Glossary of Terms
One of our aims at the ICFR is to bring some clarity to the terms and Institutions involved in international financial regulation.
Detailed below is short list of useful terms and abbreviations.
You can also give us your suggestions to add to the list by contacting us at enquiries@icffr.org
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Y.
The SCR level reflecting the Pillar 2 supervisory review process including, for example, the results of stress and scenario testing.
Asset Liability Management the process of analysing the interaction between the risks to assets and its liabilities. One example in insurance is duration risk which arises where assets and liabilities have different maturities.
BAC
Banking Advisory Committee (EU).
Link to the website
BaFin
Bundesanstalt fur Finanzdienstleistungsaufsicht (Germany).
Link to the website
BASE
Buenos Aires Stock Exchange.
Link to the website
Basel II
An accord providing a comprehensive revision of the Basel capital adequacy standards issued by the Basel Committee on Banking Supervision. Pillar I of the accord covers the minimum capital adequacy standards for banks, Pillar II focuses on enhancing the supervisory review process, and Pillar III encourages market discipline through increased disclosure of banks’ financial condition.
BAV
Bundesaufsichtsamt fur Versicherungswesen (Germany)
BAWe
Bundesaufsichtsamt fur den Wertpapierhandel (Germany)
BCBS
Basel Committee on Banking Supervision.
Link to the website
BCCI
Bank of Credit and Commerce International
BCOBS
Banking Conduct of Business Sourcebook
BCS
Bolsa de Comercio de Santiago/ Santiago Stock Exchange (Chile)
Link to the website
BIPAR
The European Federation of Insurance Intermediaries
BIS
Bank for International Settlements.
Link to the website
BOBS
Board of Banking Supervision (UK)
BOFI
Bank and Other Financial Institutions
BOJ
Bank of Japan.
Link to the website
Book value per share
The value of a company’s assets after deducting the value of its liabilities, divided by the number of outstanding shares.
BRUEGEL
Board of the Brussels European and Global Economic Laboratory (BRUEGEL).
Link to the website
BSC
Banking Supervision Committee of the European Central Bank
BSE
Budapest Stock Exchange (Hungary).
Link to the website
Buba
Deutsche Bundesbank.
Link to the website
Budget
A statement of the projected revenues, proposed expenditures, and planned financing of any surplus or deficit of an entity.
BVB
Bucharest Stock Exchange (Romania).
Link to the website
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CBFA
Banking, Finance and Insurance Commission (Belgium).
Link to the website
CBRC
China Banking Regulatory Commission. Li
nk to the website
CCA
Commission de Controle des Assurances (France)
CCPs
Central Counter Parties
CDIC
Canada Deposit Insurance Corporation.
Link to the website
CEA
European Insurance and Reinsurance Federation (EU equivalent of ABI)
CEBS
Committee of European Banking Supervisors. L
ink to the website
CECEI
Comite des Etablissements de Credit et des Enterprises d’Investissement (France)
CEIOPS
Committee of European Insurance and Occupational Pension Supervisors. One of the Lamfalussy ‘level 3’ committees which develops guidance to promote consistent application of Lamfalussy directives. The other level 3 committees are the Committee of European Banking Supervisors (CEBS) and the Committee of European Securities Regulators (CESR). CEIOPS also provides technical advice to the European Commission on the development of the Solvency II framework and other policy issues.
Link to the website
Committee of European Securities Regulators.
Link to the website
CFTC
Commodity Futures Trading Commission (US).
Link to the website
CGFS
Basel Committee on the Global Financial System.
Link to the website
CIRC
China Insurance Regulatory Commission.
Link to the website
CMF
Conseil des Marches Financiers (France)
CMVN
Comissão de Mercado de Valores Mobiliários (Portugal).
Link to the website
CNMV
Comisión Nacional del Mercado de Valores (Spain).
Link to the website
CNV
Comisión Nacional de Valores (Argentina).
Link to the website
COB
Commission des Operations de Bourse (France)
Commercial mortgage-backed securities index (CMBX)
A series of indexes, each referencing 25 tranches of commercial mortgage-backed securities, with differing credit ratings.
Committee of European Securities Regulators (CESR)
The European Commission established CESR (in Decision 2001/527/EC of 6 June 2001). It is one of the two committees envisaged in the Lamfalussy Report. CESR is an independent committee that is made up of the heads of the securities regulators of the twenty-five Member States, plus Norway and Iceland. It acts as an advisory committee to assist the Commission, in particular in its preparation of draft implementing measures in the field of securities. It also works to ensure more consistent and timely day-to-day implementation of community legislation and to improve co-ordination between securities regulators.
Link to the website
Commodity Derivatives
Financial instruments (such as futures and options) whose value is based on, derived from, or determined by reference to an asset that is a commodity.
Common equity
Shareholders’ total equity minus preferred equity.
Competent Authority
The national body which is (or the bodies which are) responsible, under the legal provisions of the Member States, for carrying out the obligations arising from EU legislation.
CONSOB
Commissione per le Societa e la Borsa (Italy).
Link to the website
Consolidated Admission and Reporting Directive (CARD)
CARD (2001/34/EC) deals with the admission of securities to official listing on a stock exchange and the information to be published on those securities.
Consumer price index (CPI)
A measure of a country's general level of prices based on the cost of a typical basket of consumer goods and services.
Continuing Obligations
The on-going obligations imposed on a company that is admitted to trading on a regulated market. These include the periodic return of financial information and the requirement to keep the market informed of any price-sensitive information.
Cost of Capital Approach
A method for estimating the value of insurance liabilities on a market consistent basis in the absence of a market price. The liability is valued at the best estimate plus a risk margin which is assumed to be the cost to the insurer of bearing the risk in the liability. That cost is the product of the amount of capital required (e.g. to meet regulatory requirements) and its price.
CPSS
Basel Committee on Payment and Settlement Systems.
Link to the website
CRA
Credit Rating Agency
CRD
Capital Requirements Directive
CRD2
Amendments to the CRD, applying from 1st January 2011, relating to improving: management of large exposures; supervision of cross-border banking groups; quality of bank's capital ("hybrid" capital); liquidity risk management; and risk management for securitised products (5% exposure)
CRD3
Amendments to CRD, applying from January 2011, relating to: changes to levels of capital held against risks in the trading book; tougher requirements on re-securitisations; and principles on remuneration practices.
Credit default swap (CDS)
A credit derivative whose payout is triggered by a “credit event,” often a default. CDS settlements can either be “physical”—whereby the protection seller buys a defaulted reference asset from the protection buyer at its face value—or in “cash”—whereby the protection seller pays the protection buyer and amount equal to the difference between the reference asset face value and the price of the defaulted asset.
Credit derivative
A financial contract under which an agent buys or sells risk protection against the credit risk associated with a specific reference entity (or specified range of entities). For a periodic fee, the protection seller agrees to make a contingent payment to the buyer on the occurrence of a credit event (usually default in the case of a credit default swap).
Credit spread
The spread between benchmark securities and other debt securities that are comparable in all respects except for credit quality (e.g., the difference between yields on U.S. treasuries and those on single A rated corporate bonds of a certain term to maturity).
CSE
Consolidated Supervised Entity (US)
CSRC
China Securities Regulatory Commission.
Link to the website
CSSF
Commission de Surveillance du Secteur Financier (Luxembourg).
Link to the website
CVM
Brazilian Securities and Exchange Commission (Brazil).
Link to the website
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DBERR
Department of Business, Enterprise and Regulatory Reform.
Default
In finance, default is the term used when a party is unwilling or unable to pay their debt obligations. This can occur with all debt obligations including bonds, debentures, mortgages, loans and notes. Default can also occur with sovereign bonds, that is, governments can default on their payments to creditors. In corporate finance, a default is typically a prelude to bankruptcy. With most loans the total amount owed becomes immediately payable on the first instance of a default of payment.
Derivative
A financial contract whose value derives from underlying securities prices, interest rates, foreign exchange rates, commodity prices, or market or other indices.
DICJ
Deposit Insurance Corporation of Japan.
Link to the website
Directive
In essence, a directive requires Member States to introduce its provisions via national legislation: "A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods." (Article 249 EC Treaty).
Diversification Benefits
The reduction in the level of capital required by an insurer to achieve a given level of security (e.g. credit rating) compared with the level which would be needed if all risks were assumed to be perfectly correlated.
DSM
Doha Securities Market (Qatar).
Link to the website
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EBC
European Banking Committee.
Link to the website
ECAI
External Credit Assessment Institutions
ECB
European Central Bank.
Link to the website
Economic Capital
The amount of capital that an insurer would actually require to bear the risks it takes on in the absence of regulatory requirements. Economic capital is a function of the targeted level of security and the insurer’s capacity to assess, mitigate and manage risks.
EFAMA
European Funds and Asset Management Association.
Link to the website
EFC
Economic and Financial Committee (EU)
EFR
European Financial Services Round Table.
Link to the website
EFRAG
European Financial Reporting Advisory Group.
Link to the website
EIOPC
The level 2 Lamfalussy committee of Member States chaired by the EU Commission. EIOPC will develop the level 2 implementing measures within the scope of the Solvency II framework directive (level 1). It also advises the Commission on insurance matters more generally.
Eligible Capital
The forms of capital which firms can rely on to meet the solvency requirements.
Emerging markets
Developing countries’ financial markets that are less than fully developed, but are nonetheless broadly accessible to foreign investors.
Enhanced Capital Requirement (ECR)
A capital requirement imposed by the FSA on UK insurers (however, for non-life insurance firms the ECR is not currently a ‘hard’ capital requirement). The ECR is more risk sensitive than regulatory capital in Solvency I and in particular reflects asset risk.
EP
European Parliament.
Link to the website
ESC
European Securities Committee (ESC)
This was established by the Commission decision of 6 June 2001 (2001/1493/EC). It acts as both an advisory body to the Commission and as a regulatory committee. It consists of representatives of Member States with the chairperson and secretariat from the European Commission. The Committee may invite technical experts or observers to take part in meetings. The ESC votes on the level 2 implementing measures submitted to it by the Commission.
Link to the website
European Securities Committee (ESC)
This was established by the Commission decision of 6 June 2001 (2001/1493/EC). It acts as both an advisory body to the Commission and as a regulatory committee. It consists of representatives of Member States with the chairperson and secretariat from the European Commission. The Committee may invite technical experts or observers to take part in meetings. The ESC votes on the level 2 implementing measures submitted to it by the Commission.
Link to the website
EVCA
European Private Equity and Venture Capital Association.
Link to the website
Exchange Rate
The price of one currency in terms of another. Most commonly, exchange rates are expressed as the number of units of domestic currency that will purchase one unit of foreign currency (e.g. units of currency per U.S. dollar). An exchange rate may also be defined as the inverse: the number of units of foreign currency that one unit of domestic currency will purchase.
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Fair (market consistent)
Value the price at which transactions would occur at arms’ length between willing parties
FASB
Financial Accounting Standards Board.
Link to the website
FCAG
Financial Crisis Advisory Group.
Link to the website
FCD
Financial Conglomerates Directive (FCD) the directive which makes provision for group-wide supervision of companies which have subsidiaries operating in more than one financial sector (2002/87/EC).
FDIC
Federal Deposit Insurance Corporation (US).
Link to the website
FESCO
Forum of European Securities Commissions
FFMS
Federal Financial Markets Service (Russia).
Link to the website
FGD
Financial Groups Directive
FIBV
Federation Internationale des Bourses de Valeurs
Financial Instrument
Examples of financial instruments include transferable securities, money-market products, units in collective schemes, options, futures and derivative contracts.
Financial Services Action Plan (FSAP)
The European Commission produced the Financial Services Action Plan (FSAP) Communication on 11 May 1999 [Com (1999)232] and it was endorsed by the European Council in Lisbon in March 2000. The 42 measures it recommends are the original framework for the creation of a single market in financial services in Europe. In particular, they are the framework for a single wholesale market, an open and secure market for retail financial services and state-of-the-art prudential rules and supervision. The original timeframe for completion was 2005, but this was later amended to 2003 for wholesale capital market integration.
Fin-FSA
Finnish Financial Supervisory Authority (Finland).
Link to the website
FOPI
Federal Office of Private Insurance (Switzerland).
Link to the website
FRC
Financial Reporting Council (UK).
Link to the website
FSA
Financial Services Authority (UK), the UK’s integrated regulator of financial services.
Link to the website
FSA (also JFSA)
Financial Services Agency (Japan – also JFSA).
Link to the website
FSAN
Financial Supervisory Authority of Norway.
Link to the website
FSAP
Financial Services Action Plan (EU).
Link to the website
FSAP
Financial Sector Assessment Programme (IMF).
Link to the website
FSB
Financial Stability Board.
Link to the website
FSC
Financial Services Committee (EU)
FSCS
Financial Services Compensation Scheme (UK).
Link to the website
FTA
Free Trade Agreement
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GAAP
Generally Accepted Accounting Principles
GAO
Government Accountability Office (US).
Link to the website
GATS
General Agreement on Trade and Services.
Link to the website
Globalization
The process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies. Major factors in the spread of globalization have been increased trade liberalization and advances in communication technology.
Government-sponsored enterprise (GSE)
A financial institution that provides credit to specific groups or areas of the economy, such as farmers or housing. Most enterprises maintain legal and/or financial ties to the government.
Gross Domestic Product (GDP)
Gross domestic product is the most commonly used single measure of a country's overall economic activity. It represents the total value of final goods and services produced within a country during a specified time period, such as one year.
Gross National Product (GNP)
Gross national product was formerly used as a measure of a country's overall economic activity, equal to GDP less compensation of employees and property income payable to the rest of the world plus the corresponding items receivable from the rest of the world; GNP has been renamed gross national income (GNI) in the System of National Accounts.
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Hedge fund
An investment pool, typically organized as a private partnership and often resident offshore for tax and regulatory purposes. These funds face few restrictions on their portfolios and transactions. Consequently, they are free to use a variety of investment techniques—including short positions, transactions in derivatives, and leverage—to attempt to raise returns and manage risk.
Hedgeable Risk
A risk that can be hedged and thus priced through purchase of a financial instrument, for example a derivative.
Hedging
Offsetting an existing risk exposure by taking an opposite position in the same or a similar risk—for example, in related derivatives contracts.
HMT
HM Treasury.
Link to the website
Hybrid security
A broad group of securities that combine the elements of both debt and equity. They pay a fixed or floating rate coupon or dividend until a certain date, at which point the holder can have a number of options, including converting the securities into the underlying share. Therefore, unlike equity, the holder has a predetermined cash flow, and, unlike a fixed-income security, the holder has the option to gain when the issuer’s equity price rises. Hybrids are typically subordinate to other debt obligations in the capital structure of the firm.
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IAA
International Actuarial Association.
Link to the website
IAASB
International Association of Deposit Insurers
IADI
International Association of Deposit Insurers.
Link to the website
IAIS
International Association of Insurance Supervisors (IAIS) represents insurance regulators and supervisors worldwide; the IAIS issues global insurance principles and standards.
Link to the website
IAS
International Accounting Standards
IASB
International Accounting Standards Board(IASB) independent accounting standard-setter based in London. The IASB formulates accounting standards known as International Financial Reporting Standards.
Link to the website
IASC
International Accounting Standards Committee
ICAS
Individual Capital Adequacy Standards (ICAS) the FSA’s framework that UK insurance firms use to assess what level and quality of capital they need to maintain.
ICG
Individual Capital Guidance (ICG) the FSA’s guidance about the minimum quality and level of capital that a firm needs to hold, which is provided following the firm’s ICAS submission.
ICI
Investment Companies Institute (USA).
Link to the website
ICMB
International Centre for Monetary and Banking Studies.
Link to the website
IDX
Indonesia Stock Exchange.
Link to the website
IEA
Institute of Economic Affairs.
Link to the website
IFAC
International Federation of Accountants.
Link to the website
IFRS
International Financial Reporting Standards (IFRS) accounting standards set by the IASB; listed EU companies have been required to produce their accounts using IFRS since 2005.
IGD
Insurance Groups Directive (IGD) the EU Directive which applies Solvency I regulatory capital requirements to insurance groups and makes provisions for group supervision (98/78/EC).
IIROC
Investment Industry Regulatory Authority Organization of Canada
IMF
International Monetary Fund (IMF)
Organization established by international treaty in 1945 to promote monetary co-operation among its members. Its statutory purposes include promoting the balanced growth of international trade, stability of exchange rates and the maintenance of orderly exchange arrangements among members. The IMF monitors global economic and financial developments and gives policy advice, lends to member countries with balance of payments problems, and provides technical assistance in its areas of expertise.
Link to the website
IMFC
International Monetary and Financial Committee.
Link to the website
IMRO
Investment Management Regulatory Organization (UK)
Inflation
A sustained increase in the general price level, often measured by an index of consumer prices. The rate of inflation is the percentage change in the price level in a given period.
INREV
European Association for Investors in Non-listed Real Estate Vehicles. Link
to the website
Inside Information
Information of a precise nature that has not been made public, relating directly or indirectly to issuers of financial instruments. If it were made public, this information would be likely to have a significant effect on the prices of those financial instruments or on the price of related financial derivative instruments. It is also information that a reasonable investor would be likely to use as part of the basis for their investment decisions. The case is different for commodity derivatives. Inside information is what users of the markets where such derivatives are traded would expect to receive in accordance with accepted market practices on those markets.
Insiders' Lists
Lists maintained by issuers and their advisers that include details of persons acting on their behalf, who may have access to inside information.
Institutional investor
A bank, insurance company, pension fund, mutual fund, hedge fund, brokerage, or other financial group that takes investments from clients or invests on its own behalf.
Interest
Scheduled payments made to a creditor in return for the use of borrowed money and which will be determined by the interest rate, the amount borrowed (principal) and the duration of the loan.
Interest Rate
The fixed charge or return, usually expressed on an annual basis, on a financial asset expressed as a percentage of the price of the asset.
Intermediation
The process of transferring funds from the ultimate source to the ultimate user. A financial institution, such as a bank, intermediates when it obtains money from depositors or other lenders and on lends to borrowers.
Internal Model
A model which represents the (material) assets and liabilities on an insurer’s balance sheet and can be used to forecast the impact on solvency of changes in relevant variables e.g. financial market prices, adverse deviation in underwriting results etc.
International Accounting Standards (IAS)
These are issued by the International Accounting Standards Board and are designated International Financial Reporting Standards (IFRSs).
International Monetary Fund (IMF)
Organization established by international treaty in 1945 to promote monetary co-operation among its members. Its statutory purposes include promoting the balanced growth of international trade, stability of exchange rates and the maintenance of orderly exchange arrangements among members. The IMF monitors global economic and financial developments and gives policy advice, lends to member countries with balance of payments problems, and provides technical assistance in its areas of expertise.
Investment-grade obligation
A bond or loan is considered investment grade if it is assigned a credit rating in the top four categories. S&P and Fitch classify investment-grade obligations as BBB- or higher, and Moody’s classifies investment-grade obligations as Baa3 or higher.
IOPS
International Organization of Pension Supervisors.
Link to the website
IORP
Institutions for Occupational Retirement Provision (EU).
IOSCO
International Organisation of Securities Commissions.
Link to the website
IPO
Initial Public Offering
ISAs
International Standards on Auditing
ISDA
International Swaps and Derivatives Association.
Link to the website
ISP
Insurance Supervisory Principles
Issuer
Generally, the company that has issued securities for trading on an EU regulated market. It is defined under the TD as a legal entity governed by private or public law (including a State) whose securities are admitted to trading on a regulated market. In the case of depository receipts representing securities, the issuer must have issued the securities represented.
ISVAP
Istituto per la Vigilanza sulle Assicurazioni Private e di Interesse Colletivo (Italy).
Link to the website
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Lamfalussy Report
The Final Report of the Committee of Wise Men on the Regulation of European Securities Markets is known as the Lamfalussy report. It proposes a four-level approach to European securities legislation. Level One The Commission proposes a directive or regulation after a full consultation process. Framework principles and descriptions of implementing powers are contained in the legislation adopted by the European Parliament and the Council. Level Two After consulting the ESC, the Commission requests advice from CESR on technical implementing measures that will implement level one's framework provisions. CESR prepares measures in consultation with stakeholders and sends it to the Commission. The Commission examines the measures and makes proposals to the European Securities Committee, which then votes on the proposal. Level Three The supervisory convergence of regulatory practice to ensure that there is consistent implementation and application of legislation across Europe. CESR works on joint interpretation recommendations, consistent guidelines and common standards (in areas not covered by EU legislation), peer review, and compares regulatory practice to ensure consistent implementation and application. Level Four The enforcement stage. The Commission checks Member States' compliance with EU legislation and may take action against those in breach.
LCDX
An index referencing credit default swaps on loans of 100 individual companies that have unsecured debt trading in the secondary market.
Leverage
The proportion of debt to equity (also assets to equity and assets to capital). Leverage can be built up by borrowing (on-balance-sheet leverage, commonly measured by debt-to-equity ratios) or by using off-balance-sheet transactions.
Leveraged buyout (LBO)
The acquisition of a company using a significant level of borrowing (through bonds or loans) to meet the cost of acquisition. Usually, the assets of the company being acquired are used as collateral for the loans.
LIBOR
LIBOR stands for the London Interbank Offered Rate and is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale (or "interbank") money market.
LIFFE
London International Financial Futures Exchange.
Link to the website
Listing Rules
The FSA rules made under CARD and Part VI of the FSMA
LZB
Landeszentralbanken
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Market Manipulation
Market Manipulation is a market abuse offence comprising three strands. The first of these is entering into transactions or orders to trade that: (a) give a false or misleading impression of the supply of, demand for, or price of a qualifying investment; or (b) secure the price of such an investment at an abnormal level. The second is entering into transactions or orders to trade that employ fictitious devices or any other form of deception or contrivance. The third is disseminating information to give a false or misleading signal about a financial instrument.
MCR
Minimum Capital Requirement (MCR) the level of capital required by Solvency II below which there would be an unacceptable risk to policyholders and which triggers “ultimate” supervisory intervention requiring the firm to restore rapidly the level of solvency.
MERVAL
Mercado de Valores de Buenos Aires (Argentina).
Link to the website
MGF
Minimum Guarantee Fund (MGF) the minimum amount of capital required under Solvency I. For most insurers the greater of one third of the Regulatory Minimum Margin or €4million.
MiFID
Markets in Financial Instruments Directive.
Link to the website
Mortgage-backed security (MBS)
A security that derives its cash flows from principal and interest payments on pooled mortgage loans. MBSs can be backed by residential mortgage loans or loans on commercial properties.
MPC
The Monetary Policy Committee.
Link to the website
Multilateral Trading Facility (MTF)
In broad terms, a system that brings together multiple parties (e.g. retail investors or other investment firms) that are interested in buying and selling financial instruments and enables them to do so. These systems can be crossing networks or matching engines that are operated by an investment firm or a market operator. Instruments may include shares, bonds and derivatives. This is done within the MTF operator's system. The MTF operator is required to allow the interests of the buyers and sellers to interact, so that trades come about without unfairly intervening in the interaction of the interests. The description of MTF excludes bilateral systems where an investment firm enters into one side of a transaction effected using the system. It does this on its own account and not as a riskless counterparty between the buyer and the seller.
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NAIC
National Association of Insurance Commissioners (US).
Link to the website
NASD
National Association of Securities Dealers (US)
NGO
Non-Governmental Organization
Nonperforming loans
Loans that the bank foresees it will have difficulty in collecting. They include nonaccrual loans, reduced rate loans, renegotiated loans, and loans past due 90 days or more. They exclude assets acquired in foreclosures and repossessed personal property.
NRSRO
Nationally Recognized Statistical Rating Organization (US)
NZX
New Zealand Stock Exchange.
Link to the website
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Passport
A term describing the right to conduct financial services across the EU based on a single authorisation or approval. Firms authorised in one Member State acquire passporting rights enabling them to establish branches in other Member States (see Articles 31 and 32 MiFID). Issuers have their prospectus approved by their home competent authority in one member state and are then allowed to "passport in" to any of the other 24 member states, using that prospectus to raise capital in those states without further approvals.
PBOC
Peoples Bank of China.
Link ot the website
PCAOB
Public Company Accounting Oversight Board (US).
Link to the website
PIA
Personal Investment Authority
Pillar 1 SCR
The SCR determined by the standardised approach or the firm’s internal model, before consideration of the implications of the Pillar 2 supervisory review process for the firms capital requirement.
Pillars 1, 2, 3
The three-pillar structure which will be applied to Solvency II, derived from the Basel II reforms to banking supervision. Pillar 1 will define a quantitative standard for technical provisions and the regulatory capital requirements; Pillar 2 will define the supervisory review process and Pillar 3 the regulatory disclosures firms will be required to make publicly and to supervisors.
PIOB
Public Interest Oversight Board.
Link to the website
Private equity
Shares in privately held companies that are not listed on a public stock exchange.
Private equity fund
Pool of capital invested by a private equity partnership, typically involving the purchase of majority stakes in companies and/or entire business units to restructure the capital, management, and organization.
Prudent Person
A principle which guides asset management by requiring the manager to invest as a prudent person would do.
Prudential Margin
A margin added to the best estimate of an insurance liability which to reflect the uncertainties in the underlying liability. An appropriate prudential margin reflects the cost of capital required by the market to bear the risk of holding the liability (also referred to as fair or market consistent valuations).
PSD
Payment Services Directive
PSE
Prague Stock Exchange.
Link to the website
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Qualified Investor
Persons that may be issued with securities without the need for an FSA-approved prospectus usually because they are knowledgeable in financial matters. These include: (i) legal entities that are authorised or regulated to operate in financial markets, including: credit institutions, insurance companies and pension funds; (ii) national and regional governments, central banks and public international bodies; and small and medium-sized enterprises and (iii) individuals who are authorised by the FSA.
Quantitative Impact Study
Study undertaken by CEIOPS to quantify the impact of the proposed Solvency II reforms on firms’ regulatory capital requirements.
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RCM
Risk Capital Margin (RCM) a term used by the FSA to refer to the risk-based capital requirements that is added to the realistic valuations of life insurance firms' liabilities where the firm has a with-profits funds of more than £500m.
Registration Document
A part of the three-part prospectus, the registration document contains information about the issuer. With the Securities Note and Summary, it forms a valid prospectus.
Regulated Market
A market place, trading system or exchange which meets the minimum EU standards set out in title III of the MiFID. Under MiFID, entities that offer multilateral trading for financial instruments (such as an order book), must be organised as either a regulated market or an MTF, with slightly different standards applying to each. "Regulated market" is, however, the core concept across the FSAP directives for securities markets: admission to trading on a regulated market triggers prospectus obligations under the PD, disclosure and accounting obligations under the TD and market abuse obligations under the MAD.
Regulations
In contrast to directives, regulations do not have to be transposed separately into national legislation: ‘A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States’ (Article 249 EC Treaty).
Regulatory arbitrage
Taking advantage of differences in regulatory treatment across countries or different financial sectors, as well as differences between the real (economic) risk and that as measured by regulatory guidelines, to reduce regulatory capital requirements.
Repurchase agreement (repo)
An agreement whereby the seller of securities agrees to buy them back at a specified time and price. The transaction is a means of borrowing cash collateralized by the securities “repo-ed” at an interest rate implied by the forward repurchase price.
RFS
Registry of Friendly Societies (UK)
Risk aversion
The degree to which an investor who, when faced with two investments with the same expected return but different risk, prefers the one with the lower risk. That is, it measures an investor’s aversion to uncertain outcomes or payoffs.
Risk Mitigation Techniques
Methods of transferring risk including reinsurance but also through derivatives and other financial instruments.
Risk premium
The extra expected return on an asset that investors demand in exchange for accepting the higher risk associated with an asset.
Risk-free (interest) Rate
The rate of return available on an asset which has no or negligible credit risk.
RMM
Required Minimum Margin (RMM) the main Solvency I capital requirement, calculated as a proportion of technical provisions.
ROA
Return on assets, which equals (net income before preferred dividends plus ((interest expense on debt minus interest capitalized) multiplied by (1 minus the tax rate))) divided by last year’s total assets multiplied by 100.
ROE
Return on equity, which equals (total income minus preferred dividends) divided by total common equity multiplied by 100.
ROSC
Report on the Observance of Standards and Codes (IMF).
Link to the website
Run-Off Period
The period of time over which any claim made under an insurance contract is settled.
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SCR
Solvency Capital Requirement (SCR) the risk-based capital requirement and key solvency control level in Solvency II. Firms may use internal models to estimate the SCR or the standardised approach.
SEBI
Securities and Exchange Board of India.
Link to the website
SEC
U.S. Securities & Exchange Commission.
Link to the website
Securitization
The creation of securities from a pool of pre-existing assets and receivables that are placed under the legal control of investors through a special intermediary created for this purpose (a “special purpose vehicle” [SPV] or “special purpose entity” [SPE]). In the case of “synthetic” securitizations, the securities are created from a portfolio of derivative instruments.
SEPA
Single European Payments Area
SESC
Securities and Exchange Surveillance Commission (Japan).
Link to the website
SFBC
Swiss Federal Banking Commission.
Link to the website
SGX
Singapore Exchange.
Link to the website
Share Buy-backs
These occur where an issuer enters into a programme to purchase its own securities either to reduce its capital or to meet obligations arising from: (i) debt financial instruments exchangeable into equity instruments or (ii) employee share option programmes or other allocations of shares to employees of the issuer or of an associate company.
SI
Systematic Internalizer
SIB
Securities and Investment Board (UK)
Solvency I
Catch-all term for the current set of Directives governing the prudential regulation of insurance in the EU.
Solvency II
The new EU framework for prudential regulation of insurance companies.
Sovereign Debt
A debt instrument issued by a sovereign government. Most sovereign debt takes the form of bonds.
Spread
See “credit spread” above. Other definitions include (1) the gap between the market bid and ask price of a financial instrument; and (2) the difference between the price at which an underwriter buys an issue from the issuer and the price at which the underwriter sells it to investors.
SRO
Self-Regulatory Organization
Stabilisation
This is when an issuer that is involved in a distribution or offering of its securities buys or sells such securities in the market, in order to support the market price of those securities for a predetermined period of time. During this time, there may be selling pressure as a result of the distribution.
Standardised approach (to the SCR)
Approach to calculating the SCR which prescribes a method for firms to apply; for example in non-life insurance it is likely that the standardised approach will be formula-based.
Structured credit product
An instrument that pools and tranches credit risk exposure, including mortgage-backed securities and collateralized debt obligations.
Structured investment vehicle (SIV)
A legal entity whose assets consist of asset-backed securities and various types of loans and receivables. An SIV’s funding liabilities are usually tranched and include short- and medium-term debt; the solvency of the SIV is put at risk if the value of the assets of the SIV falls below the value of the maturing liabilities.
Subprime mortgage
A mortgage loan to a borrower with an impaired or limited credit history, and who typically has a low credit score.
Supervisory co-operation
Processes designed to achieve effective regulation of cross border groups and consistent application of the relevant directives to insurers across the EU.
Surrender Value Floor
A minimum value for an insurance liability set by the value an insurer would pay if the policyholder surrendered the policy.
Swap
An agreement between counterparties to exchange periodic interest payments based on different reference financial instruments on a predetermined notional amount.
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T
Tangible assets (TA)
Total assets less intangible assets (such as goodwill and deferred tax assets).
Tangible common equity (TCE)
Total balance sheet equity less preferred debt less intangible assets.
TASE
Tel Aviv Stock Exchange (Israel).
Link to the website
Technical provisions
The regulatory valuation of insurance liabilities.
Tier 1 capital
The core capital supporting the lending and deposit activities of a bank. It consists primarily of common stock, retained earnings, and perpetual preferred stock.
Tier 1 FHC
This is the new designation for systemically important financial institutions that will come under the consolidated supervision of the Federal Reserve. They can be bank holding companies currently regulated by the Fed or other financial holding companies, even ones that don’t own a depository institution.
Tier 2 capital
The supplemental capital supporting the lending and deposit activities of a bank. It includes limited life preferred stock, subordinated debt, and loan-loss reserves.
Total capital
The total investment in the company. It is the sum of common equity, preferred stock, minority interests, long-term debt, non-equity reserves, and deferred tax liability in untaxed reserves. For insurance companies, policyholders’ equity is also included.
Total debt
All interest-bearing and capitalized lease obligations.
Total deposits
The value of money held by the bank or financial company on behalf of its customers.
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Value at Risk
The maximum loss a firm could sustain over a given period of time and with a given probability; also refers more generally to the methods used to estimate this value.
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WFE
World Federation of Exchanges.
Link to the website
World Bank
The World Bank includes two development institutions owned by 184 member countries: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD is concerned with middle income and creditworthy poor countries, while the IDA focuses on alleviating poverty in the poorest countries in the world. Both institutions provide low-interest loans, interest-free credit and grants to developing countries for projects and programs to, for example, build schools and health centres, provide water and electricity, fight disease and protect the environment. World Bank assistance is funded both by member country contributions and through bond issuance.
WTO
World Trade Organization.
Link of the website
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Yield curve
The relationship between the interest rates (or yields) and time to maturity for debt securities of equivalent credit risk.
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