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Risk engine calibration

ISDA SA-CCR, CEM, IMM QIS

Jonathan Berryman Risk Strategy

[email protected]


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13 January 2017


This paper shows the calibration for interest rates, foreign exchange and equity risk factors

of the FIS risk engine compared to the BCBS Regulatory Consistency Assessment

Programme (RCAP) report on risk-weighted assets for counterparty credit risk (CCR)

published in October 2015 and the European Banking Authority (EBA) report for equities

(July 2016).


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13 January 2017

Pre-exercise validation

To help identify and rectify misinterpretations of trades and netting sets the banks were requested to submit

certain pricing information on a separate data collection template. The trades were booked to be at the

money on 1 October 2014 and the RCAP exercise run from 31 October 2014 giving an initial market value

(IMV) at that date. These were calculated by FIS to be:

Trade Type Base ccy IMV (base) Swap / Fwd / Strike

1 EUR IR Swap EUR 10,228 1.761539

2 USD IR Swap USD -9,131 1.88939

3 USD IR Swap USD 9,131 1.88940

4 GBP IR Swap GBP 3,048 1.219345

5 GBP IR Swap GBP -3,140 0.96044

6 USD IR Swap USD 10,632 2.609529

7 USD Swaption USD 35,329 3.39574

8 JPYvUSD Forward USD -51,980 108.857036

9 USDvEUR Forward EUR 9,578 1.275557

10 USDvEUR MtM Ccy Swap USD -787 n/a

11 JPYvUSD MtM Ccy Swap USD -28,042 n/a

12 Buy AXA EUR -69,950 19.80

13 Sell Metlife USD -26,316 53.00

14 Buy Volkswagen EUR 64,721 156.00

15 Sell DAX index EUR 4,859 9,345.79

16 Sell FTSE 100 index GBP 1,933 660

17 Long Call Google USD 139,979 510.04

18 Long Put S&P 500 USD 55,057 1,946.16

These compare to the IMV published by BCBS as below:


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13 January 2017

Absolute value of IMV for netting sets

The IMV for netting sets 1-16 from the FIS risk engine (in the specified netting set currencies) are set out

below:

Netting set ID Type (trades) Base ccy IMV (base)

1 IR Directional (1,2) USD 3,678

2 IR Offsetting (1,3) USD 21,940

3 Correlation rates (4,5) GBP -91

4 Correlation vol (6,7) USD 45,961

5 IR real life (1-7) EUR 46,809

6 Correlation FX (8,9) EUR -31,926

7 Long term FX (10,11) USD -28,829

8 FX real life (8-11) USD -68,814

9 Equity (12,13) EUR -90,962

10 Equity (14,15) EUR 69,580

11 Equity (12,16) GBP -52,925

12 Equity (17,18) USD 195,036

13 Equity (12-18) EUR 136,812

14 Correlation IR&FX (6,10) USD 9,845

15 IR FX real life (1-11) USD -10,190

16 IR FX EQ real life (1-18) USD 161,154

These compare to the IMV published by BCBS as below:


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13 January 2017

IR & FX calibration of the IMM risk engine

To demonstrate suitable calibration of the risk engine for IR and FX the exposure profile of netting sets 15 and

24 (all IR and FX trades) can be compared to the BCBS published dispersion.

Non-margined

Netting set ID Trade ID Description Trade

Currency

Netting set

currency Rationale

15 IR-FX all-in (11 trades)

Combination of IR and FX all-ins Same directions as for above

netting sets Mix USD

- Correlation between different asset classes and risk factors

FIS Risk engine - 20 year EE profile for netting set 15


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13 January 2017

Margined

Netting set ID

Ref to unmargined

netting set ID Margined features

Currency for variation

margin Rationale

24 15

(IR-FX all-in)

Bilateral agreement, symmetrical for all features Zero Initial Margin, Zero Independent Amount,

USD 5.000 Minimum Transfer Amount, USD 50.000 Threshold Amount

USD

Current realistic features of bilateral margin agreement;

Margin agreement that isolates the

effect of threshold amount and minimum transfer amount;

FIS Risk engine - 20 year EE profile for netting set 24


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13 January 2017

FIS Risk engine - one year EE profile for netting set 15


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13 January 2017

FIS Risk engine - one year EE profile for netting set 24


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13 January 2017

Absolute value of EEPE and stressed EEPE for netting sets

The EEPE and stressed EEPE for various netting sets as calculated by the FIS risk engine (all in USD) are

set out below:

Netting set ID Description EEPE Stressed EEPE

2 IR Offsetting (1,3) 71,015 99,898

17 NS2 margined 15,487 22,951

18 NS2 margined + Thr +MTA 29,414 35,808

19 NS2 margined + IA + MTA 97 658

1 IR Directional (1,2) 24,188 51,656

20 NS1 margined 7,642 13,428


22 NS1 margined + IA + MTA 3 50

15 IR FX real life (1-11) 107,725 166,810

23 NS15 margined 35,240 53,318


25 NS15 margined + IA + MTA 335 3,647

These compare to the EEPE and stressed EEPE published by BCBS as below:


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13 January 2017

Equity calibration of the IMM risk engine

There are no comparable numbers published in the BCBS report for equity trades or netting sets so to

demonstrate suitable calibration of the risk engine for equities reference is made to the EBA report on CCR

benchmarking published in July 2015.

https://www.eba.europa.eu/documents/10180/950548/EBA+report+on+CCR+benchmarking+2014

The EBA analysis is based on the data coming from the sample of nine EU banks that participated in the

BCBS exercise. EBA published the average stressed EEPE for each trade and also the standard deviation

(STD).

Comparing the standard deviation from the EU sample to the FIS S-EEPE shows that the FIS risk engine

calibration is satisfactory.

Netting Set ID Description

EBA (avg) S-EEPE

EBA (STD) S-EEPE

FIS S-EEPE

Abs (Diff) |EBA - FIS|

Diff / EBA STD

Trade12 Buy AXA 123,360 52,369 112,291 11,069 0.21

Trade13 Sell Metlife 153,830 118,976 121,263 32,567 0.27

Trade14 Buy Volkswagen 138,614 38,457 132,424 6,190 0.16

Trade15 Sell DAX index 87,040 23,725 84,951 2,089 0.09

Trade16 Sell FTSE100 index 50,398 22,207 54,354 3,956 0.18

Trade17 Long Call Google 164,700 22,713 173,081 8,381 0.37

Trade18 Long Put S&P500 78,239 18,774 86,712 8,473 0.45

https://www.eba.europa.eu/documents/10180/950548/EBA+report+on+CCR+benchmarking+2014


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13 January 2017

The same comparison can be made for netting sets including equity trades:

Netting Set ID Description

EBA (avg) S-EEPE

EBA (STD) S-EEPE

FIS S-EEPE

Abs (Diff) |EBA - FIS|

Diff / EBA STD

9 Set 9 (Trades 12&13) 120,594 90,276 139,423 18,829 0.21

10 Set 10 (Trades 14&15) 151,577 63,045 171,617 20,040 0.32

11 Set 11 (Trades 12&16) 75,864 37,122 103,641 27,777 0.75

12 Set 12 (Trades 17&18) 289,146 123,486 258,511 30,635 0.25

13 Set 13 Total EQ 307,339 137,428 318,535 11,196 0.08

16 Set 16 Total Portfolio 452,816 156,539 444,245 8,571 0.05


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13 January 2017

Models used for risk factor modelling

Interest rates

Interest rates are evolved using a three factor PCA model.

Foreign exchange and Equity

Foreign exchange rates against the Euro are evolved using a GBM Asset Price model without drift. Same for

model used for Equity risk factor.

Choice of stressed period for stressed EEPE

The stressed period is determined around the global financial crisis leading to a ratio of stressed EEPE to non-stressed EEPE of around 140% which is higher than reported by BCBS (paragraph 3.4.2.4) for the group of banks following this calibration period in the RCAP exercise (115%).

Monte-carlo paths and number of grid points

The monte-carlo simulation is run with 5,000 scenarios. BCBS also published the number of grid points used by the different banks over different time horizons which compare to proposed configuration of the FIS engine as follows (the FIS engine uses a set of fixed dates from a base time grid but also dynamic dates which include any deal's cashflow dates and other significant dates, such as rate reset dates and option exercise dates).

Bank Number of time steps up to the respective horizon of simulation

1Y 2Y 5Y 10Y 20Y

Median 26 29 36 48 64

FIS engine 29 39 69 119 178

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