• 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

Recent market events have highlighted the importance of stress testing within banks and other financial services organisations. There are several key themes in the initial lessons learned from recent market turmoil:

• Senior management involvement: It is essential that senior management are involved in overseeing a comprehensive and coordinated stress and scenario testing programme. Senior management engagement is a necessary condition for integration of stress testing into business, risk and capital decisions and encourages more thorough exploration of tail risks as well as milder adverse scenarios.
• Contagion: It is important for firms to pursue more thorough analysis of risk transmission and contagion mechanisms (including ripple and reinforcing effects from a primary stress scenario extending to other markets or products) and also to better reflect how risk correlations may vary in stressed conditions.
• Firm-wide holistic view: Firms should be able to conduct stress and scenario testing that helps them identify and assess risks at a firm-wide level. A firm's stress testing programme should be holistic in terms of risk capture and coverage. A firm needs to be able to carry out stress testing at different levels (for example also at business unit, or business line, level) and to bring together top-down and bottom-up risk assessment in a coherent manner.
• Liquidity stresses: Contagion from a liquidity stress situation in one market may spread across multiple markets, and as well as affecting firms' liquidity positions may ultimately also expose firms to capital stresses, including those arising from pipeline transactions which cannot be distributed as planned in conditions of decreased demand, and off-balance sheet exposures which are re-assumed.

Stress and scenario testing is an important tool for a firms' prudential risk management. In particular, it can be useful to decision making by:

• enabling the firm to shape the risk profile of the firm through a better understanding of the risks the firm is exposed to;
• helping to provide a more forward-looking assessment of risk, as a complement to other risk management tools, and helping to overcome the limitations of reliance on historical data;
• helping to evaluate the impact of extreme events which may result in significant losses;
• helping to identify risk concentrations across multiple business lines or units;
• enabling the firm to better integrate business strategy, risk management and capital planning decisions; and
• providing a framework which supports a firm's internal and external communication.

Razor's scenario and stress testing 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 non-linear OTC derivatives can be effectively addressed. 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 firm, portfolio or aggregation level. Comprehensive graphical or tabular result screens allow drill-down to transactions and trade contributions. Razor'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 data set.

Razor covers the new regulatory reverse stress testing requirements currently being considered to encourage firms to: explore more fully the vulnerabilities of their business model (including 'tail risks'); make decisions that better integrate business and capital planning; and improve their contingency planning. An underlying objective would be to ensure that a firm can survive long enough after risks have crystallised for one of the following to occur:

• the market decides that its lack of confidence is unfounded and recommences transacting with the firm;
• the firm down-sizes and re-structures its business;
• the firm is taken over, or its business is transferred in an orderly manner; or
• public authorities take the firm over, or wind down its business in an orderly manner.

For further information, please contact us.