Stress Testing for Financial Services
Exari Hub lets you Stress Test your Contracts- and your Business- Before it’s Too Late
In times of stress, even big companies can fail. Which is why banking regulators around the globe are compelling big banks to stress test their operations now, so they don’t fail during a crisis later.
But what about the rest of us? Any financial services firm could be brought down by the next crisis- and waiting for it may be too late. There are no second chances in the real world. There are no bailouts for the rest of us.
So, where do you start?
How the Big Banks Do It
A good blueprint for financial stress testing is the approach taken by the Federal Reserve under SR 14-1, which summarizes the preparations expected of large bank holding companies in the US (a.k.a the “too big to fail” banks). It outlines the sort of information and insight that large banks are expected to have in order to understand their risks and exposure during various crisis scenarios.
A major feature of stress test preparation is a granular and robust understanding of the contractual rights and obligations that exist between holding companies, internal affiliates and external counter-parties and suppliers. It is these contracts and legal agreements that answer many of the important questions that arise during a crisis:
- What are the terms of financial trading agreements such as ISDA Master and Credit Support Annexes? What crisis events might lead to termination?
- What collateral rights and obligations exist between you and other parties? Do you understand how that might play out in a crisis? What assets can you use as collateral? Are you able to substitute and re-hypothecate? Do you understand how collateral terms vary under complex multi-party umbrella agreements?
- What guarantees and inter-affiliate credit support has been provided that might cause the financial distress of one legal entity to infect the holding company or some other material legal entity?
- What business critical operational dependencies exist between you and your affiliates or external service providers and what are the key terms of these relationships? Are the terms of these service contracts robust, or might they be terminated under stressed events? Do you understand all of the termination triggers under these critical contracts, such as change of control, cross-default and other events?
The Devil is in the Data
The answers to many of these questions are often submerged in a sea of unstructured documents. To find the answers, you first need to translate the legal wording of many different contracts into trusted operational data. Only then is stress testing possible.
This is where experience counts.
Exari’s Contracts Hub™ for Financial Services is the product of 10 years of working with major financial institutions to understand contractual terms and risk. We’ve built a robust data model that clearly and accurately reflect the terms of even the most complex financial contracts.
With Exari’s Universal Contract Model for Financial Services, you can:
- Accurately model contracts with diverse party structures, including simple bilateral agreements to multi-party umbrella agreements with agents, guarantors and third parties
- Cleanly capture and roll-up the agreements, amendments, assignments and restatements, where important terms may be distributed across multiple documents
- Drill deep into critical stress testing terms such as collateral obligations, termination events and netting rights
- Receive quick trusted results without losing precious time building a solution from scratch, but with the option to customize and tune the model to reflect unique features of your own business
Put simply, by capturing your contracts in the Exari Contracts Hub™ for Financial Services you won’t have to wonder how you’ll perform under a stress test. You’ll know. And if there are any problems, you’ll know exactly where they are and what needs to be done to fix them.