How To Manage Risk With Razor Risk

Transcription

1 FOR BANKS, BROKERS AND ASSET MANAGERS

2 A comprehensive risk management solution. Razor Risk is a high performance valuation, risk management and control product suite offered to financial institutions. Razor Risk enables organizations to effectively address their market, counterparty credit, capital and liquidity risk management requirements, both on an enterprise and a departmental basis. A Fully integrated Framework Unlike other risk management solutions, Razor Risk has been built to accurately measure and manage a range of risk measures of a financial institution, aggregating all of its global activities. Such design allows for the calculation of the optimal risk/reward trade-off across the enterprise. The risk platform is fully integrated, built on a single data architecture and a distributed risk engine to marshal risk-related information within an institution into one consistent and transparent source for all risk analytics. Risk Policy The platform delivers a powerful risk policy engine allowing firms to aggregate and view risk data, as well as define portfolios, dimensions, reference data, and risk measures. Firms can define an unlimited number of dimensions including counterparty, location, industry, credit rating, product, etc. Risk Data Aggregation Razor Risk was designed to deliver multiple risk calculations, consolidate risk types across business units and calculate capital needs on a consolidated platform where all of an institution s risk measures are aggregated and reported. Risk Limits Firms can setup flexible limit structures across configured dimensions, methodologies and risk measures. Features include revolving limits, terminating limits, reservations, limit spikes or warning thresholds all monitored in various currencies as well as the base currency. Limits may be set in a hierarchical basis allowing for a full roll up of risk, as specified by the firm s risk policy. Risk Control Limits are managed in near real-time for any risk measure with a workflow engine providing the staged approval and notification process flow. The risk platform provides a comprehensive limit violation/excess reporting system which supports violation detection and alerting, limit status, and a 4 eyes approval mechanism. What-If Analysis A firm can perform hypothetical analysis across the enterprise. Scenarios can include deal sets (containing insertions, amendments, and deletions), market data, reference data (including organizational structural changes, netting and collateralization agreement changes), correlations, and simulation parameters. Drill-Down & Scenario Analysis Razor Risk provides analysis at any portfolio or aggregation level. Comprehensive graphical or tabular result screens allow drill-down to transactions and dependant risk factor level. The extensive scenario analysis module provides on-line what-if analysis on a trade or position level, as well as full stress testing functionality with extensive ability to apply shocks across the complete market data set. Truly Scalable Razor Risk is a fully-distributed solution based on a single, extensible, robust data architecture and high-performance risk engine. This solution can be easily scaled to incorporate new risk management tools, hedge funds, business divisions, geographical areas, instruments & methods and lines of business as they evolve. The platform delivers the following benefits: high performance, low total cost of ownership open, extendable modular design flexible enterprise data management and analytics INTEGRATED FIRM-WIDE VIEW AND RISK CONTROL Cleared and Non-Cleared margining Market Risk Counterparty Credit Risk Capital Management Outstanding performance About Razor Risk TMX Technology Solutions recognizes that to proactively measure and manage risk it is necessary to manage the total exposure of a financial institution across of all of its global activities. TMX Technology Solutions products, including Razor Risk, have been created to help transform the way banks, brokers, central counterparties and stock exchanges in many countries measure their risk and manage their capital.

3 A margining solution for banks, brokers and asset managers In the context of over-the-counter (OTC) derivatives in particular, the 2008 financial crisis demonstrated that improved transparency in the OTC derivatives markets and further regulation of participants would be necessary to limit excessive and opaque risk-taking to mitigate the systemic risk posed by derivative transactions, markets, and practices. In response, the Group of Twenty (G20) initiated a reform program in 2009 to reduce the systemic risk from OTC derivatives, which program requires among other things that: All standardized OTC derivatives should be cleared through central counterparties (CCPs); and Non-centrally cleared derivatives contracts should be subject to higher capital requirements. Increase capital efficiency, increase profitability. Razor Risk delivers a solution to manage the increased demands for margining of bilateral and centrally cleared derivatives as required by the Dodd Frank Act, EMIR and Basel Accord 261 Margin requirements for non-centrally cleared derivatives. Initial and Variation Margin Using a range of calculation methods, firms can calculate portfolio margin requirements, including trade level contributions for both cleared and un-cleared trades. Margin requirements can be calculated ahead of time for leading clearing venues such as LCH, CME, ICE, NYSE and EUREX or internal and standardized models for bilateral margining. Best Execution Razor Risk s what-if capability gives firms the ability to determine the appropriate venue and instrument to trade with taking into account counterparty or venue netting structures, current portfolios and offsetting rules. Cheapest to Deliver Razor Risk applies its what-if functionality to determine the cheapest instrument from an available list of eligible collateral maximizing efficiency of operations. Collateral Management Razor Risk provides integration services into leading collateral management systems to ensure collateral is efficiently used and managed. MTM Historical VaR Weighted Historical VaR Monte Carlo VaR Delta Gamma Vega SPAN Modified SPAN TIMS SIMM Parametric PORTFOLIO WHAT-IF ANALYSIS MILLION, USD VENUE 1 VENUE CURRENT EXPOSURE WHAT-IF WHAT-IF IMPACT CURRENT EXPOSURE WHAT-IF WHAT-IF IMPACT

4 Market risk for the trading book The Razor Risk solution provides a comprehensive market risk solution to enable large and small financial institutions to fully meet internal and regulatory market risk management requirements. This solution helps firms prepare for the BIS Fundamental Review of the Trading Book initiative detailing the shift to expected shortfall from the traditionally reported value at risk (VaR) measure in addition to applying multiple liquidity horizons. Risk Measurement Razor Risk supports general and specific risk. The platform can utilize a range of bottom-up historical, Monte Carlo or sensitivity based methodologies. Calculations leverage its distributed architecture enabling fast and accurate performance. The time horizon, confidence interval, base currency and number of scenarios are available contingent on the methodology. Sensitivity Analysis Sensitivity analyses including PV01, CS01, Greeks, parallel and non-parallel shifts, butterflies and twists can be performed by shocking any curve or risk factor. Stress Testing User-defined stress tests are available to stress market data, stochastic parameters, correlations and reference data, to determine the impact on portfolio risk as well as to perform regulatory stress tests such as CCAR/DFAST, EMIR and other jurisdictional requirements. Risk Decomposition Razor Risk s risk decomposition functionality provides the ability to break down VaR into each of its components. This enables VaR to be isolated to interest rate, FX, equity or volatility risk. Firms can define which sources of risk should be isolated in the calculation. Results can be drilled down from the portfolio level, scenario and individual trades for each scenario to the individual risk factors that make up the valuation. Back Testing Razor Risk back testing framework calculates theoretical P&L comparing against the relevant VaR results and the realized P&L on a daily basis. The magnitude and frequency of breaches is reported in Razor Risk, and back-testing can be performed for any portfolio in the system such as business center or desk. Expected tail gains and losses are calculated as part of the VaR analysis. This information is plotted and can be readily reported and extracted into Microsoft Excel. Historical VaR Monte Carlo VaR Delta Gamma Vega Parametric VaR Credit VaR Stressed VaR Incremental VaR Conditional VaR Relative VaR Marginal VaR Component VaR IRC/CRM ActP&L TP&L 1D (99%)

5 Counterparty credit risk for the trading and banking book Razor Risk provides a comprehensive solution to measure and manage counterparty credit risk. It has been designed to accurately measure risk across all asset classes, providing the decision support tools required by today s credit risk manager to isolate areas of risk and take the appropriate action to prevent the firm from major losses. Risk Measurement Razor Risk provides a number of methods for accurately measuring credit risk exposures and credit risk pricing across the trading and banking books. Razor provides the flexibility to apply multiple risk exposure methodologies at the same time. Different approaches can be mixed depending on IMM approval or availability of models. Risk Mitigation Risk can be calculated inclusive or exclusive of any ISDA/CSA arrangements. Razor Risk supports both gross and net limits with the latter taking into account any credit mitigation arrangements. Netting/collateral attributes such as ISDA threshold, maximum transfer amount, maximum unsecured amount, and maximum tenor are factored into the exposure aggregation process. Trade and cross-product netting is also available. What-if Razor Risk provides extensive intra-day what-if functionality to model the impact of portfolio changes without impacting the actual underlying credit exposure. Razor Risk stores all intermediate calculation results for every trade, scenario and credit node. MTM + Add ON Monte Carlo PFE Netting + Collateralisation CVA + sensitivities Wrong Way Risk Stressed PFE EE EPE/ENE EEE EEPE Limits An enterprise-wide limit management solution is available supporting pre-settlement limits, settlement limits, limits in reduction, multi-currency, spike limits, reservations, revolving or non-revolving limits, warning thresholds and flexible tenors. The platform enables limits and exposure to be measured at any aggregation level including counterparty, industry, region, country, and product type, in addition to counterparty hierarchies with single or multiple parents. Comprehensive excess management functionality to ensure that appropriate action is taken in the event of limits going into excess. Breach Management + Workflow Razor Risk provides a comprehensive breach reporting system that supports online violation detection and alerting, trigger analysis showing the root cause of the breach to occur accompanied by a 4 eyes approval workflow with commentary options. Workflows can be customized to suit the firm s business processes.

6 Managing firms capital and performance With Razor Risk, a financial institution can take a rigorous approach to capital management across all lending and trading books. With the increased capital demands of today s regulatory environment, financial Institutions are more focused than ever on achieving reductions and appropriate returns for capital employed. Razor Risk s leading-edge combination of thought leadership in managing capital and state-of-the-art technology allows businesses to improve the performance of their business lines and achieve appropriate hurdle rates. Regulatory Capital Razor Risk helps firms to calculate minimum capital requirements according to regulatory mandates. Razor Risk calculates Common Tier 1 and Tier 2 equity capital, RWA, market and credit risk capital requirements, both standardized and internal model approaches. In order for firms to achieve reductions in capital required, the solution optimizes capital by taking into account available collateral in accordance with haircut schedules. Economic Capital Razor Risk utilizes multiple bottom-up Monte Carlo methodologies, applying integrated credit and market factors for wrong way risk, in addition to risk mitigation and portfolio aging algorithms. Concentration Risk The Razor Risk solution supports the Basel Pillar II framework for measuring and monitoring concentration risk. Limit policy settings can be implemented across any set of dimensions, including counterparty, rating, industry and country. Threshold breaches are recorded real time, and visible through Razor Risk s dashboard or via automatic alerting mechanisms. Stress Testing Razor Risk supports the ability to stress credit and market factors including correlations, PDs, LGDs, and risk factors across all asset classes in addition to stochastic parameters such as drift, beta or mean reversion. Razor Risk can be used for the CCAR/DFASTR, EMIR or other jurisdictional stress testing regimes. Reconciliation Razor Risk gives organizations the tools and insight to better reconcile discrepancies between regulatory and economic capital. By drilling down on areas of excess capital consumption, the solution helps to streamline the use of capital, increasing performance and profitability Performance Razor Risk calculates a risk adjusted return on capital (RAROC), allowing a firm s insights into the effectiveness of allocated capital along business lines, sectors, countries, etc. This solution is able to calculate risk adjusted return on capital on a net and gross basis, and compare against established hurdle rates for business lines. Common Equity RWA Haircuts Advanced IRB Stressed VaR CVA Capital Charge IRC Capital Adequacy Ratios Credit VaR Expected Loss RAROC ROC EVA WWR Credit Migration Risk Mitigation GROSS RETURN VS RISK ADJUSTED RETURN BY BUSINESS UNIT 20% 15% 10% GROSS RETURN RISK ADJUSTED RETURN 5% -5% -10% GOV FX IRD EQD CRED

7 Balance sheet risk management With Razor Risk s integrated framework, the platform delivers a robust ALM/liquidity risk solution which fully supports the Basel III regulatory initiative. It offers the unique ability to measure, monitor, report and control liquidity risk in real-time using some of the most sophisticated analytical tools available today. Razor Risk is truly a scalable enterprise liquidity solution that measures and manages liquidity risk consistently across the banking and trading books. The risk platform provides consistent, verifiable measurement of an institution s aggregate liquidity risk by linking disparate forms of exposures across multiple business lines, portfolios and products. Furthermore, Razor Risk provides multi-level decision support for executives and liquidity managers. Interest Rate Risk Razor Risk supports a wide range of traditional ALM analyses. These include static gap analysis aggregating positions by grouping keys, such as maturity and re-pricing dates, dynamic gap analysis, allowing the balance sheet manager to model growth and reinvestment strategies as well as liquidity gap reports. Dynamic Balance Sheet Analysis A key strength of Razor Risk is its forward-looking risk framework that generates cash flows and values transactions and accounts over scenarios forward in time. This enables the balance sheet manager to produce realistic risk measures and to evaluate alternative investment, funding and hedging strategies. Strategies include: cashflow settlement, physical settlement, pre-determined strategies, dynamic strategies and conditional strategies. Regulatory Compliance The information and data required to comply with the Basel III framework is wide ranging and more extensive than that needed under the existing regime. In addition to information on liquid assets and cash flows, firms will also need to provide additional data on areas such as funding sources, pricing and type. Razor Risk helps firms comply with the Basel III regulatory framework through its data platform, where cash flows are pooled to calculate necessary risk measures including the LCR, NSFR and leverage ratio. EaR WAL PV01 LCR NSFR Leverage Ratio VaR Mismatch Reporting Dynamic Gap Analysis Liquidity Gap Reports Total Return and P&L Analysis Depositor Runoff Counterbalancing Capacity Funds Transfer Pricing Stress Testing Razor Risk defines liquidity risk factor scenarios to compute future distributions of value. Because individual risk factors can evolve jointly (and arbitrarily) over time, Razor Risk allows users to capture the relationships between disparate sources of market, credit and liquidity risk, over multiple time steps. Data Management The data framework has the following capabilities: METADATA a framework that provides a single repository for regulatory and risk information INTEGRATION the Razor Risk API simplifies integration from multiple systems from different departments DATA VALIDATION AND AUDITABILITY a core part of the solution

8 tmxtechsolutions.com/razor-risk TO FIND OUT MORE ABOUT HOW RAZOR RISK CAN BE AN ESSENTIAL COMPONENT OF YOUR OPTIMAL TRADING AND RISK INFRASTRUCTURE TODAY AND INTO THE FUTURE, CONTACT: SALES ENQUIRIES This document is provided for information purposes only. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this document and are not responsible for any errors or omissions in your use of, or reliance on, the information. The information provided is not an invitation to purchase securities listed on Toronto Stock Exchange and/or TSX Venture Exchange. TMX Group Limited and its affiliates do not endorse or recommend any securities referenced in this document. Please seek professional advice to evaluate specific securities. While the information herein is collected and compiled with care, neither TMX Group Limited nor any of its affiliated companies represents, warrants or guarantees the accuracy or the completeness of the information. You agree not to rely on the information contained herein for any trading, business or financial purpose. This information is provided with the express condition, to which by making use thereof you expressly consent, that no liability shall be incurred by TMX Group Limited and/or any of its affiliates as a result of any errors or inaccuracies herein or any use or reliance upon this information. TMX is the trade-mark of TSX Inc. Razor Risk is the trade-mark of Razor Risk Technologies Limited and is used under license TMX Group Limited. All rights reserved. Do not copy, distribute, sell or modify this document with TMX Group Limited s prior written consent. Toronto Stock Exchange TSX Venture Exchange TMX Select Alpha Montréal Exchange BOX NGX Shorcan TSX Private Markets The Canadian Depository for Securities Limited Canadian Derivatives Clearing Corporation TMX Datalinx TMX Atrium TMX Technology Solutions TMX Equicom TMX Equity Transfer Services