FACTS AND FIGURES (JANUARY 2008)

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1 FACTS AND FIGURES (JANUARY 2008) B R U S S E L S. D U B A I. F R A N K F U R T. G R E N O B L E. H O N G K O N G. N E W Y O R K. PA R I S. S Ã O PA U L O. S E O U L. S I N G A P O R E. S Y D N E Y. W A R S A W

2 FERMAT SOFTWARE...2 One of the few truly integrated software packages...2 SOLUTIONS...4 Fermat CAD...4 Fermat CAD RRT...6 Fermat E-CAP...7 Fermat GEM...8 Fermat ALM...10 Fermat IAS/IFRS...11 Fermat VAR...12 Fermat RAPM...13 Fermat OpRisk...15 ARCHITECTURE & TECHNOLOGY...16 Leading edge technology...16 Fermat architecture: a complete lifecycle for risk and performance management...17 The Fermat toolkit: from a turnkey solution to full expertise transfer...18 Volumes handling: the option to avoid aggregation...18 A simplified integration and evolution that builds upon previous investments...18 Local installation...19 Centralised installation at group level...20 Decentralised installations across banking groups...21 EDUCATION...23 Fermat Education...22 CONTENTS

3 Fermat is a leading provider of integrated risk and performance management software solutions to the global banking industry. The company has achieved a market leadership position through a number of critical factors: Targeted, scalable solutions addressing real and pressing customer needs Modular, building block solution architecture reducing barriers to adoption and enabling banks a validated step-by-step deployment approach A simplified integration and evolution that builds upon previous investments Respect of delivery commitments: we deliver on time, as testified by our track record Well-defined market focus and strong customer references supporting a capital-efficient growth momentum Strong intellectual property and highly educated, diverse human capital Commercial leverage of successful technology, channel and delivery partnerships Software Product of the Year 1

4 One of the few truly integrated software packages Based on a robust and flexible architecture, the Fermat product range has been designed from scratch by financial engineers and software developers combining extensive academic and professional knowledge in finance, mathematics and information technology. Fermat s software suite completes and capitalizes upon the information systems of financial institutions. It consolidates all business lines (e.g. capital markets, corporate banking, commercial & residential mortgages, project financing, retail and private banking, etc.), and is based on an enterprisewide Financial Data Warehouse (Fermat DataMart) which represents the cornerstone of our modular product line. Highly scalable, the Fermat software range can be used by a wide range of financial institutions, from local organisations to large head offices of multinational banks. Each Fermat software package and its modules may be used individually or integrated together to respond to specific client requirements may be phased in, to upgrade the current scope of analysis offers a fully relevant and practical response to one clearly identified need bundles Fermat s core software components in order to meet the functional and technical approaches most frequently chosen by our clients. The core components upon which our software range relies on can be combined on a pick and mix basis to match exactly the scope of the analysis and level of sophistication required. When used together, our products generate a consistent and comprehensive assessment of the relevant business activities because they use the same information sources, the same data processing environment and analytics and the same reporting tools. FERMAT SOFTWARE 2

5 Integrated Risk & Performance Management Software Fermat DataMart - (Dedicated Finance & Risk Data Warehouse and Data Management Platform) Market Risk Credit Risk Operational Risk Balance Sheet Management/ ALM Income Financial Control VaR Basel I & II Data Management Interest Rate Risk Funds Transfer Pricing Net banking Income Basel I & II Limits, collateral & credit workflow Economic Capital Measurement Risk Assessment Framework / Loss Database Capital Calculation Liquidity Risk Currency Risk Option Risk Net Interest Income Income Statements Cost Allocation Basic/Std/AMA Static and Dynamic Simulation (Forecast)/Multi GAAP (Local, IAS) Regulatory Reporting and Management Reporting Risk Management Revenue and Cost Management Fermat has historically built its products, reputation and business around advanced Risk Management Solutions for Banking Institutions and has continuously expanded its offering to address customer needs for Integrated Risk and Performance Management. PROFITABILITY ANALYSIS PERFORMANCE MANAGEMENT CAPITAL MANAGEMENT ACTIVE BANK MANAGEMENT FERMAT SOFTWARE 3

6 Integrated Risk & Performance Fermat CAD Management Software Risk Capital Assessment Basel I & II Fermat CAD is a system that helps banks comply with both Basel Accords and provides the basis for Economic Capital assessment. It is a mature and comprehensive solution offering an immediate response to the requirements of the Basel Committee, the European Capital Requirements Directive and to national banking super visors interpretations of the supra-national texts. With Fermat CAD, banks can achieve Basel compliance in line with tight deadlines and maintain flexibility to adapt to the evolution of local regulations. The system is being used for over 40 supervisors. When facing the urgency of an implementation over a short period of time, the bank can apply the fast track approach with a simplified data model allowing accelerated data mapping. Beyond that stage, Fermat has also translated its customers best practices into an extensive financial data model in order to take maximum benefit from the comprehensive and flexible calculation engine when addressing the complexities of the banking business and when optimizing the RWA calculation. Other business requirements such as Economic Capital and IAS compliance also benefit from this. With Fermat CAD, bank staff can pick and choose according to their needs: Pillar I requirements PD/LGD and other risk factor model generation through the Risk Drivers Analyzer module powered by KXEN. In addition, the data and calculation logic required by models determined outside of Fermat can be integrated with Fermat CAD. Credit Risk capital requirement assessment for all Basel I and II approaches and flavours. In addition, national discretion options covering most local regulation requirements in Europe, North America, Latin America, the Middle East and Asia-Pacific. The integration of the Basel I calculation rules within the Basel II engine enables compliance and comparison during parallel run periods. Several Basel II approaches can be applied to the same portfolio, thus facilitating the transition period between Standardised and IRB approaches, or the comparison of LGD models. Within a consolidated calculation, subportfolios can receive different calculation approaches, for instance retail exposures can be computed in the Advanced approach and sovereign bonds in the standardised approach. Market Risk capital requirement assessment for standard Basel I and Basel II approaches with a coverage of all required risk factors, including option risk. The Internal Models Approach is also possible using Fermat VAR. The capital requirement calculation takes into account national discretion options covering most major local regulation requirements in Europe, North America, Latin America, the Middle East and Asia-Pacific. Operational Risk capital requirement assessment (Basic Indicator, Standardized Approach incl. ASA). See other section for a wider description of Fermat Operational Risk. Reconciliation of economic and regulatory capital when Fermat E-CAP is deployed alongside Fermat CAD or when economic capital values are imported. Comprehensive regulatory reporting capability: Producing COREP and other national statutory report equivalents for Cooke & McDonough ratios for most of the major local regulations in Europe, North America, Latin America, the Middle East and Asia-Pacific. Fully integrated with other regulatory capital calculation engines and/or any other external results sources. Please see the section on Fermat CAD RRT Regulatory Reporting Tool. SOLUTIONS 4

7 Pillar II requirements Banks need to know how much capital is required in response to changes in business levels/strategy or changes in external factors out of the control of the bank. Fermat therefore proposes capital stress testing and scenario analysis capabilities to simulate capital requirements through user defined scenarios implemented across various reporting dimensions. Factors such as PD, credit grades and external ratings, LGD, CCF, interest rates, exchange rates and collateral values can be modified through shifts and transition matrices. It s also possible in the same scenario to simulate changing business volumes through for example new business or just simple increased facility utilisation. Within a single run, business volumes, market risk and credit risk factors can be impacted (for instance, increased drawdowns, a shift of interest rates plus a migration of obligor PD). For retail banks with exposures often in the tens of millions, changes are applied in the pool segmentation criteria (the true risk drivers) causing the reconstitution of pools as exposures shift due to changes in risk profile. A Back testing engine allows the validation of past estimates of risk factors such as PDs linked to internal rating classes (through the creation of internal ratings transition matrices), LGD, CCF and EAD associated with product types as well as the PD, EAD and effective LGD of retail transactions. This is done using real life credit and loss events such as ratings defaults, ratings migration, watch-listing, recovery cashflows etc. A dedicated web client provides the bank with an operational tool for related daily data input into Fermat. Large Exposures/Risk Concentration calculations, reporting and analysis tools. These features inherit expertise from the Fermat CAD Basel I product and integrating new regulatory requirements which can differ greatly from one supervisor to another, differences which are fully catered for in the standard product. Liquidity risk and interest rate risk in the banking book can be fully assessed using Fermat ALM which enables income sensitivity analysis SOLUTIONS according to market, customer-behaviour and business mix shifts. Fermat can also estimate the capital requirement at risk (EaR) due to interest rate risk using advanced Monte Carlo simulation techniques. Economic Capital assessment of expected and unexpected credit losses through a comprehensive range of industry standard analytical or simulation credit portfolio models. Please see the section on Fermat E-Cap for further details. Capital Allocation: At a basic level, reporting dimensions and results can be easily sliced and diced to create views of the overall capital usage (both regulatory and economic) according to any subdivision of the bank s activity (e.g. business line, customer segment ). In addition to this, Fermat GEM can monitor risk capital limits and Fermat RAPM can be used to identify where to allocate capital according to the bank s total risk adjusted performance and target credit rating. Origination: Pillar 2 requires to include risk capital calculations in the credit decision making process. Fermat therefore provides dedicated features to help banks in this respect including risk capital limits checking in real time (with Fermat GEM) and incremental deal analysis (with Fermat RAPM). Deal analysis is not just at the risk capital calculation level but consists in a full customer/deal profitability analysis including cost simulation and re-allocation, risk capital limits checking in real time. Pillar III requirements Fermat automates the reporting of the type of disclosures originally described in the Pillar III section of the International Convergence of Capital Measurement and Capital Standards document (Basel II). Fermat addresses such market discipline requirements through making available a very exhaustive set of reports. Each report is divided in two parts. The first part is a qualitative part which generally describes strategy and implementation methods. The second part is a quantitative part which details the Basel II calculation results. These reports can be easily adapted for either content or look and feel in order to arrive at a final set of disclosures suitable to the tastes of each bank. 5

8 Integrated Fermat Risk CAD & RRT Performance Management Software Regulatory Reporting Tool Fermat CAD Regulatory Repor ting Tool (RRT) produces banks regulatory capital adequacy reports in commonly used formats of local supervisors. Although the solution can use results produced by the various Fermat CAD Basel II calculation engines, it is also designed to process and consolidate imported results coming from other systems (e.g. some risk type capital requirements or some subsidiary results not being computed by Fermat). Fermat CAD RRT produces capital adequacy reports related to Pillar 1 calculations for: Credit risk Market risk Operational risk Own funds (including deductions from own funds) Mac Donough ratio Fermat CAD RRT is available for most of the major local regulations in Europe, Africa, the Middle East, Asia-Pacific, North America and Latin America. SOLUTIONS 6

9 Integrated Risk & Performance Management Software Fermat E-CAP Economic Capital Fermat E-CAP calculates expected and unexpected credit losses, with a comprehensive range of industry standard analytical or simulation credit portfolio models. It is a very operational tool. Creditmetrics, a well known simulation based calculation methodology which evaluates the impact upon the portfolio of market value shifts due to obligor rating migrations. Fermat enables to define risk factors as a set of country/sector pairwises, correlations between counterparties and those pairwises, correlations between pairwises and volatility for each pairwise. It then reprices the whole portfolio with Monte Carlo simulations. Economic Capital is then deducted from the portfolio market value distribution. CreditRisk+, a well known default only analytical approach taking into account portfolio diversification. Input data are directly taken from Fermat s Basel II engine (PD, secured EAD & LGD per obligor). Fermat s CreditRisk+ engine computes unexpected loss, risk contribution and economic capital at portfolio and transaction level. Fermat enables to define up to 6 sectors as defined by the methodology and dependency levels for each counterparty against those sectors Fermat Parametric approach: using standard mathematics based on uncertain PD and LGD, known EAD and a sensitivity calibration process, it then computes economic capital as the output of an analytical formula. This method offers a rapid response to simulate the impact of a new transaction. The unexpected loss and risk contribution of each obligor and transaction is identified at each aggregation level of the portfolio, enabling dynamic risk selection. Particular attention has been paid to performances when treating large portfolios. The three methods allocate capital at any level of the organization e.g. contract level, portfolio or sub portfolio, business unit, division taking into account diversification effects. While Creditmetrics for example is SOLUTIONS usually run as a global calculation in batch mode, Fermat Parametric can be run in a real time mode thanks to its very fast computing methodology. Fermat ECAP outputs are stored in dedicated results tables that are fully available for risk adjusted profitability computation. For instance, Economic capital is used as denominator of the RAROC while the numerator comes from Fermat s ALM Revenue module and Fermat s cost allocation engine. When using the Parametric approach it is then possible, when revenues and cost are available, to perform an on the fly RAROC calculation. 7

10 Integrated Risk & Performance Management Software Fermat GEM Limits and Collateral Management, Credit Approval Process Effective limits and collateral management is a key element within the overall risk management of a financial institution. In addition, the integration of credit approval, review and other workflow processes offers a key competitive advantage in terms of the speed to implementation of important credit decisions. Fermat GEM provides such an integrated system and the capability to effectively link the relationships between counterparties, facilities and risk mitigants which are at the heart of good risk management system. 1.1 GEM Limits Management GEM Limits Management enhances portfolio analysis and control thanks to high level measurement and analysis features regarding exposures and limits. To achieve this goal, Fermat has designed an integrated solution where exposures are aggregated over business dimensions (customer, counterparty, internal organization, product ) and compared to limits that are setup using either embedded automatic calculation functions, via manual entry or from external sources. Reports are provided to display outputs in a business view mode where users can drill down from the top level to the most detailed information. They are configurable to user-specific needs and can be published in private environments. GEM therefore offers rapid and relevant access to accurate portfolio data and fits with the current trend in financial institutions to improve risk management policies and team performance. Since GEM is also able to consolidate all branches, subsidiaries and business lines, it is possible to centralize the overall position of the organisation. GEM s historical and analytical features allow the analysis of exposure, authorization and availability in order to define the relevant limits and to optimize capital allocation by business line. GEM provides tremendous SOLUTIONS flexibility in implementing and monitoring corporate credit guidelines and offers advanced operational workflow features such as limits lending, limits approval process and a four eyes principle for creation, validation and blocking of limits. GEM helps to optimise allocated resources by pointing out and forecasting available credit lines and through the setting or adjusting of corporate guidelines. An unlimited variety of exposure frameworks are possible, combining criteria such as counterparties, geographic areas, ratings, tenors, bilateral close-out netting contracts, add-on calculation methods and any types of limits. Limits frameworks can be applied over exposures measured within GEM or over any other exposure measurement approaches used when another Fermat product is deployed alongside GEM. When doing so, GEM can for example position the retained regulatory or economic capital calculation approaches at the centre of the risk control process, enabling the monitoring of limits on Regulatory Capital, Exposure at Default, Expected Loss, Economic Capital, etc. 1.2 GEM Collateral Management Since effective and timely risk mitigation is increasingly important, GEM Collateral Management is proposed as an integrated module together with GEM Limits Management. Collateral management is a consistently ongoing activity in the overall credit process where lending value, status and amount can change due to market or counterparty events: Fermat DataMart stores all qualitative and quantitative information on any risk mitigant whatever its type e.g. collateral, guarantee, margin agreement Fermat can either perform on demand mitigation effect revaluation or request revaluation from an external system Fermat makes available pools of collaterals that can be used by the bank as security for its borrowings and enables users to link various 8

11 collaterals to a facility or group of facilities in order to mitigate risk. Fermat then validates whether or not a facility has been released based on different qualitative and quantitative criteria e.g. coverage ratio taking collateral haircut into account, collateral types regarding contractual terms, documentation availability and expiry dates Fermat offers the capability to free up the collaterals when no longer required, if for example the facility has expired. Those collaterals which are freed up thus rejoin the pool of available collaterals, subject to validity/eligibility, and increase the customer s overall lending capacity in the event for example of a request for a new line of credit. Fermat facilitates collateral reallocation through features that detect available collateral for reallocation and eases their selection and linking to facilities e.g. colour coding, popup menus to get additional information. Fermat manages at any time potential impacts on the amount of an approved limit which depends on the value or validity of collaterals e.g. collateral valuation falls due to market movements and triggers actions to counterparties e.g. margin call, closing Since collateral recovery is a necessary activity in case of client default, Fermat provides a credit event and loss data base that provides relevant features for recovery monitoring such as client default file, client events as downgrading, recovery rates 1.3 GEM Credit Approval Process (CAP) GEM CAP can manage the entire life cycle of the credit application and approval process from the initiation of the client relationship, the preparation of the credit proposal, its cycle of approval and/or rejection, the management of the required documents all the way through to the facility release. Via a web based access, users of GEM CAP are able to carry out all the necessary steps of the credit application cycle, for example they can: input, verify and approve credit applications; sanction loans; perform collateral documentation management; escalate cases that require attention; input comments related to credit applications; and manage special approval (e.g. those clients that have specific SOLUTIONS management requirements or are too complex to be managed by the system). A facility is typically released at the end of a credit approval process based on three factors: counterparty, related facilities and related collaterals. It represents an unblocking of funds and the creation of a limit for future drawdowns management. For a given counterparty, Fermat lists each single facility as well as groups of facilities issued against this counterparty, whether facilities have been released or still in the approval process. Fermat GEM CAP is a web based tool that benefits from our in-house built workflow management capability Fermat Workflow Services. 1.4 Fermat Real Time Services (RTS) with GEM GEM can be enabled by Fermat Real Time Services after which the management of critical activities is performed via a real time Risk Authorisation Server for the relevant business units. Relationship Managers, Sales people or other Front Office staff can therefore access GEM in real time mode which enables them for example, before closing a deal to verify whether a credit line is available; forecast future line availability; reserve a credit line for a certain period of time; and simulate the impact of a deal on all credit lines; and all this in order to optimise the ratio between credit line consumption and return. Pre-deal checking, real time alerts and exception handling thus help prevent unexpected or unauthorized exposures from entering into the trading and banking book activities. In addition, by adding the Real Time Services capability to GEM, realtime intra-day book-keeping is possible whereby deals captured in a real time mode with different status levels (simulated, reserved ) are held in intra-day positions. GEM can then be used via multiple communication channels to perfectly interface with the information systems used by each business line. 9

12 Integrated Risk & Performance Management Software Fermat ALM Balance Sheet Management/Asset and Liability Management Fermat ALM analyses the exposure of the bank to interest rate, liquidity, foreign exchange and inflation risks with indicators such as gap analysis and net economic value sensitivity. The system is used to monitor risk and performance and is increasingly figuring in banks controlling and budgeting activities. Calculations are performed over the whole or any part of the balance sheet structure, based on current or simulated data, taking into account ALM conventions (for example on accounts or prepayment). Interest rate risk and liquidity risk are measured in full compliance with Pillar II of the Basel II Capital Accord. Past and future net interest income (NII) calculations in Fermat ALM enable managers to assess retail business profitability based on appropriate calculation methodologies according to portfolio strategies. Funds transfer pricing (FTP) transfers risk to the interest rate risk management experts. FTP is estimated for products with or without contractual maturity. For the latter, sophisticated replicating models are used. Net interest margin can be broken down into commercial margin, transformation margin, liquidity margin, etc., assigning each margin to profit centres. Banks can model the entire organization s future balance sheet to fully quantify expected performance, profits and related risks. Future net banking income and income statements are produced and delivered in compliance with IAS/IFRS standards. Static simulations capture the impacts of customer behaviour (prepayment and loan renegotiation, etc.) and changes in market conditions (interest rates, foreign exchange, economic indexes such as inflation, etc.) on the current balance sheet. Dynamic simulations are aimed at modelling the evolution of the balance sheet structure over time according to different scenarios such SOLUTIONS as market data, customer and bank behaviour shifts according to volume growth, target setting, or roll-over conditions. State of the art new production generation fully responds to the complexities inherent to retail banking. Past budget forecast scenarios can be back-tested when compared to current calculated results. Interest rate risk and inflation risk on new production can be hedged with dynamic hedging functionality. The related cost of such hedging on the future income is calculated and incorporated. Market risk scenarios are either user-definable (stress scenarios) or simulated based on a Monte Carlo engine. In this latter case, it is possible to calculate a global VaR and an Earningsat-Risk to evaluate the stability of the expected results by month, quarter or other accounting period. 10

13 Integrated Risk & Performance Management Software Fermat IAS/IFRS International Financial Reporting Standards/US GAAP compliance Fermat IAS enables Banks to comply, through limited changes in their information systems, with the regulatory and operational requirements resulting from the application of IAS 39/32 and FAS 133/157. The system completes but does not replace existing information systems. It centralises all the required data and substitutes for missing items, providing any missing processes required to issue adequate reporting and account postings. It offers financial institutions a reliable, automated, and industrial approach to the production process. Fermat IAS enables the recognition and classification of all on and offbalance sheet items, including embedded derivatives. It provides indicators such as fair value, effective interest rate, interest income, amortised cost, collective and individual evaluation for impairment, etc. and makes them available for disclosure reporting under IAS 32 (fair value, credit risk, etc.) as well as for accounting purposes. Fermat IAS enables banks to generate balance-sheet and income statement adjustment values between any local GAAP (Generally Accepted Accounting Principles) and IAS GAAP. This is done at transaction level. Adjustment values can then be exported either at transaction level or at the level of aggregation required by the General Ledger. Using these values, the bank can generate the appropriate account postings in order to publish IAS 39 compliant balance sheet and income statements. Highly scalable, Fermat IAS can be used by a wide range of Financial Institutions, from local organisations to large head offices of multinational banks. Impairment tests are performed according to IAS/IFRS principles. Fermat IAS estimate cash flows, individually or collectively assessed. Industry standard pricing libraries are used for the evaluation of derivatives and other market instruments. Other banking products, such as loans with/without prepayment options, are processed by Fermat s own calculation libraries, which optionally use estimated streams of cash receipts, including prepayments and default models, rather than relying on contractual cash flows. Fermat IAS also provides full support for hedge accounting : management of the hedging relationship life cycle, designation of micro or macro hedging relationships, re-evaluation and effectiveness testing (both retrospective and prospective), change of scope (cash flow hedge becoming fair value hedge) and termination. SOLUTIONS 11

14 Integrated Risk & Performance Management Software Fermat VAR Value-at-Risk In addition to operational market risk indicators, Fermat offers, on the same platform, a full set of Value at Risk methodologies. Fermat VAR estimates a value-at-risk either using parametric models (Asset Normal approach) or simulation models (Monte Carlo or Historical scenarios). Fermat VAR offers a full coverage of market risk factors with Interest Rate Risk, Foreign Exchange Risk, Equity Risk, Commodity Risk as well as Volatility Risk. Therefore Fermat can complement its global VaR measure of the portfolio with specific risk factors VaR, incremental and component marginal VaR. Several techniques enable to optimize performance such as variance reduction techniques or sensitivity based pricing. Fermat can be also used to consolidate the risks of the bank on a single platform. In fact Fermat VAR can aggregate results that are computed in parallel with other systems used on more limited scopes in the daily monitoring of risk sensitive activities. Fermat complements its VAR offering with Stress testing capabilities, a flexible simulation engine to estimate risks under severe crisis scenarios. This simulation engine can independently measure the effect of market factors and credit factors on the risk profile of the bank. Fermat VAR can also be used for the internal model approach for market risk capital requirements in compliance with Basel II. For that purpose, Fermat offers along with its VaR calculation, a backtesting capability with either hypothetical or realized P&L calculation. Thanks to its coverage of market risk capital requirements in both standard and internal approaches, Fermat is the perfect solution to handle on a single platform the transition between standardized and internal model for part or the complete scope of the trading book. SOLUTIONS Fermat offers an extensive coverage of financial instruments. Industry standard pricing libraries are used for the evaluation of derivatives, exotic options, structured products and other financial instruments. Fermat VAR encompasses all financial instruments not only in the trading room but also in the banking book. Therefore Fermat VAR can assess the global VaR of the whole financial institution. 12

15 Integrated Risk & Performance Management Software Fermat RAPM Risk Adjusted Performance Management Fermat RAPM empowers banks with a calculation and reporting framework built upon a single sour ce of pr ofitability and performance information. In particular after a period during which most financial Institutions have invested significant time and resource for regulatory compliance with Basel II, making the additional step to performance management completes the business case for Basel II, more fully leveraging investment and positioning for future growth. Banks which have a culture of integrated risk and profitability management are better positioned to maximize return on, and use of capital for competitive growth. RAPM is a solution for measuring and managing a bank s profitability and other performance metrics. This is done through a series of KPIs, such as Economic Profit/Risk Adjusted Return /RAROC/EVA, etc.) measured on either past, current or forecasted data and available at transaction level where needed. RAPM facilitates a better understanding of the shape of a bank s business. It has been designed for use by business managers, with a focus on profitability business measures and levers such as revenue, facility utilization, interest margins, cost dynamics, limit and collateral changes. Since RAPM provides a bottom-up analysis across many dimensions, it can provide performance dashboards at a very granular level which can be used at various levels of the bank, for example by: senior management for measuring and monitoring the past and future profitability of various divisions, country or business units and then allocating/budgeting capital and resources to the most productive parts of the business product managers in order to forecast the results from a choice of potential marketing campaigns SOLUTIONS relationship managers in order to more effectively manage the bank s activity with individual or strategic accounts managers at all levels of the organisation as a basis for setting targets and reward schemes RAPM therefore proposes a multi-faceted view of under and over performance across many dimensions. It offers transparency on capital allocation ensuring that management clearly identifies business synergies and it encourages healthy competition between business units and distribution channels. As such, Fermat RAPM is intended to assist the Bank with its conformance under the use test requirement of Basel II Pillar 2. The calculation of KPIs is enabled by a thorough modeling of the bank s processes and their related costs, risks and incomes at transaction level. Although Fermat RAPM is a stand-alone product, it is fully integrated with, and fully leverages off, other Fermat products which can be used to source the inputs required by RAPM at transaction level (these can of course be externally sourced: Fermat s Regulatory and Economic Capital products can provide input data for provisions, unexpected loss and capital charges (cost of doing business) Fermat ALM can provide past, current and future revenue and FTP Fermat s Cost Allocation Engine manages product, sales & marketing and overhead costs via a flexible rules based engine and reconciliation features. It s then possible to allocate each cost against individual transactions and roll that back up to customers and products for example. Fermat IAS/IFRS can provide economic provisions data. 13

16 RAPM vs. traditional performance measurement Over the past decade, financial institutions have placed a significant amount of time and resources into developing ways of measuring and improving risk and return. Traditional performance indicators however, such as Return on Assets, Return on Equity etc., focus on an accounting vision of profitability. As a result of this: measures of risk and performance were often developed independently, involving little co-ordination between risk and finance capital management initiatives negatively impacted business relationships whilst businesses expanded without due recognition of changing risk profiles on capital requirements a financial, regulatory view was created rather than one aligned to business imperatives True shareholder value is realized when earnings on capital invested is greater than the minimum required by investors to compensate for taking on underlying risk. Banks therefore strive to maximize returns within the boundaries of defined risk limits. Risk adjusted performance measurement offers more advanced performance indicators using risk measures derived from regulatory & economic capital which answer questions such as: how much capital is needed to support the bank s total risk and target credit rating? how much capital is needed to support a given level of profitability /business mix? SOLUTIONS 14

17 Integrated Risk & Performance Management Software Fermat OpRisk Operational Risk Fermat OpRisk is a proven solution with over twenty customer sites throughout Europe, Asia and the United States. It is a leader both in terms of Standardized Approaches and the Advanced Measurement Approach and easily integrates within existing IT infrastructures thanks to its open architecture. The solution is proposed in collaboration with List Group S.p.A. Fermat OpRisk consists of six integrated inter-dependent modules: Loss Data Collection (including Action Plans) Risk & Control Self Assessments Key Risk Indicators Quantitative Analysis (Capital Modelling) Scenario Analysis Bayesian Integration Fermat OpRisk has been instrumental in cost and operational loss reduction leading to substantial returns on investment. It delivers a unique combination of flexibility, performance and user-friendliness in a single software suite: Flexiblity: thanks to several key features such as a totally dynamic data model, or to parameterization through the User Interface for workflow design (as opposed to customization), customers achieve a high level of independence from Fermat, ensuring their system is evolutive and easy to maintain Performance: the offering is based upon many years of experience in building powerful calculation engines with unrivalled performance and proposes world class parallel Monte Carlo processing, a Scenario Analysis assessment engine and comprehensive statistical tools for Capital Modeling User-friendliness: thanks to a deep experience in web-based portals, customers can tailor the multiple user preferences (e.g. in audit trail features) critical in the success of a distributed application Fermat OpRisk is developed and maintained as a single product which adapts itself to various customer needs, and ensures that all software features are available to all its customers, thus maximizing the efficiency of support and maintenance. SOLUTIONS 15

18 Leading edge technology Each of the software packages of the Fermat range meets a high level of performance in responding to a specific perimeter of a financial institution s requirements. All software packages run within a common architecture, fully designed and developed, and as such fully mastered, by the in-house expertise of Fermat. As a consequence of this common architecture, financial institutions can benefit from a global, truly coherent and comprehensive solution. The Fermat s software suite is built on an 3-tier architecture. The solution s main components are: THE DATABASE SERVER Fermat operates on an Oracle Relational Database Management System. Clients can choose the most appropriate hardware and operating system for their environment, including platforms such as Windows, Linux, Unix. THE CALCULATION ENGINE The calculation engine is written in C++ and runs on Windows XP/2003/2000. In case of multiple simultaneous calculations or very large volumes of exposures to be processed, several calculation servers can share the workload and compute data in parallel. The calculation servers can be departmentally dedicated servers or enterprise-wide with timeshared utilization. An industry standard financial library, FinCAD to price financial products, is embedded in addition to which Fermat has developed its own calculation libraries to assess certain specific financial instruments. THE CLIENT APPLICATION The client application is available as thick, thin or true web client. Fermat client workstations are dedicated to presentation (GUI). No calculations or data storage are performed locally. The communication channel between the client workstation and the Oracle Database is provided by oracle*net native technology. Standard machines are therefore required running on Windows 2003/2000/XP. Optional Components Fermat deployment can also include several optional machines to address specific requirements: One or several application servers to provide distant access to the platform through a thin client with full functionalities to distant users. This is particularly relevant in an environment of low bandwidth. This service can be provided through Citrix application server technology, or Microsoft Terminal Server. J2EE server: required in case the end-users access Fermat through the Web Client, in which case Fermat components are deployed on a java J2EE server (such as websphere, weblogic) and the users desktop only require a standard web browser (Internet Explorer, Mozilla). It is also required when using the Bank s own authentication directory, since the Fermat Authentication Server uses J2EE components to communicate via LDAP or Active Directory. ARCHITECTURE & TECHNOLOGY 16

19 Fermat architecture: a complete lifecycle for risk and performance management FERMAT S DATAMART ARCHITECTURE All software packages in the Fermat product range have been built on a shared and fully integrated data and service infrastructure. All modules benefit from the same functional data model that is technically implemented as an original feature in the Fermat DataMart, with a focus given to performance and handling large volumes of data. As a consequence, Fermat s risk and performance management product range enables financial institutions to operate a truly consistent enterprise-wide software solution within a single, open operating environment and workflow. Data model which reflects bank practices. Deliberately designed to represent bank practices, the Fermat data model addresses transaction classification, credit risk mitigation, counterparties classes, ratings, credit events and losses, market rates, client behaviour, general ledger, assessment of accounting consistency based on balance sheet reconciliation Single data flow. Data are imported asynchronously from multiple data sources into the Data Mart using Fermat s import platform or a market ETL. Imported data sets are then checked for technical integrity and consistency, edited and corrected by users, or automatically, and made available for calculation. Moreover, simulated transactions and market data can be generated based on forecasted scenarios of the bank s activity and environment. Single and modular workflow. Calculation outputs are segmented in workspaces that store multiple functional setups. Workspaces hold all the historical snapshots of the bank s transactions, imported at different reporting dates into the DataMart. Therefore, historical calculations remain available to the user for trend analysis at both aggregated results level and concerning detailed transaction characteristics. User administration features such as LDAP compatible authentication, access rights and activity audits ensure that Fermat can be operated in a flexible and manageable manner. ARCHITECTURE & TECHNOLOGY 17

20 The Fermat toolkit: from a turnkey solution to full expertise transfer In order to empower each institution to fine-tune the software package to its particular objectives and profile, the entire Fermat software suite comes with a powerful toolkit. Relying on a widely available technology, the toolkit enables to adapt the system to your business model, and to later expand features coverage: expanding data warehousing features (data storage, historical data management, editing and audit trail) to handle data not managed by default customising the user interface by adding bespoke screens and reports implementing the required set of rules and calculation functions to meet your specific business rules, such as the required credit risk practices within Fermat CAD when using the A-IRB approach under Basel II. As a first step upon purchase you can take advantage of a turnkey solution out of the box. At a later stage, and if relevant to your needs, Fermat will perform a full expertise transfer of the toolkit. Fine-tuning performed with the toolkit does not alter the core of the packages and bears ascending compatibility with future releases; in other words, customers benefit from upgrades in the package while taking advantage of their own stable bespoke environment. Volumes handling: the option to avoid aggregation Thanks to their particular architecture and to an effective and efficient use of the chosen technology, all Fermat modules are able to handle large volumes of data if needed. This enables banks to keep contract level details and the possibility of setting customised parameters according to bank specific business models without irrelevant aggregation in the interfaces. As a result, analysis can be performed, on either a detailed (transaction) level or at an aggregate level, by choosing the appropriate level of aggregation (done inside or outside of Fermat) needed for a specific analysis. Aiming at the most efficient processing possible for large volumes of data, multidimensional analysis can be performed when required, using the embedded OLAP features (on line analytical processing) through which reports can be designed and calculated dynamically using many different reporting dimensions with drill down available to individual contract details, or up to a consolidated overview. ARCHITECTURE & TECHNOLOGY A simplified integration and evolution that builds upon previous investments Customers can progressively set-up an integrated and comprehensive enterprisewide risk and performance management system: Each functional module just taps into the relevant area from the financial Data Warehouse; This modular approach has the advantage of strictly limiting the integration process to current functional needs; Software extension builds on previously implemented interfaces 18

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