10.1.2 Financial risk

492. Investment firms can also be exposed to ‘financial risks’. This covers all credit and market risks an investment firm can be exposed to in its normal business operations and when performing or providing any of the investment services or activities, but also any other financial risk to which the investment firm can be exposed. Credit risk can be defined as “the risk that a counterparty will fail to perform fully its financial obligation”,1 whereas market risk focuses on the risks an investment firm can be exposed to for any movements in the value of a financial instrument the investment firm holds for own account. Not all investment services or activities will result in an exposure to financial risks for the investment firm. Certain investment services, such as dealing on own account and underwriting will inherently result in a bigger financial risk for an investment firm, as these activities will result in the investment firm holding financial instruments for its own account. Other investment services such as investment advice will most likely not result in a financial risk for the investment firm.