• Product Overview
  • Base Architecture Module
  • Credit Risk Module
  • Market Risk Module
  • Limit Management Module
  • Economic Capital Module
  • Reporting Module
  • Razor Technology
• Solutions
  • Credit, Market & Liquidity Risk
  • Credit & Market Risk
  • CCP Risk Management
  • Limit Management
  • Stress and Scenario Testing
  • Capital Management
  • Margin Management
  • Risk Aggregation
  • Portfolio Replication Solution
  • Incremental Risk Charge
  • Basel II
  • CPSS-IOSCO
  • CVA Solution
  • Solvency II
• Why Choose Razor

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.

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.

For further information, please contact us.