Risk Management Flashcards

What is counterparty risk in financial transactions?

Answer: The risk that the other party in a financial transaction will default on their contractual obligations

Counterparty risk is the risk that the other party in a financial contract will fail to fulfill their obligations, particularly relevant in derivatives and over-the-counter transactions in the UAE market.

What is the role of the compliance function in UAE financial institutions?

Answer: Ensuring the institution adheres to all applicable laws, regulations, and internal policies

The compliance function ensures that the financial institution operates in accordance with all applicable laws, regulations, and internal policies, serving as a critical control function required by UAE regulators.

What is concentration risk and why is it monitored by UAE regulators?

Answer: Risk from excessive exposure to a single counterparty, sector, or geographic area, which could amplify losses

Concentration risk arises when a financial institution has disproportionate exposure to a single counterparty, sector, or geographic area, which the CBUAE monitors to prevent systemic failures.

What is the three lines of defense model used in UAE financial risk management?

Answer: Business line management (1st), risk and compliance functions (2nd), and internal audit (3rd)

The three lines of defense model separates risk management into: first line (business units managing their own risks), second line (risk management and compliance oversight), and third line (independent internal audit).

What is reputational risk and how does it affect UAE financial institutions?

Answer: The risk of damage to an institution's standing that could result in loss of business, legal action, or regulatory sanctions

Reputational risk can arise from operational failures, regulatory breaches, or unethical behavior, potentially causing loss of clients, increased funding costs, and regulatory scrutiny for UAE financial institutions.

What reporting requirements exist for UAE financial institutions regarding risk management?

Answer: Regular submission of risk reports to the CBUAE covering capital adequacy, liquidity, and large exposures

UAE financial institutions must submit regular risk reports to the CBUAE, including capital adequacy ratios, liquidity metrics, large exposure reports, and other prudential returns as specified by regulations.