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CompatibL Technologies was founded in 2003 to offer risk technology solutions to banks and asset CompatibL
Model Validation
managers. Since then CompatibL has established itself as the leading provider of quantitative software
and services for derivatives analytics, limits, and regulatory capital.
CompatibL has over 200 experienced developers and financial engineers and boasts a client base
of over 50 banks, central banks, supranationals and asset managers in the US, EMEA and Asia, including
4 out of 5 largest derivatives dealers. Over 140 major projects have been implemented across this client
base. CompatibL is headquartered in Princeton (United States) with the main delivery centres located
A new approach to model risk control
in London (UK), Warsaw (Poland) and Singapore.
www.compatibl.com
info@compatibl.com
Singapore Warsaw
CompatibL Pte. Ltd. CompatibL Sp. z o.o.
30 Cecil Street Prosta 32
19-08 Prudential Tower Second Floor
Singapore, 049712, Singapore Warsaw, 00-838, Poland
+65 6813 2067 +48 (22) 110 8005
About CompatibL Model Validation
CompatibL is a leading software vendor and consultancy that combines advanced CompatibL offers independent validation services across a wide range of valuation
application engineering with top quant expertise for the capital markets industry. and risk models, including formal regulatory validation reports as well internal
The company provides enterprise risk solutions and multi-asset analytics for front, middle reviews with actionable insights to mitigate models’ weaknesses and limitations.
and back office. CompatibL is also a leading provider of custom software development We have expertise in the latest quantitative research and model validation methodologies
services and model validation consultancy for the financial industry. as well as implementation practices.
Our software is running in over 85 financial institutions worldwide, including 4 of the 5 CompatibL has teams located in strategic global locations across Europe,
largest dealers, 33 central banks and some of the world’s largest asset managers North America, Asia working in close contact with clients. We also have experience
in the Americas, EMEA and APAC. Over the years, our products have won industry in long-term partnerships and have been working closely with the clients’ internal
recognition for their quality, performance and flexibility. teams for many years.
15+ 200+
years experience in-house experts, including quants,
in software development for software engineers, solution architects,
financial institutions UI/UX designers and analysts
in 4 branch offices
140 85
delivered enterprise software clients worldwide, including 4 Market Risk CompatibL Risk Alexander Sokol
projects and hundreds of quantitative of the 5 largest dealers, 33 central Technology Vendor Product of the Year Quant of the Year
consultancy and model validation banks and some of the world’s largest of the Year Award Award Award
Operational
Risk Basel II Basel IV
Market
Risk FRTB IRRBB
Basel II.5
Credit
Risk SA-CCR
Basel III
Systemic
Risk
ISDA SIMM
Margin
Once we have ensured that the calculation flow works as expected, we perform tests
Traditional approach and analyze the entire model.
Monolith
Inputs Outputs
model
Monolith
Inputs Outputs
model
Validation
Validation
Focus not only on the entire Unit tests for model components
model but also on its individual lead to easier to understand,
CompatibL approach Composite Model components more reliable test criteria
and implementation
Validation Validation
Composite Model
Validation Validation
Components Components
Components Components
Inputs Outputs
Consolidation, Validation
Testing stage:
• Run validation tests
• Assess the impact of model choice on material measures
Compared to the traditional approach of using manual tests on hardcoded inputs and direct
integration with market data, our model replication approach enables a wider validation Conclusion stage:
scope, not limited by simple cases and analytical examples. If desired, it can be scaled
• Analyze individual test results, provide recommendations and conclusions
to a full live portfolio, providing ultimate confidence in the validation results. • Gather all findings into an executive summary and a highly detailed full validation report,
conforming to the relevant regulatory validation template when applicable
Overall, our approach to the automation of model validation tests provides depth
and scale advantages over the legacy validation methodologies.
Delivery stage:
• Deliver validation documentation, reports, and supporting materials
• Deliver test code artifacts and detailed documentation that allows this validation
to be rerun in-house after project completion
Models
Analytic Asymptotic
Model Actual vs Expected
Semi-analytic Approximate
Models
Independently replicated
Model Actual vs Expected
Actual Actual Alternative
model outputs 1
Conclusion Conclusion
Test case 1: Inputs 1
Expected Expected Test case 1: Inputs 1 Actual Consolidated
model 1 outputs 1 model actual outputs
Expert + Consolidated Expert
judgement inputs judgement
Challenger Consolidated
Actual Actual Test case N: Inputs N open-source expected
model outputs N model outputs
Test case N: Inputs N
Expected Expected
model N outputs N
How we do it?
Internal Model Standardised Standardised Model review: Validation model review: Analysis and summary:
Basic Approach
Approach for market Approach for market Approach for CVA
for CVA (BA-CVA - Background, market practice - Detailed test descriptions - Detailed analysis of test results,
risk (IMA-TB) risk (SA-TB) (SA-CVA)
and methodology and complete inventory providing the foundation for
of the required input data report conclusions
- A thorough analysis of model
specifications, assumptions - Detailed instructions on - Model risk assessment
CompatibL has developed and presented several training courses to help model validation specialists and limitations how to perform tests and and conclusions
to broaden their expertise in the latest regulatory frameworks. Our experts can customize the training independently reproduce
program to suit the needs of your quants and model validation experts. their results