Csc Chp 1

Financial intermediary

An institution (e.g., a bank) that borrows money from suppliers of capital and lends it to users of capital, facilitating the movement of financial instruments between them. Includes investment dealers, banks, credit unions, trust companies, and insurance companies.

Suppliers of capital

Those who have money to invest or lend (investors/savers).

Users of capital

Those who need money (borrowers), such as a couple buying a home or a business raising funds.

Capital markets

Markets where capital is transferred between suppliers and users; among the most sophisticated and efficient in the world in Canada.

Two main functions of investment dealers

(1) Transfer capital from suppliers to users by underwriting and distributing new securities in the primary market; (2) maintain secondary markets where previously issued securities can be traded.

Three categories of investment dealers

Retail firms, institutional firms, and integrated firms.

Retail firm

Investment dealer serving individual investors and smaller business accounts. Includes full-service dealers and self-directed (discount) brokers.

Full-service dealer

A retail firm offering a wide variety of products, services, and advice.

Self-directed broker (discount broker)

A retail firm offering reduced trading rates but no investment advice; execution-only.

Institutional firm

Investment dealer that primarily handles the trading activity of large clients such as pension funds (e.g., CPP) and mutual funds.

Integrated firm

Investment dealer offering products and services covering all aspects of the industry (the broadest type) — underwriting, retail, institutional, and trading.

Front office

Performs functions directly tied to portfolio management: portfolio management, trading, sales, and marketing.

Middle office

Performs functions critical to firm operations: compliance, accounting, audits, and legal.

Back office

Settles the firm's securities transactions (trade settlement).

Principal transaction

The dealer owns the securities as part of its inventory at some stage; profit/loss is the difference between buying and selling price. Also includes underwriting.

Agency transaction

The dealer never owns title to the securities; it acts on behalf of a client and earns a commission per trade.

Broker

An agent acting on behalf of a client; the term is also used loosely for an investment dealer acting in any capacity.

Underwriting

A principal transaction in which a dealer buys a new issue of securities from a government or company at a set price and date, using its own capital, then resells it for profit in the primary market.

Primary market distribution

The underwriting and sale of new securities, transferring capital from suppliers to users (also called a primary offering).

Initial public offering (IPO)

The first sale of stock to the public when a private company goes public in the primary market.

Secondary market

The market where previously issued, outstanding securities are traded (e.g., on the TSX).

Services provided by investment dealers

Advise on new-issue terms; add liquidity by trading from inventory; act as market makers; buy listed stocks as principals to serve institutional clients; enhance the primary market by ensuring buyers can resell.

Clearing system

A central system handling daily settlement between exchange members so each trade is not settled separately.

CDS Clearing and Depository Services Inc.

The entity through which securities are cleared in Canada; operates CDSX. Not itself a financial intermediary.

CDSX

The CDS facility for clearing and settling equity and debt securities trades and various cross-border transactions in Canada.

Netting

A process that compiles each firm's settlement sheets to establish one credit/debit balance, reducing the securities and cash that must change hands daily.

Chartered bank

Financial institution whose primary function is to accept and safeguard deposits and lend those funds out (mortgages, loans). The largest financial intermediaries in Canada.

Bank Act

Federal legislation setting operating rules and restrictions for banks, updated on roughly five-year revision cycles.

Schedule I bank

Canadian-owned, domestic bank not a subsidiary of a foreign bank (may have foreign shareholders). Regulated by the Bank Act; includes the Big Six.

Big Six banks

BMO, CIBC, National Bank of Canada, RBC, Scotiabank, and TD Bank Group.

Schedule I ownership rules (by size)

Large banks must be widely held with no single holder over 20%; medium banks ($2B–$12B equity) allow one holder up to 65% with the remaining 35% publicly traded; small banks (under $2B equity) can be fully owned by one party.

Schedule II bank

Foreign bank subsidiary incorporated and operating in Canada; deposits may be CDIC-eligible; can do all business permitted to a Schedule I bank. Revenue mainly from retail banking and electronic services (e.g., AMEX Bank of Canada, Citibank Canada, UBS Bank (Canada)).

Schedule III bank

Federally regulated foreign bank branch authorized under the Bank Act to do business in Canada; focuses on corporate and institutional finance and investment banking (e.g., Barclays, Comerica).

Schedule II vs III mnemonic

II = subsidiary (incorporated in Canada, full Schedule-I powers); III = branch (foreign-incorporated, corporate/institutional focus).

Firewall

Barriers that inhibit information sharing across a bank's different business units to keep operations separate.

Bank spread

The difference between interest earned on loans and interest paid on deposits; covers operating costs and provides profit.

CDIC (Canada Deposit Insurance Corporation)

Insures eligible deposits up to $100,000 per depositor per member institution (banks, trust companies, loan companies) across nine separately covered deposit categories.

CDIC eligible deposits

Savings/chequing accounts, GICs and other term deposits, and foreign currency held at a member institution. Different branches of the same member are not insured separately.

Credit union / caisse populaire

Cooperative, member-owned institution offering a wide range of services (deposits, lending, mortgages, mutual funds, insurance, dealer services, debit/credit cards); caters to members sharing a common bond.

Cooperative Credit Associations Act (CCAA)

Federal legislation governing credit unions; limits their activities and requires a "prudent portfolio approach" with limits on real-property and equity exposure.

Provincial insurance corporations

Provincial organizations (deposit insurance/guarantee corporations, stabilization funds) that protect credit union member deposits; terms and coverage vary by province.

Trust company

The only corporations in Canada authorized to engage in trust business; act as trustee over assets and also offer banking-like services (deposits, term deposits, loans, mortgages, RRSPs, estate planning, asset management).

Insurance company lines of business

Two lines: life insurance and property & casualty (P&C) insurance.

Life insurance products

Health and disability insurance, term and whole life, pension plans, RRSPs, and annuities; only life insurers may offer annuities and segregated funds.

Property and casualty (P&C) insurance

Protection against loss of home, auto, and commercial business; largest premiums come from auto, then property, then liability.

Insurance underwriting

Evaluating the risk and contractual responsibility an insurer will accept in exchange for premiums; the most important aspect of the insurance business.

Reinsurance

The practice of exchanging risk between insurance companies to improve risk management.

Insurance Companies Act

Key federal legislation governing insurers; grants enhanced lending powers but restricts in-house trust services and deposit-taking; allows only life insurers to offer annuities and segregated funds.

Banks selling insurance

Some Schedule I banks own insurance subsidiaries, but the Bank Act forbids selling insurance through bank branches, except insurance related to loans and mortgages.

Investment fund

A company or trust that sells shares/units to the public and invests proceeds in a diversified securities portfolio.

Closed-end fund

An investment fund that issues shares only at start-up or infrequent periods.

Open-end fund (mutual fund)

An investment fund that continually issues shares and redeems them on demand; about 95% of aggregate funds invested.

Savings bank

A government-established institution mainly accepting savings deposits and paying interest; e.g., ATB Financial (formerly Alberta Treasury Branches), a provincial crown corporation.

Consumer finance company

Makes direct cash loans to consumers, often those unable to get a bank loan, typically at higher interest rates.

Sales finance company

Purchases installment sales contracts from retailers/dealers at a discount (e.g., for cars, appliances, home improvements) and profits on the spread — the same mechanic as modern BNPL platforms.

Pension plan

A form of institutionalized savings offered to employees; a major driver of the institutionalization of savings over recent decades.

Financial technology (fintech)

Technology-driven innovation in financial services; a key trend reshaping the industry.

Robo-advisor

An online investment service providing goal-based advice and managed portfolios built with algorithms based on modern portfolio theory; unlike discount brokers (execution-only), robo-advisors provide advice.

Cryptocurrency / Bitcoin

A digital asset valued as a medium of exchange and store of value; investment vehicles include trusts, mutual funds, hedge funds, futures, and options. The CSA cautions that crypto assets are not the same as fiat currency.

Investment Industry Association of Canada (IIAC)

The national association representing investment firms across Canada, including investment and mutual fund dealers, exempt market dealers, portfolio managers, and fund managers.

Canadian Investment Regulatory Organization (CIRO)

Canada's national self-regulatory organization, formed January 1, 2023 by amalgamating IIROC and the MFDA; oversees investment dealers, mutual fund dealers, and debt/equity marketplace trading.