Chartered Institute for Securities & Investment (CISI) Qualifications Risk Management in Financial Services Syllabus

Risk Management in Financial Services syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Risk Management in Financial Services in Chartered Institute for Securities & Investment (CISI) Qualifications, not a summary of it.

1. 1

   Risk Governance and Framework

   3 topics

   • Enterprise risk management
     • Risk appetite and tolerance
     • Three lines of defence model
   • Risk culture and governance structures
   • Risk identification, assessment and reporting
2. 2

   Categories of Financial Risk

   3 topics

   • Market risk
     • Value at Risk (VaR) and stress testing
     • Interest rate, equity and FX risk
   • Credit risk
     • Probability of default and exposure at default
     • Counterparty and concentration risk
   • Liquidity risk: funding and market liquidity
3. 3

   Operational, Conduct and Emerging Risks

   4 topics

   • Operational risk events and loss data
   • Conduct, legal and reputational risk
   • Cyber risk and operational resilience
   • Climate and ESG-related financial risk
4. 4

   Capital Adequacy and Prudential Regulation

   3 topics

   • Basel III framework and capital ratios
   • Liquidity coverage and net stable funding ratios
   • Investment Firms Prudential Regime (IFPR)

Risk Management in Financial Services flashcards for Chartered Institute for Securities & Investment (CISI) Qualifications

25 of 52 cards from the Risk Management in Financial Services deck — real questions with worked answers.

1. What is Enterprise Risk Management (ERM)?

   A holistic, firm-wide approach to identifying, assessing, managing, monitoring and reporting all material risks in an integrated way, aligned to strategy and risk appetite, rather than managing risks in isolated silos.

2. What are the four typical risk treatment ('4 Ts') strategies in ERM?

   Treat (mitigate/reduce), Tolerate (accept), Transfer (e.g. insure or hedge), and Terminate (avoid by ceasing the activity).

3. Define 'risk appetite' versus 'risk tolerance'.

   Risk appetite is the amount and type of risk a firm is willing to take to meet its strategic objectives; risk tolerance is the acceptable level of variation around specific objectives/limits, often a tighter operational boundary within appetite.

4. What is the 'Three Lines of Defence' model in risk governance?

   1st line: business/operational management that owns and manages risk; 2nd line: risk management and compliance functions that oversee and challenge; 3rd line: internal audit providing independent assurance to the board.

5. What is 'risk culture' in a financial firm?

   The shared values, attitudes, norms and behaviours regarding risk-taking and risk awareness across an organisation, shaping how risks are identified, discussed and acted upon day to day.

6. What role does 'tone from the top' play in risk culture?

   Senior management and board behaviour, communication and incentives set the example for acceptable risk-taking; a strong, consistent tone from the top embeds sound risk values throughout the firm.

7. What is the difference between inherent risk and residual risk?

   Inherent risk is the level of risk before any controls or mitigation are applied; residual risk is the risk remaining after controls and mitigating actions have been put in place.

8. What is a risk register?

   A central record documenting identified risks, their assessment (likelihood and impact), owners, existing controls, residual risk ratings and planned mitigating actions.

9. In risk assessment, how is a risk's significance commonly scored?

   By combining probability (likelihood) and impact (severity), often as $\text{Risk score} = \text{Likelihood} \times \text{Impact}$, typically plotted on a risk/heat map.

10. What is a Key Risk Indicator (KRI)?

    A forward-looking metric that provides an early warning signal of increasing risk exposure, helping management monitor risk levels against defined thresholds and appetite.

11. Define market risk.

    The risk of loss in on- and off-balance-sheet positions arising from movements in market prices, including interest rates, equity prices, foreign exchange rates and commodity prices.

12. What is Value at Risk (VaR)?

    A statistical measure estimating the maximum expected loss of a portfolio over a given time horizon at a specified confidence level; e.g. a 1-day 99% VaR of £1m means losses should exceed £1m on only 1% of days.

13. State the parametric (variance-covariance) VaR formula for a single position.

    $$\text{VaR} = z_{\alpha} \times \sigma \times V \times \sqrt{t}$$ where $z_{\alpha}$ is the confidence-level z-score, $\sigma$ the return volatility, $V$ the position value and $t$ the time horizon.

14. What is a key limitation of VaR?

    VaR does not describe the size of losses beyond the confidence level (the tail), can underestimate extreme events, and may not be sub-additive; Expected Shortfall (ES) is used to capture average tail loss.

15. What is Expected Shortfall (ES / Conditional VaR)?

    The expected (average) loss given that the loss exceeds the VaR threshold: $\text{ES} = E[L \mid L > \text{VaR}]$. It captures tail risk better than VaR and is used under the FRTB market-risk framework.

16. Name the three main methods of calculating VaR.

    Parametric (variance-covariance), Historical simulation, and Monte Carlo simulation.

17. Define credit risk.

    The risk that a borrower or counterparty fails to meet its contractual obligations, resulting in financial loss to the lender or counterparty exposure holder.

18. State the formula for Expected Loss (EL) in credit risk.

    $$\text{EL} = \text{PD} \times \text{LGD} \times \text{EAD}$$ where PD = probability of default, LGD = loss given default, and EAD = exposure at default.

19. What does Loss Given Default (LGD) represent, and how does it relate to recovery rate?

    LGD is the proportion of an exposure expected to be lost if default occurs; $\text{LGD} = 1 - \text{Recovery Rate}$.

20. What is counterparty credit risk (CCR)?

    The risk that the counterparty to a derivative or securities financing transaction defaults before final settlement, where the exposure value is uncertain and can change with market movements (e.g. measured via CVA).

21. What is Credit Valuation Adjustment (CVA)?

    An adjustment to the value of a derivative reflecting the expected loss from counterparty default risk; it is the market price of counterparty credit risk over the life of the trade.

22. Distinguish funding liquidity risk from market liquidity risk.

    Funding liquidity risk is the risk a firm cannot meet its cash-flow obligations as they fall due without incurring unacceptable cost; market liquidity risk is the risk that a position cannot be sold/unwound quickly without significantly moving its price.

23. What is a maturity (liquidity) mismatch?

    A gap between the maturities of assets and liabilities (e.g. funding long-term illiquid loans with short-term deposits), exposing the firm to refinancing and liquidity risk.

24. What is a 'liquidity buffer'?

    A stock of high-quality, unencumbered liquid assets a firm holds to survive a period of liquidity stress when normal funding sources are unavailable.

25. Define operational risk per Basel.

    The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It includes legal risk but excludes strategic and reputational risk.

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