Razor Risk Briefing Document

Transcription

1 Razor Risk Briefing Document April 2012

2 Razor Risk 145 Leadenhall Street London EC3V 4QT Telephone: Facsimile RAZOR RISK: Briefing Document 1 I N T R O D U C T I O N 3 2 R A Z O R R I S K : T H E B U S I N E S S C A S E 12 3 R A Z O R R I S K T E C H N O L OGY: O U T S T A N D I N G P E R F O R M A N C E T H R O U G H I N N O V A T I V E D E S I G N 14 4 R A Z O R R I S K - U N E Q U A L L E D F IRM- W I D E R I S K M A N A G E M E N T A N D C O N T R O L 16 5 D E L I V E R I N G T H E R I G H T I N F O R M A T I O N T O T H E R I G H T P E O P L E A T T H E R I G H T T I M E 18 6 K E Y B E N E F I T S O F R A Z O R R I S K 19 Created: Updated: Version: 1.0

3 1 I NTRODUCTION There are many ways to manage mark to market valuations and risk. In today s uncertain times, even seemingly invincible financial institutions can fall prey to market crashes, rogue traders and massive corporate bankruptcies. Yet, these unforeseen and unmeasured risks can be avoided. Since 1999, Razor Risk has set industry standards and has successfully installed our enterprise risk management solution, Razor Risk, at client sites located around the world. The synergy of our leading-edge solution, experienced personnel and a proven implementation approach ensures that the valuation and risk management solution, which meets a client s needs, is implemented quickly and cost-effectively. The flexible nature of the Razor Risk solution means that both the largest and the smallest institutions can benefit from Razor Risk. 1.1 THE CHANGING FACE OF RISK MANAGEMENT While financial institutions have taken steps to measure risk in an effort to satisfy client and regulatory requirements and avoid losses, their efforts have been focused primarily in silos, computing market and credit risk separately, managing different asset classes separately for varying portfolios and business lines. This approach, however, does not capture the interaction of the different types of risk that a firm faces, across either the whole firm or within a client s portfolio or certain asset class for example. Furthermore, it is generally difficult to reconcile and compare numbers or results coming from disparate solutions. Recent market events, major corporate failures, increased volatilities and evolving regulatory demands have demonstrated all too clearly the need to measure and manage all types of risks up to and including the enterprisewide level. Only by accurate measurement of the different risks and calculating the optimal risk and reward trade-off across the enterprise, can an institution maximize client or shareholder value whilst mitigating and ultimately reducing the risk associated with increasing that value or return. Risk Functions also face an increasing number of other business, operational and regulatory challenges: Increasing volumes of plain vanilla products and the increasing volume and complexity of high margin structured products risk management is a brake on business Increasing competition and speed of product development drives the need for quicker risk control approvals time to market The increasing penetration of ebusiness performance demands on risk technology Increasing regulation increasing administrative burden on risk managers Basel II is pushing banks to enhance their market and credit risk measurement approaches regulatory capital constraint & regulatory expectations Banks are striving to increase revenues while maintaining or trying to rebuild or maintain their existing depleted capital levels economic capital constraint Consistency across risk and finance for regulatory reporting and performance measurement - integrated risk and finance Recent and current industry consolidation multiple disparate risk systems Increasing need for analytical pre-deal checking for both market and credit risk information for decision making 1.2 THE RAZOR RISK RESPONSE Founded in 1999, Razor Risk was created in response to the complex issues surrounding risk management. The company recognized then that, to proactively measure and manage risk, it was necessary to determine the total exposure of a financial institution across all of its global activities. Since then, the company s software has helped transform the way Banks, Alternative Investment Funds, Central Clearing Counterparties and Stock Exchanges in many countries, measure their risk and manage their capital. Our flagship product, Razor Risk is a high performance valuation, risk management and control product offered to financial institutions. Razor Risk enables organisations to effectively address their market, credit and liquidity risk management requirements, both on an enterprise and a departmental basis. Razor Risk clients include ANZ, ASX, 2012 TMX Technology Solutions- Razor Risk Commercial in Confidence Page 3 of 19

4 HSBC, International Derivatives Clearing Group, Federal Home Loan Bank, Treasury Corporation of Victoria, Royal Bank of Canada, LCH.Clearnet, NYSE Liffe Clearing, KPEI, Winterflood Securities, CDCC and the Man Group plc. Our award-winning Razor Risk framework for valuation, risk/reward measurement and management accounts for all events and scenarios between the present and some future time horizon. Since the framework explicitly incorporates the passage of time, it allows for portfolios that change over time and under differing scenarios. Thus, a more realistic assessment of risk is possible. A real world example of how important the passage of time effects portfolios and risk measurement was given on January 28, 2008 when Bloomberg.com reported that Merrill Lynch s value at risk was calculated at $92 million compared to actual losses from the credit crisis of $18 billion, 200 times larger than measured risk levels. Razor Risk includes the traditional value at risk calculations, both historical VaR and Monte Carlo VaR. Razor Risk also includes important extensions to the concept to avoid the kind of risk measurement errors that Merrill Lynch experienced. Razor Risk includes a full multi-period value at risk calculation that allows for dynamic changes in portfolio composition and VaR on a fully default adjusted basis. Cash flows are re-invested, options are exercised, and so on. Standard VaR and credit VaR make an unrealistic assumption that there is only one time period in the analysis and that the portfolio stays unchanged. Users have this option in Razor Risk but the best practice multi-period VaR calculation is much more realistic because the portfolio evolves over time as some transactions mature and new transactions are added in a predictable fashion. Razor Risk is a comprehensive, yet flexible, methodology that links disparate sources of risk and provides a means to calculate the risk/reward trade-off within a single, unified framework. Since it is a framework and not a risk measure, practitioners can easily incorporate new sources of risk and accommodate innovations in supervision and risk management best practice. Neither practitioners nor regulators are locked into formulaic approaches to risk. Razor Risk is the latest milestone in the Razor Risk quest to advance risk management practice and oversight. The company believes that this new framework will profoundly affect the way institutions manage risk and allocate capital, leading to better and more extensive risk management worldwide. Razor Risk is a financial services technology company, wholly owned by the TMX Group ( is now a key component of the TMX Technology Solutions division, who specialise in providing solutions to the global Financial Services markets. Razor Risk s Europe, Middle-East and African regional Head Office is based in London with offices in New York, Sydney and Toronto, offering a highly skilled team of over 300 Razor Risk specialists, project managers and technicians who support Razor Risk implementations across the financial markets and risk management business areas. Today, Razor Risk has the most sophisticated and proven solution that can truly integrate different pricing and risk functions using a single, unified, scalable platform to simultaneously reduce costs, improve the quality of risk information and allocate capital more efficiently TMX Technology Solutions- Razor Risk Commercial in Confidence Page 4 of 19

5 1.3 RAZOR RISK AN ENTERPRISE RISK MEASUREMENT & MANAGEMENT SOLUTION. Resulting from years of collaborative development efforts between Razor Risk and the financial community, Razor Risk offers the unique ability to measure, monitor and control market, credit and liquidity risk in a real-time manner using some of the most sophisticated analytical tools. Razor Risk is truly a scalable enterprise risk solution that measures and manages market, credit and liquidity risk consistently across the banking and trading books. Razor Risk solutions provide consistent, verifiable measurement of an institution s aggregate risk by linking disparate forms of exposures across multiple business lines, portfolios and products. Furthermore, they provide multi-level decision support for executive, front-, middle- and back-office users. 1.4 A FULLY INTEGRATED FRAMEWORK. Unlike other solution providers in the industry, Razor Risk delivers a fully integrated solution based on 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. At its core, Razor Risk s suite of solutions is driven by a flexible, scenario-based analytic framework that enables risk managers and investment professionals to capture accurate, fully integrated measures of risk at every level of the enterprise, using a single, consistent methodology. This ensures a coherent and scalable approach to tactical and strategic decision making. It also results in a simplification and integration of the institution s technology infrastructure with fewer systems and dramatically reduced IT costs. 1.5 TRULY SCALABLE. Razor Risk provides a fully distributed solution based on a single, extensible, robust data architecture and highperformance risk engine. This solution may be easily scaled to incorporate new risk management tools, new hedge funds, new business divisions, new geographical areas, new instruments and methods, and new lines of business as they evolve. In an environment characterized by rapidly evolving markets and frequent mergers and acquisitions, this gives firms the critical ability to construct enterprise risk management functions that embrace changing business requirements without the need to reinvest in costly new systems. 1.6 LEADING-EDGE ANALYTICS. Razor Risk is widely known for its innovations in financial engineering and its extensive coverage of financial instruments, scenarios and advanced analytics, across both the trading and banking books. In 2004, Razor Risk was awarded risk magazine's 'technology development of the year award' for its Razor Risk technology, and it continues to lead the industry as the methodology of choice for the development of innovative enterprise risk management solutions. The proven performance of Razor Risk s risk engine provides the basis for even the most challenging realtime risk analytics as well as end-of-day analysis. 1.7 MORE THAN VAR. As noted above, Razor Risk includes both traditional approaches to value at risk and credit adjusted value at risk and a much more modern approach: a dynamic multi-period credit-adjusted value at risk. This flexibility allows market risk managers to replicate legacy systems while moving forward to a more modern approach that allows multiple VaR horizons and an analysis period as far beyond the traditional 10-day VaR calculation as the user thinks is appropriate. Many Razor Risk users, for example, look at VaR analysis where the time horizon is many years. 1.8 PREPARING FOR COMPUTING CAPITAL FOR INCREMENTAL RISK IN THE TRADING BOOK Broadly, the incremental risk charge (IRC) is intended to address a number of perceived shortcomings in the current 99%/10-day VaR framework. Foremost, the current VaR framework ignores differences in the underlying liquidity of trading book positions. In addition, these VaR calculations are typically based on a 99%/one-day VaR which is scaled up to 10 days. Consequently, the VaR capital charge may not fully reflect large daily losses that occur less frequently than two to three times per year as well as the potential for large cumulative price movements over periods of several weeks or months. The extension of the incremental charge to cover default, migration, spread and equity risks - including correlations within and across those risks - is an instrumental step in managing the real risks faced by institutions today. The proposed changes are likely to result in a more comprehensive and risk-sensitive capitalization standard for the trading book TMX Technology Solutions- Razor Risk Commercial in Confidence Page 5 of 19

6 Potential approaches being currently discussed include developing a comprehensive asset pricing model incorporating both diffusion and jump processes for price movements over liquidity horizons. Alternatively, a firm could potentially quantify the incremental risk associated with moving from the 99%/10-day VaR to the 99.9%/1-year IRC in terms of discrete events that capture all material price risks, except those reflecting non-irc market factors, including but not necessarily limited to defaults, credit migrations, gapping of credit spreads, and equity prices. Many of our clients already examine such risks for management purposes and as we ve experienced firsthand, banks developing an IRC solution will quickly discover that speed, performance and flexibility are critical, and extending an existing market risk solution to include IRC is not a viable strategy. Regulatory guidelines mandate a 99.9% confidence level, which for highly rated products can imply running ten million plus scenarios. Traditional market risk solutions whether they be stand alone or sold as modules of trading systems were not designed to run so many scenarios, this will cause performance issues and have serious hardware and cost implications. We expect to help clients meet the upcoming regulatory capital requirements, enabling them to focus their attention on managing their core business. As the requirements evolve we believe our expertise can provide support to organizations looking to implement these changes in a timely manner. 1.9 RISK AGGREGATION Consolidation of risk is a critical topic for firms today. In the drive to better understand their diverse risks, firms are increasingly managing risk on an integrated, firm-wide basis. But with multiple specialist front- and back-office systems installed, today's risk manager faces significant challenges in producing timely figures for total risk. Razor Risk was designed to deliver multiple risk calculations, consolidate risk types across business units and calculate capital needs. Razor Risk delivers the full set of results that any genuine aggregation engine should address: Consolidation of risk measurements across multiple organisational entities; Real-time management of global market or credit risk limits at multiple aggregation levels; Determination of optimal capital; Support for a variety of aggregation strategies based on any risk attributes. Risk aggregation presents substantial technical and performance challenges, but the design of most existing risk systems is focused only on calculation, not aggregation of results. By contrast, Razor Risk incorporates high-speed results aggregation as an integral part of its unique balanced distributed processing design. Benchmarks using generally available Razor Risk releases consistently show exceptional results. Our clients are benefiting from "supercomputing" aggregation performance on their own portfolios using Razor RISK TRANSPARENCY Drill-down into risk details and applying what-if can be difficult to achieve on a large aggregated data set. Applying Scenario Analysis and ensuring scenario consistency can present huge problems. Razor Risk s portfolio aggregation capability allows analysis by any aggregation category, including product type, risk type, business unit - or any combination. Flexible screens support drilldown to the trade and scenario level for all portfolios across the enterprise. The contribution of individual transactions to each risk category can be pinpointed, so sources of risk can be quickly identified, analyzed and addressed. Razor Risk s powerful scenario analysis and what-if capabilities support full investigation into the aggregated risk figures. Razor Risk enables scenarios to be managed centrally within the aggregation engine, ensuring scenario consistency across all front office systems LIQUIDITY RISK MANAGEMENT In January 2008 Bank of America announced it would buy mortgage lender Countrywide Financial Corporation. Like the case of Northern Rock, in the UK, home price declines were devastating for Countrywide s mortgage business. As investors perceived higher default risk for Countrywide, 5 year credit default swaps on Countrywide broke out of a narrow range between 50 and 100 basis points and climbed to almost 300 basis points by September 30, The result was a 94% decline in Countrywide s ability to issue commercial paper. By December 31, 2007, credit default swap quotes exceeded 800 basis points and Countrywide was completely shut out of the commercial paper market TMX Technology Solutions- Razor Risk Commercial in Confidence Page 6 of 19

7 Razor Risk allows users to carefully measure how movements in macro-economic factors like home prices and interest rates can affect liquidity risk and the institution s ability to fund itself with both retail and wholesale deposits INTRADAY UPDATES AND WHAT IF Intraday Updates Razor Risk fully supports the intraday batch and online feed updates of trades (inserts amendments and deletions), market data and reference data (including organizational structural changes, netting and collateralisation agreement changes). The impacts of these changes can be reflected directly on all risk calculations being measured, or alternatively upon a scheduled or timed process (such as turn of day) or on demand process (such as an intraday refresh). What If Analysis Razor Risk supports a functionally rich scenario based framework for what-if analysis and model stress testing. These scenarios may encompass any combination of deal sets (containing insertions, amendments, and deletions), market data scenarios, reference data changes (including organizational structural changes, netting and collateralisation agreement changes), and simulation parameter changes. Razor Risk s extensive Stress Testing and Scenario Analysis module encompasses all market and credit risk factors and events. It provides on-line what-if analysis on a trade or position or portfolio level, as well as full stress testing functionality with extensive ability to apply shocks across the complete market and credit data set. As part of the what-if analysis there is support for measuring the what-if benefit across all impacted portfolios, and with the right security capability the user may perform a pre deal check against all impacted portfolios and/or commit the what if scenario to the live system as an intraday update. All defined what if scenario based stress tests may be saved and rerun as required, with all reporting requirements being saved to a snapshot reporting database for time series analysis and reporting. The impacts of what-if scenarios may be measured across all risk measures supported by Razor Risk from mark to market, PFE, VaR (HS, MC), IRC, Economic Capital etc MODEL STRESS TESTING. Multiple what-if scenarios can be saved and applied as a suite of model stress tests to measure effects on market risk, credit risk, and economic capital requirements. The what-if analysis and model stress testing capability provided by Razor Risk supports the banks in meeting their internal and regulatory risk reporting and proactive risk management requirements, including the IRC and Basel II/III capital requirements TMX Technology Solutions- Razor Risk Commercial in Confidence Page 7 of 19

8 1.14 LIQUIDITY RISK FOR FAS157 LEVEL 3 VALUATIONS, FAS 133/IAS 39 HEDGE ACCOUNTING CALCULATIONS Financial Accounting Standard 157 requires institutions to accurately model thinly traded hard to value assets. Razor Risk provides a state of the art framework that generates completely transparent valuations and an understanding of how bid-offered spreads in thinly traded markets reflect sampling error and other uncertainties in the valuation process. Razor Risk consultants are actively engaged in valuation services using Razor Risk for sophisticated financial institutions around the world. International accounting standards require that institutions seeking hedge accounting treatment justify a hedge by showing that market values of the assets being hedged are appropriately correlated with the hedging instrument. Razor Risk automates the process of showing both prospective and historical hedge-related correlations FRONT OFFICE PRE DEAL CHECKS Razor Risk s high performance architecture enables organisations to measure risks as they occur rather than after the event. Pre-deal checks complete in less than 0.1 seconds preventing unauthorised dealing. Exposures and limits are updated intra-day whenever portfolio changes occur. Razor Risk was designed from inception to support excellent incremental processing performance for the full simulation of pre-deal-check, what-if and intraday transaction processing. Retention of intermediate results and high performance distributed caching techniques allow Razor Risk to achieve best-of-breed online simulation performance. Razor Risk also provides additional credit exposure calculations including MTM + add-on, Face Value, and Face Value + Interest. Razor Risk fully supports using different calculations for different products, and enables flexible aggregation of these results. This approach is often useful for providing high performance for on-line Pre-deal Checking for FX deals. Additionally, Razor Risk can be operate using Fast Pre-Deal Check (PDC) mode (if both MTM + Add on and Monte Carlo simulation have been configured) where Razor Risk can PDC check transactions using MTM + Add on and if pass, there is no need to PDC against Monte Carlo simulation to enable high performance for on-line PDC's. An integrated pre-deal check function allows dealers to anticipate potential breaches in limits before committing to the trade, notifies senior management of any breaches in limits and acts as a valuable decision-support tool for users across your firm MARGINING CAPABILITIES We offer margining capabilities by individual securities, SPAN, TIMS, scenarios, by grids and by portfolios. Our popular Scenario-Based Margin solution is a framework that supports the progressive implementation of a VaR and rules-based cross-product margining methodology. It is: Capital Efficient; Margin requirements account for diversification, correlation effects and numerous risk offsets, Cross-Product And Cross-Market; All major product types across different currencies are included in a single margin framework, Transparent; All scenarios and calculations are clearly and explicitly defined, Netting and Collateralisation; fully taken into consideration, What-if Capable; To enable margin estimates to be provided to clients on the basis of individual trades or combinations of trades in strategies or portfolios, and Risk-Based; Margin requirements have a risk interpretation. Margin reports are risk reports PORTFOLIO REPLICATION The main idea of a replicating portfolio is to find a portfolio of assets whose value is equal to the value of a liability portfolio under today's market conditions and future market conditions. Because simulating a replicating portfolio consisting of a few hundred assets is more computationally efficient than simulating the entire liability portfolio, the replicating portfolio is used in place of the liability portfolio when performing any number of risk analyses. Replicating portfolios are often used to calculate risk measures such as value-at-risk or cash-flow-at-risk, as well as for economic 2012 TMX Technology Solutions- Razor Risk Commercial in Confidence Page 8 of 19

9 capital and regulatory capital calculations. In addition, replicating portfolios can be used in the construction of dynamic hedge programs or as performance targets for asset managers RISK LIMITS AND CONTROLS Razor Risk through its configurable portfolio mapping rules and configurable portfolio templates enables any limit structure to be established. For example; Product Limit type, Obligor, Country, Industry, Large exposure Obligor Legal and non-legal Entity structure Internal legal and non-legal Entity structure Time Within Razor Risk the limit structure is fully configurable e.g. you can set revolving limits or terminating limits. End users can also configure such features as limit spike or warning thresholds (tolerance triggers). Also a counterparty hierarchy can have limits monitored in various currencies e.g. a parent portfolio can be calculated in a different currency to a subsidiary and you can apply a start and expiry date to a limit. A Razor Risk portfolio can be easily established and is identified by portfolio keys which indicate the limit category e.g. Obligor and exposure methodology. For each portfolio a fully configurable limit structure can be applied for exposure management. Any limit amendments, including new limits, changes, or re-assigned limits happen in real time. Therefore when limits have been approved (using a 4-eyes process if required) they are immediately available for exposure calculations and pre-deal check. New limits entered or allocated in the system manually can be classified as Pending until they have been subsequently approved. Pending limits are available to view in the limit enquiry, but optionally may not available for exposure monitoring. Pending limits that are manually entered/allocated will require approval, at which point the status will change to Approved. Razor Risk allows limits to be set in multiple different currencies other than base currency. If aggregation needs to occur between limits in different currencies, these are aggregated in the base currency. Limits may be flagged as advised or non-advised. This will identify committed credit lines that have been advised to the obligor. Limits can be set to the level of current exposure. In this way, they will not appear in excess but further trading will be prevented. There are options to set the limit to track the exposure as it moves due to market movement, to prevent any excesses being created. Limit review dates are also supported. Limits past review date are still available for use but user interface and reporting functionality will still flag outstanding reviews. Historic utilisation of limits is calculated by Razor Risk and is available to users. For each individual limit or at an aggregated level, it is possible for the previous n months (where n is user configurable on a system wide basis) to: View maximum, minimum and average limits, exposures and utilisations for any specified time period; or View actual limit, exposure and utilisation on any particular day. Limits may be set on a hierarchical basis in many cases e.g. Parent limits and Obligor limits. From viewing limit/exposure level information it is possible to jump to viewing all trades contributing to that exposure. When viewing limits in excess, it is possible to jump to the details of that excess and from there to the deals which caused the limit to go into excess or the excess to increase. From a particular obligor record, it is possible to open up a summarized view of all limits that may be impacted by deals undertaken with that obligor. This includes not only counterparty and issuer limits for that obligor but also country limits (related to the country of that obligor), industry limits (related to the industry of that obligor) etc. It is possible to turn on/off on a user-by-user basis which limits are displayed on the basis of limit category. On/off filters are also available to display only certain limits, based upon their attributes. For example, to show only limits with exposures, not to show pending limits, only to show limits in excess, show limits only for that specific entity or for the whole hierarchy etc TMX Technology Solutions- Razor Risk Commercial in Confidence Page 9 of 19

10 In such views, limits are displayed on a time banded basis. Traffic light functionality is used to highlight limits nearing full utilisation e.g. limits < 70% utilised to be coloured green, % amber and >100% red. Razor: Limits, controls and configurable screens The user can display exposures next to the limits. For summary views of time banded limits, the exposure shown is the highest exposure in the band. It is possible to expand the view from a summary view to show granular limit, exposure and utilisation information on a daily basis for each day into the future. Razor Risk can be configured to set new categories and aggregation points as sanctioned by authorised users and has the capability to store limits with a configurable level of granularity of attributes. Each limit category can be time banded; different set of time bands may be required for different limit categories. Comments or warnings may be attached to limits. Limits can be set at any point on the limit hierarchy but are not mandatory at any point. An authorised user can input a single limit amount and Razor Risk can automatically spread the limit over time bands. Limits may be either spread on the basis of reducing the limit over time as determined by percentages in a table, or by spreading the entered limit up to a maximum tenor. Both maximum tenor and the percentage are dependent on the rating of the obligor. Limits entered for the longest tenor period are spread over the remaining limit tenors using percentages for the standard set of time bands for that limit category. An authorized user can over-ride the spread limits and manually input limits for each time band, as needed. For some limit categories no matrix will be applicable and limits will be spread across tenors manually by authorised users. Credit Officers can reserve part of the limit i.e. purposefully not allocating it or where the limit spreading logic underallocates the direct risk limit to the sub-limits. Razor Risk differentiates between these two portions of un-allocated limit credit officer reserve and limit spreading balancing item. Razor Risk provides functionality to allow an authorised user to allocate either all or a specified amount of the credit officer reserve or the limit spreading balancing item to one of the sub-limits. This does not reduce the overall credit limit but simply increases the relevant sub-limit (and applies any further applicable limit spreading). This facility is available at all levels of the obligor hierarchy. Authorised users can view the amount of un-allocated credit limit (split between credit officer reserve and limit spreading balancing item ) at any given point in time TMX Technology Solutions- Razor Risk Commercial in Confidence Page 10 of 19

11 A credit officer can add to the credit officer reserve for specific purposes. These reserved limits will be flagged with the purpose of the reservation and the expiry date of the reservation. They are viewable as part of the overall credit officers reserve but also viewable by the specific purpose. Expiring reserves produce alerts to the credit officer who created them. Limits may be re-allocated from one limit category to another. This is not necessarily the case for all limit categories though. Given this, rules are definable to identify which limits can be transferred between which limit categories e.g. it is not possible to transfer a settlement limit to the issuer risk category. Razor: Functionality that covers Risk Measurement and Management Risk controls are available around the limit allocation and reservation process to prevent misuse e.g. reports showing the current number and value of limit reservations outstanding, any reservations expiring un-used etc. In addition to limit setting, controls are also set in the form of restrictions. These can be initially defined, for each Obligor, in terms of products and tenors e.g. no FX Forwards greater than 12 months with Obligor X, but are extendable to set on other data elements of transactions. Breaches of restrictions are recorded in the system in the same way as breaches of limits. Razor Risk has templates of restrictions for all customers within a particular industry e.g. all corporates have a default set of product restrictions. These default templates can be over-ridden on a case by case basis. Razor Risk can flag limits as blocked. This will immediately prevent them from use. Any user attempting to access these limits will be warned that they are blocked. In this context, access to the limits means any utilisation enquiries including availability checks (manual and automated) as well as maintenance of the limits. If a user trades against a blocked limit, a violation is automatically reported, regardless of the resulting utilisation level. Razor Risk allows users to add comments to the limit-block so that an explanation can be provided of the reason for the block this comment then appears on all the access to the limits mentioned above. Razor Risk has the capability to block all limits for an obligor, without having to flag each limit individually. Razor Risk allows users to define set limit expiry dates. This enables limits to be given for a specific period only. User interface and reporting functionality is available to flag upcoming expiring limits. Razor Risk can restrict a customer to only collateralised trading. If for such a customer a non-collateralised trade is undertaken, this creates a violation. The default for the only collateralised trading flag is allowed to differ according to different customer industries TMX Technology Solutions- Razor Risk Commercial in Confidence Page 11 of 19

12 1.19 A PROVEN TRACK RECORD. Since its inception in 1999, Razor Risk has provided the world s leading financial institutions with enterprise risk management solutions. Supported by, over 300 staff, one of the largest dedicated enterprise risk management teams in the world, Razor Risk has successfully completed installations in many countries. Razor Risk proven methodology supports efficient, low-cost, low-risk implementation allowing a firm to maximize optimal risk and reward. 2 R A Z O R R ISK: T HE B U S I N E S S C A S E Razor Risk s suite of solutions meets the challenges of today s financial environment with an integrated series of advanced solutions designed to set a new standard in enterprise risk management. Supported by a single data infrastructure and a distributed risk engine, Razor Risk is the first software of its kind to provide a consistent, proven platform for the integration of all different types of pricing and risk functions and needs. 2.1 ENHANCED PROFITABILITY. Razor Risk s integrated risk architecture, together with an advanced scenario-based framework, enables risk managers to pursue more fully informed, proactive business decisions that prevent losses and maximize reward. Its single, extensible data architecture captures and consolidates all positions, across all asset and investment classes, thus providing a solid foundation for enterprise risk and reward analysis. By using scenarios as the basis for risk management, financial institutions obtain an integrated, consistent, forward-looking picture of their risk across the enterprise, allowing for a more efficient allocation of risk appetite via either standard or proprietary Risk measurement, budgeting and allocation models and techniques. 2.2 GREATER TRANSPARENCY FOR USERS, CLIENTS AND SHAREHOLDERS. By capturing all global positions and linking disparate forms of exposures from across multiple portfolios, asset classes and financial products, the Razor Risk provides increased transparency in reporting for users, clients and shareholders and alike. Razor Risk s integrated data architecture provides a single point of entry and single representation of financial instruments, counterparties, as well as market and credit data, thus allowing for rapid reconciliation and auditing of a firm s pricing and risk analysis. Furthermore, the use of scenarios as a basis for risk management provides an accurate picture of a firm s enterprise risk, which naturally captures the complex relationships of various sources of risk, yet is intuitive and easy to understand. 2.3 MORE EFFICIENT MANAGEMENT PROCESSES. In addition to greater transparency, Razor Risk s integrated data architecture, with its single point of entry and its single representation of financial data, leads to substantial simplifications of operations and reductions in maintenance costs. It also provides the basis for an accurate and consistent assessment of a firm s valuations and risk, which satisfies the distinct reporting needs of executive, front-, middle- and back-office users. The Razor Risk reporting capabilities allow for full distribution of disseminated information to users or recipients be they internal or external clients. The on-line risk analytic and reporting solution will allow clients to decide on what information is reported how the data is displayed to meet each individual s investment and reporting processes. 2.4 THE METHODOLOGY At the heart of Razor Risk is a robust and forward-looking framework that links disparate sources of risk and provides a means for calculating all required risk measures within a single, unified framework. By explicitly incorporating the passage of time, the evolution of scenarios, and the dynamics of multiple portfolio holdings over time, Razor Risk provides a flexible and unifying platform for managing future risk, which supports a wide range of pricing tools and risk measures. New sources of risk, as well as innovations in risk management best practice can be readily accommodated, resulting in financial institutions not being locked into a particular formulaic approach TMX Technology Solutions- Razor Risk Commercial in Confidence Page 12 of 19

13 2.5 THE BENEFITS AND ADVANTAGES Through Razor Risk s innovative approach to risk analysis Razor Risk offers many distinct advantages: - Full Integration of Enterprise-Wide Risks. Razor Risk defines 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 risk, over multiple time steps. For example, many well-known financial disasters, including recent corporate failures, occurred precisely because of the high correlation between market and credit risk in stress periods. Such occurrences are naturally modeled through scenarios where adverse changes in market conditions trigger adverse changes in credit quality. With Razor Risk all different types of risk, based upon the appetite of the firm, are integrated within a common framework using consistent, modeled and calibrated data across the investment universe. A Transparent, Easily Understood Approach. Within Razor Risk scenarios are the drivers of all future uncertainty and, as such, become the language of risk. Since the risk measures that result from scenarios can be explained in a straightforward manner, individuals with different levels of sophistication can contribute to the Risk and investment discussion through the focus on plausible scenarios. This allows users to communicate and deliver Risk results in a common and consistent framework to clients. A Forward-Looking Framework. Razor Risk s scenario-based framework produces risk and reward measures that explicitly capture the passage of time. Consequently, challenging issues such as pricing through time, VaR, marginal VaR and other complex risk measures across all asset classes including nonlinear OTC derivatives can be effectively addressed. Increased Accuracy. Whether for market or credit risk Razor Risk s use of scenarios overcomes the limitations of simplistic analytical methodologies that make onerous assumptions about risk factors or instruments for mathematical tractability. A wealth of techniques can be used to generate scenarios from history, advanced Monte Carlo models or subjective views of the world. Furthermore, extensive valuation coverage provides user flexibility in modeling even the most complex portfolios. Compute Once, Use Many Times. The realization of values across positions, scenarios and time steps determines any risk, return or budgeting measure. Thus, the addition of a new position, scenario or time step requires only the simulation of the new values, which are then appended to the previously computed results. Previously simulated results need not be recalculated; only the calculation of risk, return or budgeting measures need be repeated. Razor Risk provides computationally efficient, scenario-based risk management tools that allow a firm to identify a portfolio s most significant sources of risk and return and indicate how potential trades impact its risk-return trade-off or how trades impact risk-budgeting limits set by a Manager. These tools can be used for both real-time risk decision support and end-of-day risk analysis TMX Technology Solutions- Razor Risk Commercial in Confidence Page 13 of 19

14 3 R A Z O R R ISK TECHNOLOGY: O U T S TA N D I N G P E R F O R M A NCE THROUGH INNOVATIVE DE S I G N In today's competitive environment internal budgetary constraints mean solutions have to be quick to deploy, cheaper to deliver, and provide on-going cost benefits. At the same time, to reduce project risk, solutions have to be higher quality and more flexible. In response to these needs, Razor Risk has built an integrated, scalable, and powerful architecture that allows institutions to respond to market developments in a way that is both informed and timely. With its modern and open design, Razor Risk meets these demands. Razor Risk can be readily tailored to fit within your firm's risk infrastructure. All interfaces are open and documented, and all structures, screen layouts, pricing routines and risk definitions can be easily customized. Razor Risk s BALANCED DISTRIBUTED PROCESSING 3.1 HIGH-PERFORMANCE, LOW COST PLATFORM Razor Risk s modern distributed architecture exploits standard low-cost Wintel or Linux hardware. Razor Risk s unique balanced distributed processing capability efficiently organises and caches the multiplicity of risk valuations over the networked servers, delivering exceptional performance and scalability at a fraction of the cost of alternative technologies. Benchmarks demonstrate Razor Risk s outstanding performance and linear scalability. 3.2 OPEN, EXTENDABLE MODULAR DESIGN Razor Risk comes as a series of modules, licensed and installed according to the functionality required. To simplify implementation, Razor Risk uses open, industry standard XML/FpML interfaces. New or proprietary pricing models or analytics can be readily configured into the Razor Risk system without development in the core Razor Risk product TMX Technology Solutions- Razor Risk Commercial in Confidence Page 14 of 19

15 3.3 POWERFUL, FLEXIBLE ENTERPRISE DATA MANAGEMENT AND ANALYTICS. Razor Risk risk technology is built upon a set of components that cover data management, scenario generation, relative and absolute risk analytics, limit management, on-line and distributed reporting. All components share a common data model, which maintains consistency among applications and streamlines the way data is passed between them. This approach not only allows institutions to select those components that cover their specific areas of business, but also enables institutions to scale up their systems to meet the analytical demands of enterprise risk management. 3.4 OPEN, SCALABLE FRAMEWORK. The integrated component-based approach within the Razor Risk framework and Razor Risk adherence to industry standards makes it easier for firms to integrate a configuration of Razor Risk into their IT infrastructure. Further, Razor Risk can be easily extended to accommodate new asset classes, financial models, simulation methods, postprocessing applications and emerging lines of business. Thus, firms can seamlessly evolve their risk management infrastructure to incorporate new risk management tools, business divisions, geographical areas, instruments and methods, and lines of business as they evolve. 3.5 ROBUST DATA HANDLING. Razor Risk supports real-time, batch, and intra-day data requirements. Razor Risk builds its architecture and components using platform- and database-dependent technologies such as C++ and the XML standard. To communicate and exchange messages and data between components, Razor Risk supports any third-party middleware. Razor Risk: Trade Contributions, detailed drill downs from each screen 2012 TMX Technology Solutions- Razor Risk Commercial in Confidence Page 15 of 19

16 4 R A Z O R R ISK- U N E Q U A L L E D F IRM- W I D E R I S K M A N A G E M E N T A N D C ONTROL Whatever the complexity of your risk requirements or the size of your portfolio, Razor Risk can deliver major benefits. Whether your current focus is improving your limits and use of credit lines, calculating economic capital, or meeting the demands of Basel for internal models, Razor Risk can provide the advanced risk functionality you need. Razor Risk provides a fully integrated analysis of market and credit risk within a single application, and deals efficiently with the complex interactions of different categories of risk, so it is ideal for the growing demand to develop a firm-wide assessment of risk. Continuing regulatory advances are increasing pressure towards more accurate models and sophisticated methodologies. For both demands, Razor Risk s advanced Monte Carlo engine has the breadth of function and - importantly the superior performance needed. 4.1 INTEGRATED, FIRM-WIDE RISK Razor Risk was purposely designed to enable today's drive towards an integrated approach to risk measurement, by fully supporting market risk and credit risk within a single application. Razor Risk s Market Risk and Credit Risk modules share the same analytics, transaction details and reference data, thus making the best use of hard-bought firm-wide data. Razor Risk can calculate Value at Risk (VaR), sensitivity analysis and Monte Carlo based potential future exposure concurrently across the full portfolio, or for individual portfolios. To achieve this, Razor Risk makes no compromises with accuracy: risk solutions using Razor Risk have been awarded AAA rating by Standard & Poor's and Moody's. 4.2 ACCURATE, REAL-TIME CREDIT & MARKET RISK Razor Risk supports a full range of methodologies for calculating credit exposure, and calculates VaR using both Historic and Monte Carlo simulation. Monte Carlo simulation is widely recognised as the most accurate technique for calculating risk, especially credit risk. But all too often financial institutions must compromise between accuracy and speed of calculations. Razor Risk was designed specifically to eliminate this problem, allowing you to calculate credit and market risk using Monte Carlo simulation overnight, intra-day or in real-time. 4.3 COMPREHENSIVE LIMIT MANAGEMENT All risk measures are integrated within the Razor Risk Limit & Excess management framework, so limits can be managed for both market and credit risk seamlessly within a single application. Flexible limit definition and risk definition rules allow limits to be managed in real-time at any or all levels of user-defined hierarchies. 4.4 SUB-SECOND PRE-DEAL CHECKING Razor Risk s pre-deal checking capability is optimised to meet sub-second response times using any of the calculation methods. Pre-deal checking can operate from Razor Risk s own flexible trade screens or via existing source systems. The comprehensive limit violation/excess reporting subsystem includes warning thresholds and online alerts. 4.5 FIRM-WIDE PRODUCT COVERAGE Razor Risk provides extensive coverage of all the major classes of Treasury and Lending products, including FX and FX options, interest rate derivatives, fixed income, equity derivatives, credit derivatives, commercial loans and commodities. Adding new trade types is straightforward: additional pricing routines are simply added to the pricing library by the firm and then utilised natively by Razor Risk with no performance impact. 4.6 HIGH-PERFORMANCE MONTE CARLO At the heart of Razor Risk s accuracy and outstanding performance is a multi-factor Monte Carlo simulation model developed by Razor Risk experienced financial experts. Razor Risk uses no analytic short-cuts; instead, Razor Risk 2012 TMX Technology Solutions- Razor Risk Commercial in Confidence Page 16 of 19

17 employs sophisticated financial engineering principles and advanced distributed processing design to deliver full accuracy and exceptional performance on cost efficient hardware. 4.7 POWERFUL SCENARIO ANALYSIS & DRILL-DOWN In modern risk management it is vital to be able to drill down into risk measures to analyse causes. Throughout Razor, any analysis can be run at any portfolio or aggregation level. Comprehensive graphical or tabular result screens allow drill-down to transactions and trade contributions. Razor Risk s 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. 4.8 REDUCTION IN ECONOMIC CAPITAL The benefit of aggregating measures of risk across diverse businesses to calculate economic capital and improve how risk capital is allocated is apparent to every financial institution, but is beyond the reach of many current risk systems. Razor Risk s powerful Monte Carlo simulation model delivers the full benefits of economic offsetting. In a well-diversified portfolio, these offsetting effects can yield reductions in calculated credit exposure of up to 80%. Razor Risk also calculates the full effects of risk mitigation, including netting and collateralisation. The more accurate calculation of credit exposure not only provides trading opportunities based on the increased credit availability, but also decreases the underlying economic capital requirements TMX Technology Solutions- Razor Risk Commercial in Confidence Page 17 of 19

18 5 D ELIVERING THE R I G H T I N F O R M AT I O N T O THE R I G H T P E O P L E AT T H E R I G H T T I M E Risk Management requirements differ throughout an organisation. Senior Management requires a consolidated, global view of risk across the organisation. They require the information to be confident that the organisation s risk policy is being complied with and risks are being taken in line with the risk appetite of the organisation. Senior Management should be notified when deviations from risk policy occur only when they are significantly material or frequent to merit escalation to Senior Management level. Risk Managers require a more detailed view of risk within the organisations resulting from their narrower focus. Risk Managers may be limited to viewing and managing only the risk for which they are responsible for example Market Risk for Asia Pacific business units. Salespeople are focused on maximising return from their customers within available risk or limit constraints, and require sophisticated deal analysis and what-if tools to support this. Traders require high speed risk analytics and comprehensive position and limit reporting for their areas of responsibility to enable then to trade effectively within available limits. Razor Risk enables the individual usage requirements of different areas within an organisation to be met within a single application. Users can be limited to work with just the data and functionality required for their area of responsibility, eliminating superfluous data or functionality. This greatly increases the acceptance of the system within the organisation Access to the required data and functionality is provided within a secure, fully audited Razor Risk application, and changes to access or usage requirements is managed easily and securely by the organisation. Back-testing in Razor Risk calibrates value at risk against theoretical and actual P/L TMX Technology Solutions- Razor Risk Commercial in Confidence Page 18 of 19