Since the financial crisis, financial institutions have been required to address significant regulatory changes. The new regulatory framework in the United States and Europe has introduced a series of new terms. This brief glossary is intended to serve as a helpful summary of frequently used terms. It is by no means comprehensive, and should be read with our Dodd-Frank Act, Basel III, EMIR/MiFID resources made available on our website and through our proprietary FrankNDodd database and tracking system.
1940 Act Investment Company Act of 1940.
ABA American Bankers Association.
ABCP Asset-backed commercial paper. ABCP is commercial paper (short-term unsecured debt) that is issued by a special purpose entity (SPE) sponsored by a financial institution or other issuer and may often be collateralized by the assets of the SPE. During the financial crisis, the off-balance sheet obligations of ABCP vehicles were assumed by their financial institution issuers. ABCP was sold to, and held by, money market funds (MMFs).
ABS Asset-backed securities. ABS are bonds, notes or certificates backed by pools of financial assets, such as auto loans, credit card receivables, student loans and trade receivables. Depending on the context, the term "ABS" may be used to encompass such securities backed by all types of financial assets, including mortgage loans, or it may be used (particularly in US securitization industry parlance) to refer to such securities backed by financial assets other than first lien residential mortgage loans, commercial mortgage loans and corporate bonds or loans.
ABS Interest Any type of interest or obligation issued by a securitization trust or other ABS issuing entity, whether or not certificated, including a security, obligation, beneficial interest or residual interest, payments on which are primarily dependent on the cash flows of the underlying financial assets.
ADC Loans 1-4 family acquisition, development and construction loans. ADC loans are considered the riskiest type of commercial real estate (CRE) lending. During the financial crisis, FDIC analysis shows that failed institutions had concentrations of ADC loans to total assets that were roughly three times the average of concentrations of non-failed institutions.
ADV Form ADV, the registration form used by investment advisers to register with the Securities and Exchange Commission (SEC) and/or state securities regulators.
Advanced Approaches A bank with total assets equal to or greater than $250 billion or foreignexposures equal to or greater than $10 billion, or a subsidiary of such a bank. A bank that is not mandatorily subject to the advanced approaches may opt into the advanced approaches. An advanced approaches bank measures credit risk based on the bank's internally generated models, which use certain standardized measures.
Advisers Act Investment Advisers Act of 1940. In the United States, certain advisers must register with the SEC; those not eligible to register with the SEC may be required to register with the state securities regulator in the state where they do business.
AFS Available for sale. Banks must record and mark to market available-for-sale securities. Available-for-sale securities are recorded in AOCI.
Agency MBS Mortgage-backed securities (MBS) issued or guaranteed by GNMA, FNMA or FHLMC.
AIFMD Alternative Investment Fund Managers Directive (2011/61/EU). The AIFMD is intended to introduce a harmonised regulatory framework for managers of alternative investment funds (being funds other than UCITS funds) marketing such funds in the EEA. The AIFMD covers areas such as the marketing of investment funds to investors, reporting and compliance standards. The deadline for implementation of the AIFMD by member states into their respective national laws was July 22, 2013.
ALLL Allowance for loans, leases and losses.
AMF Autorité Des Marches Financiers. The AMF is the French Financial Markets Authority which is the stock market regulator in France and regulates participants and products in France's financial markets.
AML Anti-Money Laundering. A set of procedures, laws or regulations designed to stop the practice of generating income through illegal actions. From a regulatory perspective, the Financial Action Task Force develops and promotes international cooperation to seek to combat money laundering. In the EU, Directive 2005/60/EC introduced measures to seek to prevent the use of the financial system for the purpose of money laundering and terrorist financing. An example of AML regulations are those that require institutions issuing credit to complete a number of due-diligence procedures to ensure that these institutions are not aiding in moneylaundering activities. The onus to perform these procedures is on the institutions, not the criminals or the government.
ANPR Advance Notice of Proposed Rulemaking.
AOCI Accumulated other comprehensive income. The US bank capital rules eliminate the "AOCI filter" for advanced approaches banks, which lets banks reverse fair value adjustments to shareholders' equity in their capital calculations. Non-advanced approaches banks can make a one-time election to opt out of the provisions removing the AOCI filter.
ARM Adjustable rate mortgage. An ARM is a mortgage loan on which the interest rate may change over time based on changes to an underlying interest rate index, such as LIBOR or rates on specified UST securities.
ARPS Auction rate preferred stock. ARPS and ARS (auction rate securities, which may be in the form of notes) have dividend or interest rate payments that are reset at frequent intervals through auctions, which typically occur every 7, 14, 28, or 35 days. The auctions also provide the primary source of liquidity to ARS investors who wish to sell their investment. Closed end funds, municipalities and other types of issuers relied on ARPS and ARS for funding purposes. The auctions for ARPS failed during the financial crisis, rendering the securities illiquid.
AT1 Additional Tier 1 capital. AT1 is one of the two components of Tier 1 capital, the highest quality capital under the Basel framework, with the other being common equity Tier 1 (or CET1). In order for an instrument to constitute AT1 it must meet the prescriptive criteria identified in the final Basel III framework, such as an ability to absorb losses, subordination, fully discretionary non-cumulative dividend payments, no incentive to repay or redeem, etc. AT1 also may be referred to as "non-core" Tier 1. AT1 is subordinate to depositors, general creditors and subordinated debt of the bank.
ATR or AtR Ability to Repay. The Ability-to-Repay Rule was adopted by the CFPB to implement the mandate of Title XIV of the DFA requiring a creditor to make a reasonable good faith determination that a borrower has the ability to repay a loan.
AUM Assets under management. The value of the assets that an investment adviser manages on behalf of clients.
Basel I A set of international banking regulations published by the BCBS in 1988 referred to as the "Basel Accord", which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets. Basel I has now been superseded by Basel II and Basel III which provide more sophisticated mechanics for calculating risk weighted assets.
Basel II Basel II updates the Basel I Accord published by the BCBS. It was initially published in 2004 and provides a more sophisticated measure of calculating risk weighted assets. Whereas the Basel I focus was mainly on credit risk, Basel II set out a comprehensive "three pillars" approach comprising (i) minimum capital requirements, (ii) supervisory review and (iii) market discipline including disclosure.
Basel III Basel III is a regulatory banking standard agreed to in 2010 by members of the BCBS. It is expected that its implementation will be a lengthy process. Basel III aims to strengthen the regulation, supervision and risk management of the banking sector. Basel III addresses such matters as capital requirements, bank leverage and required liquidity. BBA British Bankers' Association. The BBA is a trade association in the banking and financial services industry representing banks and other financial services firms operating in the UK. The BBA was responsible for the calculation of LIBOR but responsibility will be assumed by NYSE Euronext from early 2014.
BCBS Basel Committee on Banking Supervision. The BCBS was established in 1974 and is made up of representatives of the central banks and banking supervisory authorities of various countries. The BCBS was designed as a form for regular cooperation between its member countries on banking supervisory matters. It aims to enhance financial stability by improving supervisory knowhow and the quality of banking supervision globally. Decisions of the BCBS have no legal force, but the BCBS provides guidelines and recommendations of best practice aimed at national authorities.
BD Broker-dealer. In the United States, BDs are required to register with the SEC, and also become a member of an SRO, which is FINRA. Title IX of the DFA required that the SEC consider whether BDs should be subject to a fiduciary duty (akin to the duty owed by a registered investment adviser to a client).
BDC Business development company. BDCs are closed-end management investment companies that elect to be subject to the provisions of Section 55 through 65 of the 1940 Act. Investment companies that elect to be regulated as BDCs are subject to some, but not all, of the regulatory restrictions imposed by the 1940 Act. BDCs may be publicly traded or privately offered, invest primarily in small companies in the initial stages of development and must offer significant managerial assistance to their portfolio companies.
BHC Bank holding company. In the United States, most banking organizations are structured with a parent holding company, which is referred to as a BHC.
BHCA Bank Holding Company Act.
BIS Bank for International Settlements. The BIS was established in 1930 and is an international organization that serves as a bank for central banks around the world. Its functions include promoting discussion and collaboration amongst central banks, supporting dialogue with authorities responsible for financial stability and acting as a prime counterparty to central banks in their financial transactions.
Board Federal Reserve Board of Governors.
B-piece or B-class In a securitization, a subordinated class or interest.
BoE Bank of England. The BoE is the central bank of the United Kingdom.
BSA Bank Secrecy Act. The BSA was passed in 1970. It is also known as the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act. Among other things, it requires financial institutions to maintain records of currency transactions, file Currency Transaction Reports for each transaction over $10,000, and report suspicious activity that might signify money laundering, tax evasion or other criminal activities.
Bureau Consumer Financial Protection Bureau.
CAMELS Capital, Assets, Management, Earnings, Liquidity, Market Sensitivity (Regulatory Bank Ratings). The CAMELS rating system (from 1 to 5) is a supervisory system for US banks to evaluate the bank's condition. A CAMEL 1 rating is the strongest and a CAMEL 4 or 5 indicates serious concerns. These ratings are not published.
Capital conservation buffer The capital conservation buffer is a buffer of capital above the minimum Tier 1 capital requirement, consisting of CET1, that can be drawn on in times of stress, and is formulated as 2.5% of total RWA (or TRWA). This is an entirely new element introduced by Basel III. The aim of the buffer is to prevent firms from making distributions during times when they are experiencing financial difficulties.
CARD Act Credit Card Accountability Responsibility and Disclosure Act. The CARD Act was passed in 2009. Among other things, the Act prohibits card issuers from raising interest rates on existing balances, required that late fees and other penalties must be "reasonable and proportional," and altered credit card statements to include new information including how long it will take for a consumer to pay off a balance and the total amount of interest charged. The CFPB has rulemaking authority over the CARD Act.
CBO Collateralized bond obligation. A CBO is a form of CDO backed by corporate bonds.
CCAR Comprehensive Capital Analysis and Review. The CCAR is an annual exercise by the Federal Reserve to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks and sufficient capital to continue operations throughout times of economic and financial stress. As part of the CCAR, the Federal Reserve evaluates institutions' capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions, such as dividend payments or stock repurchases. The CCAR includes a supervisory stress test to support the Federal Reserve's analysis of the adequacy of the firms' capital.
CCF Credit conversion factor. In assessing risk weights, off-balance sheet exposures and contingencies are subject to regulatorily defined credit conversion factors.
CCO Chief Compliance Officer. The CFTC's business conduct rules require SDs (and MSPs) to appoint a CCO. The SEC requires registered investment advisers, registered funds and registered BDs to appoint a CCO. The CCO's responsibilities differ depending upon the regulatory regime under which an entity operates, but they may include, among others, designing and maintaining a program to ensure compliance with applicable statutory and regulatory requirements; conducting periodic reviews of such compliance program; preparing periodic reports (which may be provided to a regulator, an SRO or a board of directors), and assessing the extent of the entity's compliance with such requirements.
CCP Central counterparty. When a swap is cleared, the CCP becomes the party facing both parties to the original swap, whose obligations (in the US model) are guaranteed by their respective FCMs. The DFA and regulations thereunder require the clearing of many swaps formerly traded OTC. Although CCPs are intended to reduce risk in the financial system, it is not clear how well they may function in a time of market stress.
CCPA Consumer Credit Protection Act. The CCPA was passed in 1968. It is comprised of several specific acts designed to protect consumers including the Truth in Lending Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the Electronic Fund Transfer Act.
CD Certificate of deposit. A certificate issued by a bank to the depositor of funds. The certificate records the amount of money deposited, the term of the deposit and the fixed interest rate payable, and entitles the holder to repayment on those terms. CDs are typically freely transferable and for many CDs there is a liquid secondary market.
CDO Collateralized debt obligation. A CDO is a form of SPE the obligations of which are backed by collateral in the form of debt. CDOs are thought to have contributed to the financial crisis by enabling lenders to easily sell nonprime loans, thereby giving them greater incentives to make such loans.
CDS Credit default swap. A CDS provides protection against certain creditrelated risks associated with an entity referenced in the CDS. The buyer of credit protection under the CDS makes periodic payments to the seller of protection, in return for which the seller is required to make a payment if the relevant entity defaults (or is otherwise subject to a credit event) under the debt obligations specified in the CDS.
CEA Commodity Exchange Act. The CEA is one of the existing legislative acts that was substantially amended by the DFA. The CEA was originally enacted in 1936 and was amended by the DFA to provide for the extensive regulations of swaps.
CEM Current exposure method. The CEM is an approach to measuring exposures arising under derivatives contracts. In this calculation, the current exposure (which is the greater of the sum of the current mark-to-market values or zero) is added to the potential future exposure under the contract, and the market value of any posted collateral is then subtracted.
CET1 Common equity Tier 1 capital. Tier 1 capital, the highest quality capital under the Basel framework, has two components, common equity Tier 1 capital, which the BCBS has resolved should be the predominant form of bank capital, and additional Tier 1 (AT1) capital. CET1 consists essentially of common shares, retained earnings, and other reserves.
CFC Controlled foreign corporation. A corporate entity that is controlled by a U.S. person but that does business in a different jurisdiction. For tax purposes, registered investment companies may invest in commodity interests through CFCs, although financial reporting is done on a consolidated basis.
CFPB Consumer Financial Protection Bureau. The CFPB is an independent US government agency established in 2011 pursuant to the DFA. The CFPB has primary responsibility for regulating consumer protection with respect to financial products and services offered in the United States.
CFR Code of Federal Regulations. The CFR is a codification of the general and permanent rules published in the Federal Register by the executive departments and agencies of the federal government.
CFTC US Commodity Futures Trading Commission. The DFA empowers this regulator, the primary role of which had been to regulate the futures industry, to regulate swaps (but not security-based swaps, which fall under the SEC's regulation).
CICI CFTC Interim Compliant Identifier. A CICI is an interim form of LEI, used to identify to SDRs the parties to each swap.
CLO Collateralized loan obligation. A CLO is a special purpose vehicle (SPV) with securitization payments in the form of different tranches. Financial institutions back this security with receivables from a portfolio of loan obligations. Collateralized loan obligations are the same as collateralized mortgage obligations (CMOs) except for the assets securing the obligation. Banks have historically used CLOs to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios through a CLO structure.
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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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