Lehman Lesson: TMX Goes for Razors Technical Edge
November 30, 2011
TMX Group said it would seek a technical edge in the growing competition between exchange operators for worldwide trading activity by making a takeover bid for an Australian supplier of sophisticated risk management software.
The operator of the Toronto and Montreal exchanges said it would make a bid for all the shares of Razor Risk Technologies, a firm based in Sydney that provides credit risk software to clearing houses, stock exchanges, financial institutions and brokerages around the world.
The firm develops programs that analyze, in a unified fashion, credit, market, liquidity, and counterparty risk. Various modules of the company’s product line can simultaneously analyze limits of exposures to counterparties, such as an investment bank on the order of Lehman Brothers, the stress of various potential economic scenarios, such as a September 2008 run on money market accounts, margin requirements and regulatory requirements.
The products work across stocks, bonds, futures, options and other derivative securities, as well as foreign exchange and commodities.
The Razor Risk software is designed, from the start, to address the kinds of risk issues “that were brought to the forefront during the economic downturn with the collapse of institutions such as Lehman Brothers,’’ according to the company.
The software calculates the “total exposure of a financial institution across all its global activities.”
The software specifically accounts for the effects of time on assets that firms hold. For instance, it in theory would be able to flag that Merrill Lynch in January 2008 had more than $92 million at risk in its trading on the 28th day of that month – when its credit losses eventually turned out to be $18 billion during the credit crisis that ensued.
The Razor software allows firm to calculate credit and market risk using Monte Carlo simulation overnight, intra-day or in real time.
The firm first released its risk management software in 2002, but its import became most apparent in September 2008, when the global credit crisis erupted.
In fact, its chief executive officer, Andrew Wood, took his post on September 11, 2008.
Three days later, Lehman Brothers filed for bankruptcy, holding $600 billion in assets.
One week later, an “electronic run on the bank” broke open, with $550 million being withdrawn from money market accounts in less than two hours, forcing the Treasury deparmtnet to pump in $105 billion – and then simply close down the accounts.
Razor’s clients include ANZ Bank, Australian Stock Exchange, Calyon, Federal Home Loan Bank Pittsburgh, HSBC, International Derivatives Clearing Group, LCH.Clearnet Group, the Man Group, Royal Bank of Canada and Treasury Corporation of Victoria.
TMX Group plans to offer roughly $10 million for the company. The offer will be subject to a requirement that 90 percent of shares be submitted and other conditions.