R A ZOR RISK CREDIT RISK MODULE FEATURES AND FUNCTIONALIT Y OVERVIEW

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.

OverviewTMX Technology Solutions’ award-winning Razor Risk framework provides near real-time and pre-deal calculations that enable management to view their total exposure to individual entities on one consolidated platform. Our clients use Razor Risk’s advanced analytics and scenario calculations to achieve best practice in managing risk exposures for credit, market, clearing and liquidity risk within a single application.

Since Razor Risk is a framework and not a risk measure, practitioners can easily incorporate new sources of risk and accommodate innovations in best practice risk management. Razor Risk also assists financial institutions to satisfy their requirements under the Basel Regulatory Framework and the IOSCO Recommendations for Central Counterparties.

Razor Risk has helped improve the way central clearing counterparties, stock exchanges, banks, hedge funds and brokers across the globe measure their risk and manage their capital.

PRODUCT STRUCTURE

Razor Risk comprises an integrated set of modules to provide a multiple-risk and cross-asset solution that can easily be configured to suit financial institutions’ individual risk needs and appetites. The combination of Razor Risk’s modern and open design with a modular, geographical and volume based licensing model enables clients to install the functionality required, and to scale and adapt as business requirements and regulatory requirements change.

Razor Risk’s modules can be used as a standalone solution, or on a fully integrated basis. Our clients purchase the Base Architecture module which provides the core services, architecture and infrastructure required to operate all the additional modules. Then, according to their needs, our clients choose from the following major modules: Market Risk, Credit Risk, Limit Management and Economic Capital and all three pillars of Basel I, II and III.

EACH MODULE SHARES THE FOLLOWING CAPABILITIES TO FACILITATE PROACTIVE RISK MANAGEMENT:

Real-time performance Risk is automatically recalculated whenever trades or rates change so the latest risk information is available in real time.

“What-if” capabilityUsers can dynamically model any changes to their portfolio or market data using Razor Risk’s what-if capability. This enables risk managers to proactively model the risk impact of any combination of trade or rate changes.

Full trade and rate drill down Risk managers can drill down to the individual trade or scenario level providing full transparency to the underlying risks in the portfolio.

Stress testing and scenario analysis Risk managers can simulate their portfolio exposures against Razor Risk’s rich set of pre-configured historical stress scenarios. Users can also tailor and define their own scenarios and stress tests on the fly.

User defined analytics Risk managers can provide their own proprietary analytics which can be used in combination or instead of Razor Risk’s analytics. This enables clients to fully integrate all of their transactions into the system providing a fully integrated view across the enterprise

Multi-level reportingReporting at a concise summary level is supported through the flexible Razor Risk user interface, where custom layouts are configured to show appropriate levels of detail. Comprehensive drill-down capability is supported from this view.

Security and data auditability.

Workflow

Comprehensive limit management and excess management functionality.

Credit Risk Module OverviewRazor Risk’s Credit Risk module provides a comprehensive solution to measuring and managing counterparty credit risk. It has been designed to accurately measure credit risk across all asset classes, and provides the decision support tools required by today’s credit risk manager to isolate areas of risk and take the appropriate action to prevent major losses occurring.

Razor Risk’s Credit Risk module is fully integrated with the Razor Risk Market Risk module – the modules share the same infrastructure, trade details, rates, and pricing models. The integrated market and trading credit risk functionalities allows for potential synergies and efficiencies within a financial institution.

KEY FEATURES OF RAZOR RISK’S CREDIT RISK MODULE INCLUDE:

Easily extensible product coverage through the ability to add, price and simulate new products, as well as the ability to incorporate third party analytics or pricing models.

High performance credit exposure and capital calculation. Potential future exposure calculation using Monte Carlo simulation plus additional calculation methods across all major asset classes. This provides the risk manager with an accurate measurement of potential counterparty credit risk across the whole portfolio.

Sophisticated what-if functionality, scenario analysis, back testing and sensitivity analysis to accurately model the impact of portfolio changes on credit exposure.

Accurate capture of the credit mitigation effects of netting and collateral.

Integrated limit management capability to enable credit limits to be set on key areas of risk concentration (e.g., counterparty, country, industry, rating).

Mixed-risk model aggregation to support a single customer view of risk.

Pre-deal check capability with full auditing. Credit limits can be checked on a pre-deal basis to ensure all new deals conform to credit policy. If an executed deal violates credit policy a full audit trail of the deal, the dealer and the policy violation is provided to the risk manager.

Excess management with full workflow support – excesses are automatically generated if credit policy is infringed and Razor Risk’s workflow capability ensures the right people are notified so prompt action can be taken.

Compliance to Basel I, II and III standards, enabling institutions to significantly reduce the regulatory capital requirements of the trading book.

High performance credit exposure and capital calculationRazor Risk provides a number of methods for accurately measuring credit risk exposures across the entire portfolio. Razor Risk is specifically designed to perform high performance capital simulations across the entire portfolio without experiencing any portfolio issues.

Razor Risk supports the calculation of credit risk on traded products using a mark-tomarket plus potential exposure (MTM+PE) approach. The PE component of the exposure can be calculated on a portfolio exposure basis using the Monte Carlo simulation approach, or alternatively the exposures can be calculated using a trade level add-on approach based upon lookup tables. The MtM values can either be calculated in Razor Risk or fed from a source system.

The calculation of potential exposure using Monte Carlo simulation provides a more accurate measurement of credit exposure with near real-time performance. Credit exposure can also be lowered significantly for well diversified counterparties due to economic offsetting effects within portfolios.

Razor Risk also supports compliance to all Pillar I, II and III requirements under Basel, enabling institutions to significantly reduce the regulatory capital requirements of the trading book. Razor Risk provides a mechanism/methodology for clients to incorporate a sophisticated internal model producing advanced exposure calculations, including PFE, EE, EEE and effective EPE.

Razor Risk provides the flexibility to apply multiple risk exposure methodologies at the same time. The simulation approach and the MtM+add-on approach can be mixed on a trade-by-trade basis. This means that for products where the simulation approach is not approved, or the pricing algorithms are not finalised or accepted, they can be evaluated conservatively using the add-on approach. Other products are still evaluated using the simulation method realising the economic offsetting and netting benefits that this provides.

Razor Risk supports commercial instruments, including: loans, guarantees, trade finance, overdrafts and others.

THESE INSTRUMENTS CAN BE VALUED USING THE FOLLOWING METHODOLOGIES:

Face value methodThe face value method generates an accurate total outstanding exposure figure with exposure changes based on exact cash-flow dates as opposed to fixed credit nodes as applied in a simulation approach.

Add-on approachThe system can apply a factor-based approach to generate a PE from lookup tables.

Monte Carlo simulationif simulated in a portfolio approach, the movement of interest rates in floating rate products is correctly incorporated with respect to the other trades in the portfolio. In the event that the commercial instruments are denominated in a foreign currency to that of the limit being calculated, the appropriate FX risk is factored into the exposure.

The user has the flexibility to select different pricing models for specific products.

FULL DRILL-DOWN AND ANALYSIS

Razor Risk provides full drill-down analysis to the individual trade and scenario level for all portfolios. Razor Risk reports the contribution of each trade towards the exposure for a particular limit. Trade contributions are shown in both graphical and tabular form. The user can drill-down into the actual trade details.

INTRADAY AND/OR END-OF-DAY REPORTING

Razor Risk supports calculating and reporting of credit risk on both an intra-day and end-of-day basis. Intra-day transactions can either be fed automatically or manually input into Razor Risk via the Razor Risk Client Application. Credit exposure is recalculated for all portfolios impacted by the intra-day feeds. Relevant collateral and netting agreements are applied to provide an accurate credit exposure result. Limits are updated when credit exposure is recalculated and users are notified of any excesses. Intra-day updates typically take less than 10 seconds to complete. There is no limitation on the size or frequency of intra-day updates. All intra-day updates are fully logged and an audit trail details all changes.

Razor Risk’s turn-ofday (TOD) mode performs exactly the same calculations and reporting as in intra-day mode. Razor Risk’s TOD mode also advances the system date and performs any changes associated with the new system date such as limit tenor changes, applying new market data or maturing transactions.

Derivatives exposure is calculated using either an MTM+add-on approach or a Monte Carlo simulation approach.

Market values can either be calculated in Razor Risk (this is essential for Monte Carlo simulation), or they can be fed from the source system and Razor Risk can calculate the potential exposure add-on. The advantage of feeding market values from the source system is the interface between Razor Risk and the source systems is much more straightforward as it only requires Razor Risk to interface minimal transaction specific information. If Razor Risk is required to price transactions then all of the trade economic data plus market data is required. Potential future exposure is calculated either by an add-on approach based on look up tables, or using Monte Carlo simulation in order to project future portfolio distributions and report exposure at a particular percentile.

Netting and CollateralRazor Risk fully supports the calculation of exposure inclusive and exclusive of any collateral or netting arrangements. These results can be shown concurrently in the system.

Razor Risk supports both gross and net limits. Net limits take into account any credit mitigation arrangements such as netting or collateral agreements. Gross limits ignore any relevant credit mitigation agreements. Gross and net limits can be reported together to identify the legal risk for a particular portfolio.

Collateral can be imported on either an intra-day or end-of-day basis. Collateral transactions are treated in the same manner as other transactions from an interfacing perspective. Razor Risk supports all listed collateral types, assuming that the collateral amount is based on the face value plus any premium/discount plus any accrued interest. Collateral stock is supported and will offset exposure by the current market value of the stock. Standby letters of credit and certificates of deposit are fully supported in Razor Risk.

Users can define collateral categories such as delivery, listing or blanket–lien and the assignment of collateral to the relevant category. Collateral can be scored and rated. The weighting of the risk mitigation effect can be varied based on the collateral attributes and associated look-up tables.

Multiple netting and collateral agreements can be defined and Razor Risk takes these multiple agreements into account during exposure aggregation.

Netting agreements have a number of attributes including start/end date and the legal entities and products that are covered by the agreement. Collateral agreements are defined within a netting agreement and include a number of attributes including threshold. Razor Risk fully supports netting/collateral attributes such as ISDA threshold, maximum transfer amount, maximum unsecured amount, and maximum tenor and factors these into the exposure aggregation process. Trade and cross-product netting is fully supported in Razor Risk.

Guarantors are defined as counterparties in Razor Risk so the attributes and screens are identical. A counterparty can act as either a counterparty or a guarantor – the underlying entity in Razor Risk is still a counterparty. The only difference is the role of the counterparty in a transaction. Razor Risk provides comprehensive functionality to taking into account any guarantees for a deal and if they exist apportions the risk appropriately. At a fundamental level, if a guarantee exists for a deal, then the exposure to the counterparty for the deal is reduced by the guaranteed amount, and the guaranteed exposure is attributed to the guarantor for the deal. These effects are taken into account for all related portfolios (e.g., countries, ratings, etc.).

RAZOR RISK ALSO HANDLES THE FOLLOWING MORE COMPLEX GUARANTEE SCENARIOS:

Differentiation between political and commercial cover. If the guarantee only provides political/commercial cover, then only country/counterparty exposures are impacted by the guarantee.

If there are multiple guarantees for a deal, Razor Risk attributes the exposure based upon the seniority of the guarantor.

Pre-deal check and what-if capabilityRazor Risk’s pre-deal checking and what-if capability enables an end user to determine the impact of a new trade or amendment to a trade on all relevant portfolio limits.

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. This enables the what-if functionality to provide fast intra-day performance as only the changed trade requires simulation, and these results are then re-aggregated against the previously calculated results.

What-if trades can be manually entered into Razor Risk as new trades or amendments to existing trades. What-if trades can be saved for later use.

Razor Risk supports multiple market data sets so the credit exposure impact of changing market data inputs can be modelled.

Model parameters are derived by the Razor Risk ratio generation process. Razor Risk’s ratio generator calculates the Razor Risk stochastic parameters based on input historical data, choice of stochastic method, principal components and mean reversion parameters. Our clients can also use their own stochastic model as an alternative to the Razor Risk models.

Razor Risk can aggregate externally calculated exposure results with the internally calculated credit exposures. Netting and collateral is fully taken into account. Aggregation can be performed on either externally simulated or MTM+add-on exposure profiles calculated externally.

STRESS TESTING AND SCENARIO ANALYSIS

Razor Risk’s scenario and stress testing framework produces risk and reward measures that explicitly capture the passage of time.

In modern risk management, it is vital to be able to drill down into risk measures to analyse causes. Throughout Razor Risk, 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 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 data sets.

BACK TESTING

Razor Risk supports a generalized framework for back-testing of simulated credit or market exposures at any portfolio level as required. The bank defines which historic set of exposures to track against and for the realized theoretical exposures;and these can be calculated in Razor Risk where the client defines which market observations they want to use and which valuation dates to use hence whether transitioning forward in time or not.

Integrated limit management capabilityThe Razor Risk Limit Management module provides the comprehensive limit and excess management functionality required from an enterprise-wide limit management solution.

THIS FUNCTIONALITY INCLUDES:

Broad set of limit functionalityPre-settlement limits, settlement limits, limits in reduction, multi-currency, spike limits, revolving or non-revolving limits, warning thresholds and flexible tenors.

Diverse set of limit typesRazor Risk enables limits and exposure to be measured at any aggregation level including counterparty, industry, region, country, product type, internal business unit, etc.

Counterparty managementDefinition and maintenance of counterparty information. Full support for flexible counterparty hierarchies and multiple parents.

Excess managementcomprehensive excess management functionality to ensure that appropriate action is taken in the event of limits going into excess.

RISK POLICY DEFINITION/PORTFOLIO MAPPING

Razor Risk adopts a rules-based approach to map trades to the appropriate portfolios based upon the risk policy. There is no limit to the flexibility of how portfolios can be defined, and common examples include:

Counterparty

Counterparty hierarchy

Location

Industry

Credit rating

Country rating

Product

Product hierarchy

Style of exposure calculation

Internal bank hierarchy

LIMIT DEFINITION

For each portfolio, limits may be defined which will then be compared against the exposure for the portfolio. A wide variety of limit types are supported, including:

Revolving

Non-revolving

Mandatory

Optional

Temporary offsets

Warning thresholds

User defined types of caps and thresholds

Multi-currency

Template limits

These attributes can be combined in user-defined ways to create the various portfolio hierarchy structures required by the bank.

For example:

Counterparty hierarchy / product hierarchy

Industry / location

Counterparty / internal hierarchy

Limits can be set at all of the specified portfolio levels. For each limit the time bands, currency and status are specified. Limits are displayed in either a graphical or tabular form. All limits can be maintained from an external source system, or through the Razor Risk client interface. The same portfolio can be maintained through either method. If required, security measures can be put in place to restrict the ability of groups of users to maintain limits that are sourced from an external system. A full audit trail is kept of any changes to limit attributes. Workflow management of limit statuses can be configured to meet a client’s limit management approval business processes.

Each limit in Razor Risk has a status associated with it. These statuses are configurable, and can be used to control the workflow of proposing, approving and suspending limits. Razor Risk’s security module enables the bank to restrict maintenance of limits based upon the status of the limit or based upon any other portfolio attribute.

MONITORING UTILIZATION AGAINST LIMITS

Razor Risk calculates risk or exposure for each portfolio defined within the system. The calculation method is an attribute of the portfolio itself. Razor Risk supports a number of different calculation methods. In the case of credit risk, these calculations range from Monte Carlo simulation to principal plus interest for the banking book. A client can also extend Razor Risk to support proprietary calculation methods.

Razor Risk monitors limit utilization for every portfolio with a limit defined on an intra-day basis. Limit utilization is updated whenever new deals are fed to the system, and these updates are available on a global basis. Razor Risk’s pre-deal check functionality checks any impacted limits on a pre-deal basis. This functionality is optimized to meet the sub-second response times required within a dealing environment.

EXCESS MANAGEMENT WITH FULL WORKFLOW SUPPORT

Razor Risk provides a comprehensive excess or limit violation/excess reporting system that supports the following features:

Online violation detection and alerting system

The alerting system permits the routing of messages to the appropriate users based on the severity of the excess, the details of the trade and associated static data

The alerts can be sent to the razor risk client screens

The alerts can be mapped to email, pagers, sms messages, etc.

All violations are logged and can be reported as required

Trigger analysis showing what caused the excess to occur

The system raises excess events for each portfolio/limit that is breached and supports the following violation categories:

Inserted/pending trade(s)

Amended trade(s)

Deleted trade(s) – where the existing trade reduces exposure under a netting agreement

Excess violation – a batch that reflects changes in market rates will cause an excess violation

Any time bands exceeded are reported

Dealing in unauthorised products

Dealing in suspended limits

Deal maturity exceeding a maximum tenor

Other types of violation

Users are notified of violations online using the alerts system. Alerts can be routed on the following basis:

All users

All users in a branch

To a user or dealer

Senior officers based on severity

Type of violation

Details of the trade

Details of the limit breached

Related static data

The notifications can be routed to the following types of media:

The user interface monitor

An email system address obtained from the static data

A pager – number obtained from the static data

An sms message

Razor Risk provides the client with configurable event logging types such as:

Explained/unexplained

Approved/unapproved

Passive/active.

Razor Risk provides secured access to different users and the ability to add events. Razor Risk provides reports on term structures by product type, warning threshold and limit reservations, and clients can report on any exposure type calculation including user defined calculations.

Basel Regulatory RequirementsRazor Risk also supports compliance to Basel I, II and III standards, enabling institutions to significantly reduce the regulatory capital requirements of the trading book. Razor Risk provides a mechanism/methodology for clients to incorporate a sophisticated internal model producing advanced exposure calculations, including PFE, EE, EEE and effective EPE. Razor Risk has a specialist Basel Trading module that fully supports the Basel Pillar I, II and III requirements.

THE MODULE:

Utilises Razor Risk’s high performance Monte Carlo simulation engine to calculate the EPE numbers required to a high level of accuracy in real time.

Provides full support for the complex tasks of ‘back-testing’ the model, and stress testing - requirements that must be reliably met in order for the bank to receive and maintain its accreditation to use this approach.

Calculates Basel III credit risk capital requirements in the standardized or internal ratings based (IRB) approaches including the capital charge for credit valuation adjustments (CVA).

Calculates all capital, liquidity and leverage ratios.

Calculates market risk exposures based on stress scenarios, VaR methodology and standardised approaches.

Stresses risk factors such as ratings, market rates, PDs, LGDs and haircuts.

The Basel Trading module can be fully integrated with Razor Risk’s other risk management modules. This enables the Basel regulatory requirements to be fully met and provides a platform for strategic internal market and credit risk management.

Credit Value AdjustmentTMX Technology Solutions has invested around the recent and growing market interest in credit value adjustment (CVA), the fair value adjustment for the cost of hedging the credit exposure across the bank’s position, as required for accounting transparency and disclosure purposes.

The process of managing credit reserve, and in fact the level of the associated calculations, differ across banks in both the top tier and second tier banks. The common element across each of these institutions is the need to manage available capital.

Various clients are using Razor Risk to provide CVA calculations and have tended to apply different methodologies.

DIFFERENCES IN APPROACH INCLUDE:

The extent to which CVA is managed: it can be first an assessment calculation, then a hedging strategy, and then separately a risk-externalization strategy involving contingent credit derivatives

The level at which the bank actively manages or warehouses assessed risk: the extent of how functions are centralised or aligned with the trading desks (i.e., a centralised group function, or managed at a desk or group level charge from finance)

The extent of hedging of sensitivities (either market or credit) and how they are reconciled back to the front-office trading systems

Model choice (partial estimations or simulated, market-implied, or risk-neutral, historic) dependent on the level/strategy of externalization and the extent that externalized risk vehicles are marked to market

Scope of product/trading book coverage, range and strategies for liquid and illiquid counterparties, and the types of exposures covered

Scope of what risk is assessed for externalized risk and hedging purposes, based on the appetite of warehousing, and what levels of risk are to be externalized (i.e., above the credit-limit utilisation capital relief for counterparties vs. the managing the whole counterparty exposure)

In most cases, CVA remains part of a broader capital or balance sheet management process, especially important in today’s credit constrained market. The important element associated with the market’s perspective for CVA is the need for a more extensive and accurate set of instrument, simulation, and attribution analytics; enabling trading teams to ultimately externalize risk at market value, rather than typical risk assessment tolerances.

ExtendibilityRazor Risk has been specifically designed as a vendor solution that can be adapted to meet the risk model needs of each individual client, as well as scale with changing business requirements. The analytics of Razor Risk’s Credit Risk module are fully extendible so that new products can be easily added and a client’s particular pricing models easily incorporated.

AREAS OF EXTENDIBILITY INCLUDE:

incorporation of a client or a third party’s own pricing models

extension of product coverage by providing new pricing models and additional screens

inclusion of proprietary term structure generation routines

aggregation of results externally to Razor Risk and aggregated into the overall calculation

To implement a new product, the main step involved for a user to implement a new product is to provide a pricing model for the new product. A sample pricing model and detailed documentation is provided with the system to facilitate this. The existing input screens/schema can be used, and any additional parameters provided as trade extensions in the screens. If required, the user can also add a new input screen and additional trade attributes.

About TMX Technology Solutions Inc.

TMX Technology Solutions Inc. is a leading provider of risk management technology and consulting solutions

to financial institutions worldwide. We provide successful solutions to proactively measure and manage risk

in the Americas, Europe and Asia.

With offices in Sydney, Toronto, New York and London, TMX Technology Solutions has a highly skilled team

of specialists who provide risk management technology and consulting services across the financial markets

and risk management sectors. We operate on a global risk consultancy structure, drawing upon the expertise

of all employees in implementing best practices for our clients’ individual needs. This methodology supports

an efficient, low cost, minimal risk implementation, allowing our clients to maximise optimal risk and

reward. TMX Technology Solutions has a 100 per cent successful implementation record for 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

razor.sales@razor-risk.com

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.

© 2015 TMX Group Limited. All rights reserved. Do not copy, distribute, sell or modify this document with TMX Group Limited’s prior written consent.

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