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The Need
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There are a number of key
business drivers that is driving the need for a best practice
market and credit risk management solution.
Prevention of Large Credit Losses
There have been a series recent of market and credit events which have
resulted in large losses to major financial institutions. In a number
of cases the actual losses were considerably higher than those predicted
by risk management systems as not all potential risk was being captured
or recorded. By consolidating risk data in a single solution potential losses
can be predicted much more accurately. If the potential loss in a particular
area is higher than the risk appetite of the bank, then preventative action
can be taken prior to a loss event occurring.
Timely Risk Information
The need to calculate and report market and credit risk on an intra-day basis
is an essential part of effective risk management. All too often organisations
exceed available limits because out of date risk numbers are being presented to
dealers or risk managers. This becomes even more important in credit crisis situations
where a risk manager must have an intra day view of credit exposure to a credit
sensitive counterparty to determine the most appropriate action to take.
Razor’s high performance incremental architecture provides this intra-day view of market
and credit risk.
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Lack of Available Credit
Financial Institutions aim to maximise their return on available
risk capital. One key component is to ensure that available
credit lines are being utilised as profitably as possible.
In many cases, organisations turn away profitable trading
opportunities because of insufficient credit line availability.
This is most common within traded portfolios, where legacy
credit calculation techniques fail to account for economic
offsetting effects within derivative portfolios. Credit exposure
for structured products or credit derivatives is often overstated
as the credit exposure cannot be calculated accurately so
overly conservative approaches are taken which increase the
reported credit exposure. Razor’s simulation methodology
accurately calculates credit exposure for traded products
which can result in credit exposure reductions between 50
and 100%. These reductions free up credit lines, allowing
profitable trading opportunities to be acted upon.
Transparency
As well as having an accurate view of market and credit risk, it is also
very important to have transparency into where the risk is coming from.
The ability to drill down at the transaction level to see the marginal
contribution of individual transactions to market and credit risk enables
organisations to manage risk more proactively and profitably for the organisation.
The capability to choose the most credit efficient counterparty
for an individual transaction enables dealers to actively
reduce credit risk within the organisation, providing a higher
return on available capital. Razor provides the full set of
drill down and portfolio modeling tools that enable more profitable
use of available risk across the organisation.
Accurate Calculation for Credit Derivatives and Structured Products
The increased volume and sophistication of credit derivatives
and structured products is happening so quickly that it is
difficult for legacy credit applications to keep apace and
measure the credit exposure of these products accurately.
Often crude approximations are used to calculate risk, or
certain products cannot be traded because the risk applications
cannot calculate risk for these products.
Razor solves this problem by providing sophisticated structured
product and credit derivatives calculation functionality.
Razor’s analytics can also be extended to accommodate
new products as they are traded within an organisation, so
the credit risk management system is no longer the bottleneck.
Regulatory Pressure
In response to large market and credit losses and the aim to protect
the overall banking system, regulators are placing increasing pressure
on financial institutions to improve their internal approach to
credit risk management. Basel II provides the opportunity for banks
to achieve regulatory compliance, reduce regulatory capital, and implement
a best practice internal approach to market and credit risk management
as prescribed by the regulators.
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