.
Internal audit
Internal audit ensures the systematic and independent assessment of all risk management, control and governance processes. It constitutes the third line of defense of a financial institution.
Internal capital target
The amount of capital required, as determined by a financial institution, to cover all risks associated with its current and projected operations. This amount should exceed the regulatory capital amount.
Internal control
The set of control mechanisms implemented in a financial institution to give its decision-making bodies reasonable assurance that the objectives relating to operational effectiveness and efficiency, safeguarding of assets, reliability of information and compliance will be met.
Intraday liquidity
Funds which can be accessed during the business day, usually to enable an institution to make payments in real time.
Intraday liquidity risk
The risk that an institution fails to manage its intraday liquidity effectively, which could leave it unable to meet a payment obligation at the time expected.
J
K
L
Life and health insurer
An insurer authorized to carry on business in a class of insurance that deals with the life, physical integrity or health of the insured.
Lines of defense
The three separate control levels within a financial institution that are necessary for effective risk management and control. The first line of defense manages risk and operational controls. The second line of defense is composed of the risk management, compliance and, for insurers, actuarial control functions. The third line of defense, internal audit, provides independent assurance to the board of directors and senior management about the effectiveness of risk management and internal controls.
Liquidity coverage ratio (LCR)
A ratio used to ensure that a financial institution has an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted quickly into cash on the financial markets, at little or no loss of value, to meet its liquidity needs for a 30-day stress scenario.
Liquidity horizon
The time required to sell a position.
M
Management framework
A set of policies, procedures and controls for managing an organization’s key functions.
Margin agreement
A contractual agreement under which one party must supply security (collateral) to a second party in the event of a certain level of loss.
Market risk
The risk of losses in on- and off-balance sheet positions arising from movements in market prices of financial instruments.
Market risk
The risk of losses arising from movements in market values of assets and liabilities due to changes in market factors, such as interest rates, credit spreads, equity prices, foreign exchange rates and commodity prices.
Master netting agreement
Any netting agreement that provides legally enforceable rights of offsets.
Matching
Involves co-ordinating cash inflows and outflows of on- and off-balance sheet assets and liabilities whose maturity or interest rate repricing dates correspond to a given period.
Material outsourcing arrangement
An outsourcing arrangement that may have a major impact on an institution’s financial condition, its operations and, ultimately, its reputation.
Maturity mismatch
Occurs where the residual maturity of the hedge instrument is less than that of the underlying exposure.
Model approach
A method for evaluating risk or capital that is based on modelling of risks specific to a financial institution, taking its risk mitigation strategies into account (diversification). This approach analyzes the distribution of simulation results from multiple scenarios using various parameters and assumptions.
N
Net cumulative cash flow
A metric that measures an institution’s cash flows beyond the 30-day horizon in order to capture the risk posed by funding mismatches between assets and liabilities, after the application of assumptions around the functioning of assets and modified liabilities (i.e., where rollover of certain liabilities is permitted).
Net stable funding ratio
A measure of an institution’s stable funding profile in relation to the composition of its assets and off-balance sheet activities.
O
Operational incident
An event that disrupts, slows down or interrupts an institution’s critical functions.
Option
A contract under which the holder has the right, but not the obligation, to buy or sell a specific number of shares at a predetermined price during a specific period of time.
Outsourcing
An arrangement between a regulated financial institution and a service provider, whether internal within a group or external.
Over-the-counter (OTC) transaction
A transaction involving a financial instrument made outside of published markets.
Oversight functions
Control functions that are independent of the financial institution’s day-to-day operations, in particular, risk management, compliance and, where applicable, actuarial services. These functions are part of the second line of defense.
P
Parallel calculation
Calculation of capital requirements using the standardized approach and the internal model approach.
Policy
A set of general principles adopted by a financial institution for conducting its activities in a given area.
Prime brokerage
A package of services offered to large active investors, particularly institutional hedge funds.
Principal protected notes
A financial instrument guaranteeing repayment equal to or greater than the invested capital.
Principle of proportionality
The notion relating to the adequacy of the means used by a financial institution to meet the AMF’s expectations and that are commensurate with its nature, scale, complexity and risk profile.
Probable maximum loss
The threshold dollar value of losses beyond which losses caused by a major event are unlikely.
Procedure
A set series of tasks to be performed. It is generally the result of imperatives that cannot be negotiated by the individual who applies it.
Procyclicality
The changes in risk management requirements or practices that are positively correlated with business or credit cycle fluctuations and that may cause or exacerbate financial instability.
Prudential framework
A supervisory approach based on principles rather than the enactment of specific rules, favouring financial institutions’ adoption of best practices through guidelines.
Q
R
Rate sensitive deposits
Deposits where the interest rate paid significantly exceeds the average rate for similar retail products.
Reasonable assurance
Refers to all of the audit evidence that the auditor may require to be able to conclude that the financial statements taken as a whole do not contain material misstatements.
Reference asset
The asset, referred to in the contract, whose credit risk is being transferred.
Registered reinsurance
A reinsurance contract entered into with a reinsurer constituted under the laws of a province or of Canada, or by a branch office of a foreign company that has been authorized by the federal authorities, and licensed by one provincial regulator or territory of Canada.
Regulatory capital
All of the capital instruments of a financial institution meeting, according to different categories, the minimum quality criteria required by regulatory authorities.
Regulatory capital
The minimum capital required by regulatory authorities to ensure sound and prudent management of a financial institution.
Reinsurance
A transaction whereby an insurer transfers a portion of the written insurance risks by in turn buying insurance from one or more other insurers called ‘reinsurers’.
Repurchase (repo) transaction
A transaction that involves the sale of an asset with a simultaneous commitment to repurchase the asset at a predetermined price after a stated period of time.
Reputational risk
The risk arising from a negative perception on the part of customers, counterparties, shareholders, investors, creditors, market analysts, other relevant parties or regulators that can adversely affect an institution’s ability to maintain its activities.
Residual risk
The risk remaining after actions or measures have been taken to reduce the risk’s likelihood or impact.
Retail deposits
Deposits an individual places with an institution.
Reverse repurchase transaction
A transaction that involves the purchase of an asset with a simultaneous commitment to resell the asset at a predetermined price and on a stated date.
Risk appetite
The aggregate level and types of risk a financial institution is willing to assume to achieve its strategic objectives and business plan.
Risk concentration
A single exposure or group of similar exposures with the potential to produce large losses or a material change in a financial institution’s risk profile.
Risk culture
The set of norms, values, attitudes and behaviours that characterizes the way in which a financial institution conducts its activities related to risk awareness, risk taking and risk management and controls.
Risk profile
A financial institution’s overall level of risk exposure that is based on an evaluation of the risks inherent in the financial institution’s significant activities, its ability to manage risks, its financial condition and its commercial practices.
Risk tolerance
Risk tolerance sets boundaries on the level of risks a financial institution is prepared to accept based on its risk appetite.
Risk-based approach
A prudential methodology that involves graduating the supervision of financial institutions based on their respective risk profiles.
S
Secondary uncertainty
Uncertainty associated with the conversion from the location specific estimate of ground motion to damage levels for the PML calculation. In general, it is automatically recognized in the model outputs.
Securities financing transaction
A transaction, generally subject to a margin agreement, whose value depends on market valuations.
Securitization
The transformation of generally illiquid assets into securities so that they can be traded in the capital markets.
Securitization exposures
The amount owned by an entity and at risk as a result of securitization.
Security (Collateral)
An interest in or charge on property taken by a creditor or guarantor to secure the payment or performance of an obligation.
Segregated fund
A type of investment fund sold in the form of individual, variable life insurance contracts offering certain guarantees upon the maturity of the premium deposits or the death of the policyholder.
Senior management
The group of individuals responsible for managing a financial institution on a day-to-day basis in accordance with the strategies and policies set by the board of directors.
Settlement
The completion of a transaction wherein the seller transfers securities or financial instruments to the buyer and the buyer transfers money to the seller.
Significant currency
A currency where the aggregate liabilities denominated in that currency amount to 5% or more of the financial institution’s total liabilities.
Sound and prudent management practices
A financial institution’s management practices ensuring good governance and compliance with the laws governing its activities, in particular, the assurance that the financial institution will maintain adequate assets to meet its liabilities as and when they become due and adequate capital to ensure its sustainability.
Sound commercial practices
A set of practices applied by a financial institution that makes the fair treatment of customers a core component of its corporate culture.
Special purpose entity (SPE)
A corporation, trust, or other entity organized for a specific transaction. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.
Stakeholder
Any individual, group or organization that can affect, be affected by, or perceive itself to be affected by, a result, a decision or an intervention coming from another party.
Standardized approach
A method for evaluating risk or capital that is based on the use of risk formulas or factors that are predetermined and precalibrated to be suitable for all financial institutions in a given sector.
Stress testing
A risk management technique used to assess the potential vulnerability of a financial institution by testing defined and exceptional, but plausible, adverse scenario.
Strike price
A fixed price at which the holder of an option may buy (in the case of a call option) or sell (in the case of a put option) the financial instrument covered by the option.
Systemic risk
A financial risk is considered ‘systemic’ when there is a non-negligible probability of a major dysfunction in, or serious degradation of, the financial system that could ultimately lead to the collapse of the global economy.
Systemically important financial institution
A financial institution whose failure might trigger a financial crisis.
T
Tax haven
A country or jurisdiction where taxation is non-existent or nominal.
Time dependency
Model parameter enabling the earthquake probability to depend upon the elapsed time after an historical event.
Trading book
All positions in financial instruments and commodities held either for trading or hedging purposes.
Trading book
A company's book that shows and accounts for the stock market shares that are purchased and sold by the entity.
U
Underlying asset
The asset upon which a derivative or other investment is based and that influences its value. The underlying asset may be a stock, an index, a currency or a commodity.
Underlying asset
An asset upon which a derivative or other investment that influences its value is based. The underlying asset may be a stock, an index, a currency or a commodity.
Unregistered reinsurance
A reinsurance contract entered into with a reinsurer that is not licensed by the federal government or by a province or territory of Canada authorizing it to underwrite risks in Canada.
V
Volatility
A measure of the variability of the price of an asset.
W
Warrant (or Subscription warrant)
A security that gives the holder the right to purchase additional securities (such as shares) from the issuer at a stipulated price and within a specified period. The holder is not obligated to purchase the securities.
X
Y
Z
Zero coupon bond
A security which does not make periodic interest payments and is redeemed at face value at a specified maturity date.