Glossary of Terms

Acceptances

Drafts or bills of exchange drawn on and accepted by institutions for payment to the instruments' holders on the specified maturity Drafts or bills of exchange drawn on and accepted by institutions for payment to the instruments' holders on the specified maturity dates. By stamping the documentation as "accepted", institutions agree to pay a specified amount according to the terms of the letter of credit.

Accounting Principles

The accounting principles to be used for the preparation of these returns and the annual financial statements of the institution are, unless otherwise specified, to be in accordance with generally accepted accounting principles, the primary source of which is the Handbook of the *Chartered Professional Accountants of Canada (CPA Canada)* (reference subsection 308(4) of the Bank Act and subsection 313(4) of the Trust and Loan Companies Act).

Acquired Securities Subsidiary

A subsidiary of the institution incorporated in Canada, primarily engaged in dealing in securities, that was an established business enterprise acquired by the institution subsequent to changes in the Bank Act in 1987.

Agency Functions

Functions performed by an institution, for a fee, as an agent for a customer.

Allowance for *Expected Credit Losses*

The Allowance for *Expected Credit Losses* account includes allowances for loan impairment established against on-balance sheet items and allowances for *expected credit losses* established against off-balance sheet items. Allowances for loan impairment are established in accordance with the *International Financial Reporting Standards (IFRS)* and are deducted from the applicable assets. Allowances for *expected credit losses* in respect of off-balance sheet items are established in accordance with *IFRS* and are included in other liabilities. The balance in the allowance account will consist of allowances established on an item-by-item basis (individual allowances), and allowances established on a *collective* basis (country risk group allowances, and other group allowances).

Amortization

The gradual reduction of a debt by equal periodic payments, sufficient to pay current interest and to extinguish the principal at maturity.dates. By stamping the documentation as "accepted", institutions agree to pay a specified amount according to the terms of the letter of credit.

Amortized Value of Securities Held for Investment

The amortized value of securities held for investment is computed by adding an amount to (or deducting it from) the average carrying value of each issue at the end of each amortization period, which results in the carrying value equalling the par value if the security is held to date of call or to the date of maturity.

For purposes of this reporting manual:

• amortization periods may be either calendar months or financial quarter-years;
• amortization may be computed by either the yield or straight-line methods;
• amortization of an issue that has a carrying value of less than par may be computed to either the date of call or the date of maturity;
• amortization of an issue that has a carrying value of more than par should be computed to the date of call.

Annual Financial Statement

Statement the institution must send to each shareholder 21 days before the date of the annual meeting. It must include a balance sheet at the end of the financial year, a statement of income, change in financial position and changes in shareholders' equity for the financial year and certain other information. (Refer to Section 308 of the Bank Act and Section 313 of the Trust and Loan Companies Act.)

Asset Sale and Repurchase Agreements

A repurchase agreement is a transaction that involves the sale of a security or other asset with the simultaneous commitment by the seller that after a stated period of time, the seller will repurchase the asset from the original buyer at a predetermined price. A reverse repurchase agreement consists of the purchase of a security or other asset with the simultaneous commitment by the buyer that after a stated period of time, the buyer will resell the asset to the original seller at a predetermined price.

Asset Sales with Recourse

Agreements whereby an institution sells a loan or other asset or a portion thereof, but retains an obligation to assume the credit risk if default occurs. The Office notified financial institutions in April 1990 that generally when there is any recourse to the seller, the assets should remain on the Balance Sheet.

Assigned Maturities

The maturities of instruments which reflect their underlying cash flow properties rather than the term indicated by their nominated/stated maturities.

Audit Committee

A committee of the board of directors required by the Bank Act that consists of no fewer than three directors, none of whom are officers or employees of the institution or any of its affiliates, and who are appointed by the board of directors.

Call Loans

Drawn lines of credit to recognized exchange brokers and investment dealers, permitting them to trade in securities asa result of firm purchase or sale orders received from their clients; to service clients' margin accounts; to pledge security inventories, or to purchase newly-issued securities.

Call Option

Optional forward purchase contracts that oblige the seller of the contract to sell a particular financial instrument, including futures contracts, at the buyer's option.

Canada Deposit Insurance Corporation (CDIC)

Refers to the deposit insurer established under the Canada Deposit Insurance Corporation Act.

Canadian Financial Institution

A financial institution that is incorporated or formed by or under an Act of Parliament or of the legislature of a province.

Capital Leases

Leases that, from the point of view of the lessee, substantially transfer all the benefits and risks incident to ownership of property to the lessee.

Carrying Amount

The recorded investment in a loan or group of loans less any related allowances for impairment.

Carrying Value of Investments

Computed by adding purchases of securities held at cost and deducting sales on a systematic basis such as average cost, last-in first-out, or first-in first-out.

Certificates of Deposit (Cds)

Receipts payable (on demand or after a term) to the depositor for funds deposited with a institution. Some deposit certificates are transferable and may be endorsed to other parties and negotiated like a cheque or other negotiable instrument.

Charge for Impairment

The charge for impairment charged to the Statement of Income is the amount that is required to establish a balance in the Allowance for Impairment account that management considers adequate to reduce the recorded investment in its portfolio of on- and off-balance sheet impaired items to its estimated realizable amount.

Collateral Mortgage

A charge on land and premises taken as security for funds advanced pursuant to a demand or term promissory note

*Collective Allowances*

*Collective allowances are established against groups of loans to borrowers that operate in a particular industry or geographic region, or that share other identifiable common characteristics. *

Commercial Paper

Unsecured short-term negotiable promissory notes issued by commercial businesses, including finance companies and deposit-taking institutions.

Commitments

Arrangements that obligate an institution, at a client's request, to:

• extend credit in the form of loans or participations in loans, lease financing receivables, mortgages, overdrafts, acceptances, letters of credit, guarantees or loan substitutes; or
• purchase loans, securities, or other assets. (See Guideline A-4.)

Common Risk

To be determined on a case-by-case basis, with reference to the material facts of the situation. In determining whether a common risk exists between two or more entities, either of these conditions must be present:

• the expected source of repayment is the same for each entity; or
• the entities are part of a corporate group and there is material financial interdependence between the entities. (See Guideline B-2.)

Condominium

A multiple structure but financed under a registered condominium or strata title plan.

Connection

A connection exists where two or more entities are deemed to be a common risk. The accounts of the entities comprising a connection shall be aggregated for the purpose of applying limits on a institution's large exposures. (See Guideline B-2.)

Corporate Group

Includes an entity and all of its subsidiaries, be they owned directly or indirectly.

Countertrade

Two or more parties agree to exchange goods or merchandise with an institution or other third party acting as an intermediary. The institution or third party will be liable in the case of incompetence.

Country of Ultimate Risk

Synonymous with country of ultimate security, which is defined as unconditional guarantee of a borrower's debt by an entity located in another country.

Country-Risk Allowances

Country-Risk Allowances are established against sovereign risk loans to the group of countries designated by the Office of the Superintendent of Financial Institutions. These allowances are established either on a loan-by-loan basis (individual allowances) or collectively against a group of loans (*collective* allowances).

Coupon Stripping

A transaction whereby a security holder detaches coupons from the principal portion of a security and sells either the coupons or the principal portion separately.

Credit Risk

The risk that a borrower may default on his credit obligations to the lender.

Credit Line

An uncommitted, unadvised credit facility opened by one institution in favour of a customer or another institution.

Cross-Currency Interest Rate Swaps

Combine the elements of currency swaps and interest rate swaps.

Cross-Currency Swaps

A transaction in which two parties exchange currencies and the related interest flows for a period of time. Cross-currency swaps are used to swap fixed interest rate indebtedness in different currencies.

Customer's Liability Under Acceptances

Refers to a customer's obligation to pay the accepting institution under the acceptances the face amount of the instrument on or before the specified maturity date. See: Acceptances.

EFTS

Electronic funds transfer system.

Endorsements

Guarantees to pay on maturity the face value of a bill of exchange. In some countries, endorsements are effectively acceptances.

Entity

An entity is a natural person, a body corporate, trust, partnership, fund, unincorporated association or organization, an agency of the Crown in right of Canada or of a province, and any agency of a foreign government.

Eurobond

International straight or convertible bond issued by state or corporate entities, denominated in a Eurocurrency, and issued outside the currency's domicile. Normally sold on several international markets by groups or syndicates of banks or brokers in units equivalent to one thousand U.S. dollars.

Euroclear

The computer clearing system for Eurobonds operated and managed by Morgan Guaranty Trust Co., Brussels branch.

Eurodollar

U.S. dollar deposits held outside of the United States.

Existing Property

Include loans for the purchase and refinancing of existing property and the

improvement of both land and structures except where such improvement creates additional units of living or working space as referred to under the definition of new construction.

Exposure

An exposure includes claims on an entity or connection (a group of associated entities) comprising:

• any draw downs on arrangements for providing funds or credit including loans and advances, debt securities, loan substitute securities, financial leases;
• all undrawn amounts of irrevocable advised credit commitments including, but not limited to,
  • standby letters of credit,
  • financial guarantees,
  • conditional sales contracts,
  • repurchase agreements,
  • fully underwritten lending commitments,
  • note issuance facilities, and
  • revolving underwriting facilities; and
• the credit equivalent amount of foreign exchange and interest rate contracts calculated in accordance with the capital adequacy requirements for institutions.

An exposure excludes:

• as defined above, any draw downs on arrangements for providing funds or credit and all undrawn amounts of irrevocable advised credit commitments exposures to banks, trust and mortgage loan companies that have an original maturity of less than one year;
• the credit equivalent amount of foreign exchange and interest rate contracts with banks, trust and mortgage loan companies;
• loans to and loans or securities issued or guaranteed by the Government of Canada, a Canadian province, foreign central governments, and bodies designated as public sector entities that receive a 20 per cent risk weight for capital adequacy assessment purposes;
• exposures to an entity that occur while a transaction is in the course of settlement, including daylight overdrafts;
• an institution's purchase of Government of Canada securities, securities issued by a province of Canada or an OECD central government subject to an agreement that the seller will repurchase at the end of a stated period, provided that the institution has obtained control of the securities that are to be repurchased;
• loans of securities made in accordance with Office guidelines on securities lending and loans made to securities brokers and dealers that are fully collateralized by securities issued by the Government of Canada or by a province of Canada; and
• commitments pursuant to an underwriting agreement to purchase a new issue of securities or a secondary issue of securities by a subsidiary that is a member of the Investment Dealers Association of Canada or regulated by a provincial securities commission and subject to the capital requirements for such underwriting agreements. (See Guideline B-2.)

Guarantee

The undertaking of responsibility by the first party for the second party's debt or obligation to perform a specific act or duty. The guarantor becomes liable in the event of the second party's default, even though the original debtor is responsible for the debt. The term "guarantee" is also used when an institution asks another institution to guarantee signatures, endorsements and alterations on cheques or other instruments before it will accept them as complete, negotiable instruments.

Guarantee Facility

An arrangement whereby the institution, on behalf of its customer, pays a third party a sum of money either on demand or upon the presentation of certain documents.

Guaranteed Investment Certificates (GICs)

Certificates issued usually by deposit-taking institutions giving evidence of a deposit made with them for a fixed maturity, in registered form and on an interest-bearing basis.

Guarantees - Securities

Securities should be reported as being guaranteed only when the securities are guaranteed by Canada, a province or a municipal or school corporation. Guarantees are not intended to include items such as letters of awareness or intent, comfort letters or other similar documents.

Guarantor

One who makes a guarantee of another party's debt or commitment.

Guidelines

Issued by the Office of the Superintendent of Financial Institutions to provide institutions with guidance regarding their operating and reporting practices.

Impaired Loans

A loan or portfolio of loans becomes impaired when credit quality has deteriorated to the extent that the lender no longer has reasonable assurance of timely collection of the full amount of principal and interest. Impaired loans consist of loans where impairment has been identified on a loan-by-loan basis, and groups of homogeneous small loans such as consumer instalment and credit card loans where impairment has been identified and measured by establishing formulae allowances against the group.

Indirect Liability

Arises from credit facilities whereby the institution does not advance cash to the borrower but rather guarantees payment of certain sums of money under certain circumstances.

Individual Allowances

Individual allowances are established against individual assets, and groups of homogeneous small loans.

Information Services Corporation

A company whose activities are limited to

• providing data processing services,
• providing advisory and other services in the design, development and implementation of information management systems, or
• designing, developing and marketing computer software.

These activities may include, as an ancillary activity, the design, development, manufacture or sale of special purpose computer hardware.

Insured Deposit

Deposits of member institutions which are insured by the Canada Deposit Insurance Corporation (CDIC) as defined in the CDIC Act and in the institution's policy of insurance.

Insured Mortgage

Includes all residential mortgage loans insured either under the National Housing Act or by other insurance companies/agencies.

Interest Rate Futures

An obligation to sell or purchase an instrument at an agreed upon interest rate in the future. The Office of the Superintendent of Financial Institutions has reviewed the recommendations of the Toronto Stock Exchange guide for use by participants in the interest rate futures markets and has approved the use of these recommendations for accounting of interest rate futures transactions by institutions. Accordingly, in the absence of advice to the contrary, institutions should follow the accounting treatment recommended by the TSE guide.

Interest Rate Options and Currency Options

An option is an agreement between two parties where the seller of the option, for compensation (premium/fee), grants the buyer the future right, but not the obligation, to buy from the seller, or to sell to the seller, either on a specified date or during a specified period, a financial instrument or commodity at a price agreed when the option is arranged. Other forms of interest rate options include interest rate capping agreements and collar (floor/ceiling) agreements.

Interest Rate Swap

A transaction in which two parties arrange to exchange fixed for floating interest rate obligations on a similar principal amount (coupon swap); or one floating rate index for another floating rate index in the same currency (bank swap). The institution may facilitate the arrangement by acting as an intermediary.

Investment Account Securities

Securities purchased in the normal course of business, where the institution's original intention was to hold the securities to maturity or until market conditions render alternative investments more attractive.

Investment Counselling and Portfolio Management Corporation

A company whose principal activity is

• the offering of advice, or advising, on investments; or
• the investment or control, in any way that involves an element of discretionary judgement of money, property, deposits or securities that
  • are not owned by the company; or
  • are not monies deposited with the company in the ordinary course of business.

Minister

Refers to the Minister of Finance.

Mismatched Book

Occurs when the average maturity of assets is different from the average maturity of liabilities.

Mortgage-Backed Securities (MBS)

Securities backed by mortgages as collateral.

Multiple Component Facility

A facility under which several different options for drawing funds are available to the borrower.

Multiple Dwelling Structures

Includes all other residential structures comprising two or more units, e.g., semi-detached "link" singles, duplex and triplex, double duplexes, row, garden and terrace houses, flat and apartment buildings.

Mutual Fund Distribution Corporation

A body corporate whose principal activity is acting as a selling agent of units, shares or other interests in a mutual fund and acting as a collecting agent in the collection of payments for any such interests if

• the proceeds of the sales of any such interests, less any sales commissions and service fees, are paid to the fund; and
• the existence of a sales commission and service fee in respect of the sale of any such interest is disclosed to the purchaser of the interest prior to the purchase thereof.

Off-balance Sheet Activities

An institution's business, often fee-based, that generally does not involve booking assets and taking deposits.

Official Monetary Institution

Official monetary institutions are institutions such as treasuries, ministries of finance, finance or corresponding government departments; central banks, stabilization funds, equalization accounts, exchange control offices or other governmental exchange authorities; and any similar fiscal agencies (including government-owned corporations) that act as governmental agents and that have an important function or functions similar to those of a treasury, central bank or stabilization fund. Exclude other official institutions such as embassies, legations, armed forces, purchasing commissions, state trading corporations, and other banks (including nationalized commercial banks) that do not function as treasuries, central banks or stabilization funds. Include liabilities only to official monetary authorities of those countries that are members of the International Monetary Fund plus Switzerland according to the list specified by the Bank of Canada.

Officer

A chief executive officer, president, vice-president, secretary, comptroller, treasurer and any other natural person designated as an officer of the institution by by-law or by resolution of the directors of the institution, and in relation to any other entity, any natural person designated as an officer of the entity by by-law, by resolution of the members thereof or otherwise.

Office of the Superintendent of Financial Institutions

Refers to the Office created by the Financial Institutions and Deposit Insurance Amendments Act and is the regulator of deposit-taking institutions and federally incorporated financial institutions in Canada.

One Borrower

In the private sector, is a company or group of companies with common ownership and related risks, or a group of companies operating under the same management group with related risks, in the absence of other sufficient evidence to support a position that there is clearly not a single risk.

Operating Loan

A demand credit facility used to finance an entity's normal business operations. The facility permits sums to be drawn, repaid and redrawn in prescribed amounts within an overall limit during the facility's life.

Options

See: Put option, Call option

Readily Encashable Assets

The stock of liquid assets of an institution available for immediate liquidation to meet liquidity needs. They include cash resources in excess of required reserves; securities that can readily be converted into cash without incurring undue capital loss; and money market loans.

Real Property

Includes a leasehold interest in real property.

Real Property Brokerage Corporation

A company whose activities are limited to

• acting as an agent for vendors, purchasers, mortgagors, mortgagees, lessors or lessees of real property; and
• the provision of consulting or appraisal services in respect of real property.

Real Property Corporation

A company whose activities are limited to holding or otherwise dealing with real property or shares of a body corporate or ownership interests in an unincorporated entity, the activities of which are also limited to holding or otherwise dealing with real property.

Real Property Holding Vehicle

A limited partnership or a trust whose activities are limited to holding or otherwise dealing with real property or shares of a body corporate or ownership interests in an unincorporated entity, the activities of which are also limited to holding or otherwise dealing with real property.

Realized Gains (Losses)

Realized gains or losses on disposal of securities held for investments are to be charged or credited to income in the year of realization.

Recorded Investment

The face or principal amount of a loan or group of loans adjusted to reflect any principal repayments, accrued but uncollected interest, write-offs, unamortized premium or discount and unamortized loan fees and costs.

Regulated Financial Institutions

Includes:

1. bank;
2. a body corporate to which the Trust and Loan Companies Act applies;
3. an association to which the Cooperative Credit Associations Act applies;
4. an insurance company or a fraternal benefit society to which the Insurance Companies Act applies;
5. a trust, loan or insurance corporation incorporated by or under an Act of the legislature of a province;
6. a cooperative credit society incorporated and regulated by or under an Act of the legislature of a province;
7. an entity that is incorporated or formed by or under an Act of Parliament or of the legislature of a province and that is primarily engaged in dealing in securities, including portfolio management and investment counselling; and
8. an entity that is incorporated or formed otherwise than by or under an Act of Parliament or of the legislature of a province and that is engaged in the trust, loan or insurance business, the business of a cooperative credit society or the business of dealing in securities or is otherwise engaged primarily in the business of providing financial services.

Regulations

Made by the Governor in Council for carrying out the purposes and provisions of the Bank Act or Trust and Loan Companies Act.

REPOS

See: Purchase agreement for securities sold under an agreement to repurchase.

Representative Office

Established to represent a foreign bank in Canada, and cannot be occupied or controlled by a corporation incorporated by or under a law of Canada or a province. The personnel of the office are employed directly or indirectly by the foreign bank.

Resale Agreement for Securities Purchased Under Agreement to Resell ("Reverse REPOS")

A transaction whereby one party buys securities from another, subject to the purchaser's agreement to sell the assets at a specified date. The securities do not change hands and the resulting asset is similar to a short-term loan.

Resident

For reporting purposes a resident is an individual, corporation or other organization that is ordinarily resident in Canada. (See: Non-Resident.)

Resident Canadian

For purposes of identifying eligibility for directorships, etc., a resident Canadian is a natural person who is

• a Canadian citizen ordinarily resident in Canada;
• a Canadian citizen not ordinarily resident in Canada who is a member of a prescribed class of persons; or
• a permanent resident within the meaning of the Immigration Act and ordinarily resident in Canada, except a permanent resident who has been ordinarily resident in Canada for more than one year after the time at which the individual first became eligible to apply for Canadian citizenship. (See Section 2 of the Bank Act or Section 2 of the Trust and Loan Companies Act.)

Residential Interim Construction Mortgages

Residential Interim Construction Mortgages include:

• construction loans with or without firm permanent mortgage take out commitments;
• land servicing and development loans;
• bridge loans for the period between the time construction has been completed and full rental achievement has taken place;
• bridge loans for projects involving the conversion of rental apartments to condominiums when a permanent mortgage must be removed to accommodate the sale to ultimate purchasers;
• loans for the redevelopment of existing property prior to arranging new permanent long term financing; and
• land holding loans while plans and development permits are being obtained.

Residential Property

Real property consisting of buildings that are used, or are to be used, to the extent of at least one-half of the floor space thereof, as one or more private dwellings.

Restructured Loans

Loans where the lender, for economic or legal reasons related to the weakened financial condition of the borrower, grants a concession to the borrower that it would not otherwise consider. (See Guideline *IFRS 9 Financial Instruments and Disclosures*.)

Reverse REPOS

See: Resale agreement for securities purchased under agreement to resell.

Revolving Credit Arrangement

An arrangement whereby funds may be borrowed at any time, with regular scheduled repayments of a predetermined minimum amount.

Revolving Underwriting Facilities (RUFS)

See: Note Issuance Facilities (NIFs).

Tax-exempt Loans

Loans for which interest received is free of taxes (that is, there are no taxes collected from the borrower or lender).

Term Deposits

Interest-bearing deposits payable at a specified date, after a specified time or after a specified notice period (not less than seven days).

Trade

In respect of securities, means any sale or disposition of securities for valuable consideration.

Trade Date

The date on which a security transaction is executed.

Trading Account Securities

Securities purchased for resale over a short period of time. Securities held for trading account should be valued at market.

Trade-Related Contingencies

These include short-term self-liquidating trade-related items such as commercial and documentary letters of credit issued by the institution that are, or are to be, collateralized by the underlying shipment. (See Guideline A-4.)

Transaction-Related Contingencies

Transaction-related contingencies relate to the ongoing activities of a counterparty, where the risk of loss to the reporting institution depends on the likelihood of a future event that is independent of the creditworthiness of the counterparty. Transaction-related contingencies are guarantees that support particular performance obligations rather than supporting customers' general financial obligations. Performance-related guarantees specifically exclude items relating to non-performance of financial obligations.

Performance-related and non-financial guarantees include items such as:

• performance bonds, warranties and indemnities. Performance standby letters of credit represent obligations backing the performance of non-financial or commercial contracts or undertakings. These include arrangements backing:
• subcontractors' and suppliers' performance,
  • labour and material contracts,
  • delivery of merchandise, bids or tender bonds,and guarantees of repayment of deposits or prepayments in cases of non-performance;
• customs and excise bonds. The amount recorded for such bonds should be the reporting institution's maximum liability. (See Guideline A-4.)

Transactions with Recourse

Arrangements whereby an institution sells a loan or other asset to a third party, but retains an obligation to assure the credit risk if the borrower defaults or if the value of the asset otherwise deteriorates.

Transborder Risk

Refers to all cross-border claims and associated currency risks, including the possibility that an asset cannot be serviced in the currency of payment because of foreign exchange controls. In general, the transborder risk will account for a substantial portion of a institution's country-risk. (See Country-risk.)

Treasury Bills

Short-term, non-interest-bearing government obligations that are payable to bearer and sold on a discount basis.

Vendor Take Back (VTB) Mortgages

A Vendor Take Back Mortgage is a mortgage loan where the company may accept, as part payment for real estate sold by it, a mortgage.