MODEL VALIDATION & VALUATIONS
Our validation services include a complete set of in-depth analyses that help gain regulatory approval, assist with the internal audit / validation teams, and comply with stress testing requirements. We believe that without a thorough testing and validation of the model, its application could be flawed or misunderstood. It results in incorrect risk profiles, failed hedge effectiveness testing and other issue.
Our validation process is thorough, in-depth and informed by the extensive front office, trading and risk management experience of every member of our model validation team. This process involves the following steps:
- Examination of the governance structure and current validation approach
- Gap analysis to regulatory requirements or best practices
- In-depth review of the conceptual soundness, methodology review/developmental evidence, and assumptions
- Benchmarking – a review of internal models with comparable industry benchmarks
- Backtesting, including statistical tests for discriminatory power and calibration
- Stress Testing, including adverse economic impact scenarios on model output
- Verification of model operations including override and exception analysis
- Evaluation of the appropriateness of the distribution assumptions for credit risk models
- Model enhancement based on validation activities
OIS IMPACT ANALYSIS & VALIDATION
Use of OIS Curve as a discount curve for valuation is now mandated for most derivative transactions. This has posed significant challenges for the financial services industry to develop efficient and accurate OIS models, as well as to identify and implement technology solutions where these OIS models are properly implemented.
We have assisted numerous clients to validate and test OIS Models and assess vendor solution for fitness of use. Our team of financial engineers and former traders possess the ability to quickly apply a methodology of rigorous testing and common sense to bring a client live with OIS Model to meet their aggressive timelines.
At Epsilon we do not only provide a full Model Validation Service, but also help our clients in several other aspects and stages in the Model Validation Process:
- Test Plan: Support with the execution of a one-time or periodic model validation
- Review of Model Validation Methodology: Review of an existing model validation process to suggest opportunities for improvement
- Review Documentation: Support with questions concerning internal and external audit of model validation processes
- QA: If your model is in “maintenance mode”, we can help you to design a suite of tests to run in house and guide you along the way
- Automate, digitize or completely eliminate manual processes
- Implement enterprise-wide solutions by accumulating risk measures from multiple departmental systems
- Integrate to external providers for those risk calculations that you wish to outsource
Our risk analytics consultant can look at various risks on various levels and measure them accordingly – our end result will be a simple solution to what had once been complex questions and issues.
Categories of Risk we look at:
Do you need Intex or RiskMetrics integration? Have you configured your ERS limits properly? We can help you to configure your credit limits, adjust your valuation for the credit risk via appropriate means including configuring credit curves or using Credit Valuation Adjustment (CVA) calculation, or to integrate to external systems.
- Interest Rate Risk – we develop and implement hedging solutions such as static or dynamic hedging that minimize or eliminate risks related to the movement of interest rates
- Liquidity Risk – we develop cashflow projections to help balance future in- and outflows of the money
- Value at Risk – we configure your VAR calculation in your enterprise system, integrate with external provider (RiskMetrics) or develop your own model
We review, document and reengineer your business processes based on sound business process management practices.