R A ZOR RISK L IMIT MANAGEMENT MODULE FEATURES AND FUNCTIONALIT Y OVERVIEW

About Razor RiskTMX Technology Solutions’ award-winning Razor Risk framework provides near real-time and pre-deal calculations that enable management to view their exposure to individual entities on one consolidated platform. 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 achieving 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. 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.

THE RAZOR RISK MODULES ARE:

Core Services (base architecture)

Market Risk

Credit Risk

Limit Management

Economic Capital

Basic Analytics

Advanced Analytics

Basel Trading Book

Limit Management Module OverviewThere are four main areas of limit management functionality within Razor Risk:

1 RISK POLICY DEFINITION/PORTFOLIO MAPPING

2 LIMIT DEFINITION

3 MONITORING UTILIZATION AGAINST LIMITS

4 EXCESS MANAGEMENT

4.1 CONSOLIDATION OF TOTAL LIMITS

4.2 ON-LINE CHECKING OF LIMITS AND UTILIZATION

4.3 OVERRIDING LIMIT EXCESSES

4.4 LIMIT MONITORING

4.5 ON-LINE LIMIT ENQUIRY

4.6 COUNTRY LIMITS

4.7 REAL TIME UTILIZATION OF COUNTERPARTY CREDIT LIMITS

1 Risk Policy Definition/Portfolio MappingOne of the key considerations for a limit management solution is to provide a risk model that reflects the current risk policy of the bank, and to ensure that this risk model can evolve concurrently.

The risk policy dictates how risk should be monitored within a bank. 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

2 Limit Definition and MaintenanceFor 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

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.

Figure 1 shows how a limit can be set up for a particular counterparty in Razor Risk. The limit maintenance screen in the middle of the screenshot shows how the status, currency, start/end dates and term structure for the limit are defined. The graph on the right of the screenshot plots the limit and exposure for this counterparty. The red line shows the actual limit, and the amber line shows a warning threshold that has been defined as 90% of the limit amount. The purple line is a temporary offset (spike limit) that has been defined to temporarily allow an excess to the five-year limit tenor.

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

FIGURE 1 - LIMIT MAINTENANCE SCREENSHOT

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.

3 Monitoring Utilization Against LimitsRazor 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. Market risk limits can also be set defined and managed, for example, value at risk (VaR) and stress testing limits. 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.

4 Excess ManagementRazor Risk provides a comprehensive limit violation/excess reporting system which supports the following features:

Online violation detection and alerting system

Workflow management of excess events that can be configured to meet a client’s excess management business processes

An alerting system that 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

Alerts that can be sent to the razor risk client screens

Alerts can be mapped to email, pagers, sms messages, etc.

All violations are logged and can be reported as required

The excess events are passed into an event handling process that permits the bank to specify the routing of alert messages to users as required. Razor Risk supports the following violation categories:

Inserted trade(s)

Amended trade(s)

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

A batch that reflects changes in market rates will cause an excess violation

Any time bands exceeded are reported

Dealing in unauthorized products

Deal maturity exceeding a maximum tenor

Other violation types

Users are notified of violations online using the alerts system.

4.1 CONSOLIDATION OF TOTAL LIMITS

Portfolio hierarchies are defined within Razor Risk and enable the aggregation of risk into the appropriate segments. One of Razor Risk’s key differentiators is the use of a very flexible set of mapping rules to define the treatment of exposures within a bank’s portfolio hierarchy. Every bank has a different risk policy for aggregating risk, and these risk policies tend to be complex and difficult to change. Razor Risk’s flexible mapping approach enables a bank’s risk policy to be fully implemented in the system. This greatly simplifies the implementation process, as policy changes are not necessitated by system constraints.

Any attribute of the trade or organization hierarchy may be used to aggregate trades into portfolios. This includes attributes such as currency, issuer, counterparty, tenor, product, industry, location and internal/external ratings.

The benefits of netting, collateral and economic offsetting are realized at all levels in the portfolio hierarchy.

4.2 ON-LINE CHECKING OF LIMITS AND UTILIZATION

On-line checking of limits and limit utilization is fully supported. Razor Risk’s pre-deal check functionality enables dealers to determine if there is sufficient availability to execute a particular deal. Razor Risk also calculates the maximum face value for a particular deal type that can be traded within the available limit.

Limit checking can also be performed externally to Razor Risk, and front-office applications can check limit availability in Razor Risk without having to dual key input data into the Razor Risk client interface.

4.3 OVERRIDING LIMIT EXCESSES

Razor Risk supports temporary increases to limits to be applied on top of existing limits. These ‘spike’ limits enable excesses to be temporarily overridden in the system. A start date, end date, and offset amount are specified for these limits. Spike limits appear as a different colour in the Razor Risk GUI so they can be readily identified.

Razor Risk supports the definition, modification and deletion of all limits within the system and also supports the addition and maintenance of limits with multiple tenors. Figure 1 - Limit Maintenance shows how this information is maintained in Razor Risk.

Razor Risk supports a free text narrative to be entered for a portfolio. The portfolio shown in Figure 1 - Limit Maintenance has a note next to it showing that there is some narrative for this portfolio. The narrative is shown in the bottom left corner of Figure 1. Permissions can be set on who can view and also who can update this narrative.

Freezing and unfreezing of a line is performed by updating the limit status. Razor Risk can be configured to automatically cause an excess for any dealing against a frozen line. To unfreeze the line, the status is simply updated. Permissions can be set in Razor Risk to restrict which users can update the limit status.

The limit status would be used in Razor Risk to refer all transactions to a particular user. A limit status will be defined in Razor Risk to reflect this. When this limit status is set, any trades against this portfolio will automatically cause an excess for the dealing.

The user and business unit information are entered into the Razor Risk user reference data table. The Razor Risk mapping rules reference the user reference table to determine who shall be notified of which excesses.

Earmarking or reservations in Razor Risk is handled by a reservation deal type. The reservation amount is entered by inputting a reservation deal which then reserves the limit, based upon the deal amount. Reservations can be deleted during the turn of day process, or at another time specified as part of the implementation. Comments relating to the earmarking can be entered as part of the deal information or against the limit directly in the form of narrative.

4.4 LIMIT MONITORING

Any limits set in Razor Risk are automatically monitored in the system. Limits can be defined at any portfolio aggregation level including business units, counterparty/ counterparty group, product, limit and tenor.

Razor Risk’s multiple tenor limits are defined as revolving limits. Deals are automatically aged and assigned to new tenor bands as appropriate during the Turn of Day process.

4.5 ON-LINE LIMIT ENQUIRY

Razor Risk’s client interface provides full on-line enquiry capability. Limit utilization is updated intra-day whenever portfolio changes, such as new trade feeds, occur. The on-line enquiry supports querying limit utilization and availability for any portfolio in the system. The user can drill down to the transaction level to determine which deals are contributing towards the limit utilization. Razor Risk’s excess management module also provides trigger analysis functionality which enables a user to determine what caused an excess to occur.

4.6 COUNTRY LIMITS

Razor Risk provides comprehensive support for country limits. Our rules-based mapping approach gives the bank the ability to finely tune its country risk monitoring as required. For example, the system supports the following types of country limit:

regional limits

domicile/immediate country limits

ultimate/head office country limits (including multiple locations where shared ownership occurs)

country limits by product hierarchy, including product/asset group levels

These limits are monitored in real time and can be accessed via Razor Risk’s client on-line interface.

4.7 REAL TIME UTILIZATION OF COUNTERPARTY CREDIT LIMITS

One of Razor Risk’s key differentiators is the ability to calculate and monitor credit risk in real-time using Monte Carlo simulation.

The Razor Risk system allows pre-deal check requests and new deals to be entered directly into the system or supplied from external systems to avoid dual-keying of data.

The full benefits of economic offsetting and netting are applied to any portfolio changes on demand. One of the key aspects of Razor Risk’s design is the minimizing of any recalculation within the application. This is best illustrated using a “new deal” example.

FOR A NEW TRADE, RAZOR RISK FOLLOWS THE FOLLOWING STEPS:

STEP 1 The exposure profile for the new trade is calculated. This is a very quick process as only a single trade is being simulated.

STEP 2 The exposure results for the new trade are aggregated with the pre-calculated exposure profiles for all transactions in all portfolios impacted by the new trade. At this point, netting and economic offsetting benefits are realized. Again, this is a very quick process as aggregation of a large body of data is considerably quicker than re-simulating all the required data.

STEP 3 The new portfolio exposure profiles are checked against limits and any breaches are identified.

Razor Risk’s design caters for the large volumes of pre-calculated data which must be held so that it can be rapidly re-accessed. The same approach is followed for the addition of “what-if?” trades. What-if scenarios that involve removing trades are even quicker as only steps 2 and 3 outlined above are required.

Razor Risk allows the user to view all data with and without the effect of the current what-if scenario, and to switch between the two views or view the before and after side-by-side. The effect of the what-if scenario on limits can be presented in tabular form, as absolute exposures or as the changes between exposures. It can also be shown graphically, via before and after graphs, or composite graphs showing the effect of the scenario.

The user can enter a single deal, construct a structured deal using individual trade components, or enter a number of independent deals as part of a single scenario.

Razor Risk enables the user to drill down to the transaction detail for each portfolio to determine the impact on credit exposure for each deal in the portfolio. The ability to drill down at the transaction level to see the marginal contribution of individual transactions to credit risk enables users to manage credit risk more proactively and profitably. The capability to choose the most credit efficient counterparty for an individual transaction enables dealers to actively reduce credit risk within their organization, providing a higher return on available capital. Razor Risk provides the full set of drill down and portfolio modelling tools that enable more profitable use of available credit across the organization.

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.

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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