When the Risk Manager asks you what your company’s options are when in a crisis, "dunno" is simply not an option. The uncertainty could end your career, your company, or both.
Being prepared and informed during a crisis is essential. You must be able to act fast and with confidence that you know your contractual rights and remedies in a counter-party crisis. Fingertip access to your contractual obligations and defenses during an internal crisis will reduce the risk of large-scale default, termination, regulatory penalties and brand damage.
Learn the necessary steps that will help you test how to perform during the most stressful scenarios, including:
Jamie Wodetzki, Co-Founder and Chief Product Officer at Exari, and Bill Hewitt, Chief Executive Officer at Exari, discuss why asset managers, banks and brokerages should proactively stress test their contract portfolio to analyze how they will perform during crisis scenarios and unexpected events.
Here are the top ten reasons to stress test before a crisis:
1. Because the Regulator says so.
It is vital to have a strong grasp on all of your trading, vendor and inter-affiliate contracts, as well as understand your collateral terms, cross-default, termination and intercompany guarantees.
2. Forget the regulator, everyone needs to know how much damage the next crisis might cause.
You may not be able to prevent a crisis, but you can limit your losses with strong contracts and knowing your weak links, allowing you to react quickly.
3. During a market crisis, you want to know every third party relationship that might fail and how to prioritize damage control.
If a market crisis triggered multiple failures or defaults, you should understand ahead of time, instead of after your obligations are due. If not, you risk not being able to meet your contractual obligations.
Consider important questions like, “If we have to default, where can we do so with the least harm?”, “Where do we have short versus long cure periods?”, or “Where do we have cross-default exposure?”
4. During a counterparty crisis, management needs to know the likely damage, how it could spread, and how to contain it.
“How much of their collateral can you claim and can you make a margin call for more?”, “How much of your collateral do they hold and can they re-hypothecate?”, “Do you have broad termination rights that would allow you to close-out faster than other creditors?” This is all important information you need answers to quickly, if a major trading counterparty fails.
If a major vendor fails, there are items that need attention as well. You will need information on your termination and switch rights, if vendor default triggers defaults in your customer obligations or regulatory penalties, and what your rights are to any data and records they obtain.
5. During an internal crisis, management needs to know every contractual exposure that could be triggered and how to prioritize damage control.
It is vital to understand the terms of your contracts. You need to know if termination would affect any critical vendors or revenue, if any of your contracts expose you to unlimited liability, or an affiliate’s failure affects parent companies through guarantees, cross-defaults, or specified entity clauses.
6. If you discover bad contracts during a crisis, you are stuck with them.
During a crisis, you will not have any time to clean up bad contracts. If there are a large number of them, you will most likely be asked to explain why - assuming you still have a job.
7. When under stress, contracts you cannot find might as well be deemed bad.
Contracts can be stored as many versions, some drafts and some final, embodied in multiple documents. During a crisis you will need all contracts in one central place with the executed version clearly marked and no gaps in amendment history.
8. Under stress, speed reading thousands of pages is impossible.
It is rare you will be able to find all the documents you need in a crisis scenario, but you need to have data or reports at your fingertips for instant guidance on the most important contractual terms.
9. “But I did not create this mess” is a weak excuse.
You will be portrayed as either negligent, since you knew about the mess and failed to fix it, or ignorant since you did not think to ask questions about it. Either way, this is a career-limiting move.
10. Stress testing gives you certainty, a second chance to fix issues, and it is not as hard as you might think.
Stress testing gives you certainty about whether or not you have a big problem, little problem, or no contract problems before the next crisis hits. You will have a chance to fix issues before they escalate.
Stress testing will only make your business stronger. If you do not have problems to fix, you will have peace of mind about the strength of your contracts.
Solutions like Exari’s Contracts Hub for Financial Services will give you a ready-made tool kit for stress testing all your contracts, so you can be confident how they perform in a crisis scenario.