A fresh take on risk and valuation
We keep moving forward, opening
new doors and doing new things,
because we are curious, and curiosity keeps
leading us down new paths.
Independent Valuation of structured products and complex OTC Derivatives

This expert input addresses the independent valuation of structured products, and particularly of OTC derivatives. It explains for what reasons and under what conditions independent valuation is necessary and lists all other potential advantages of performing valuation independently. It further reveals how valuation is generally performed and all the necessary steps that need to be taken in order to make sure that the valuation is the best possible and unbiased estimate of the value of the assets. It shows the greatest challenges in valuation and how we, in Finalyse, seek to address them.

2018 stress tests: evolution, revolution or a chimera?

This Expert input examines EBA stress test. It provides a basic intuition behind the stress test – what it is and what purpose it is serving. It also addresses the general changes between current 2018 and 2016 stress test, how IFRS 9 has impacted the process and results – if at all – and just how much the scenarios changed. It delves into more detailed measurement, considering indicators individually for different risk types such as credit risk, market risk or operational risk, again stating the general intuition behind the methodology for each, and it explains the extent to which there have been any changes compared to the past. Lastly, it lists potential challenges with conducting stress tests and tips and tricks for overcoming them.

Basel III: Finalising post-crisis reforms

This is an extensive overview of most of the major changes to Basel II since its original publication. It focuses particularly on the changes brought about by the December 2017 release, especially on credit risk and RWA, changes to both standardised and IRB approaches of calculating RWA and whether the latter is allowed to be used or not. It also discusses the floored inputs. The next section discusses Market Risk and consequently FRTB. It gives a summary of the fundamental changes and then dwells deeper into the specific changes in standardised approach and internal models approach. The last part focuses on Interest Rate Risk in the Banking Book – more specifically on the governance, measuring and modelling of the IR risk and changes to the disclosure requirements. This paper does not address Operational risk as it is addressed elsewhere.

Collateral management, a revolution already under way

This article – a courtesy of our partners from Clearstream, focuses on collateral management as a part of derivatives trading, in light of the adoption of EMIR. It discusses the general landscape of markets in OTC and non-OTC derivatives, as well as the main collateral related topics – variation margin and initial margin, but also challenges in exchanging collaterals. There is a sizable list of suggestions on how to deal with said challenges and how to generally move in this landscape and how to navigate the regulatory requirements as well as scramble for liquidity. It ends with a short note on TARGET-2 and the way it has helped to simplify the collateral challenge.

The new definition of default – How is it going to affect you?

This Expert input delves into the new EBA definition of default that will apply as of January 2021. It examines who is going to be most impacted by the change and what is going to be the difference in the impact on institutions that use the IRB approach versus institutions that use the Standardised approach. It looks at the most substantial changes in the new definition – like the differences in unlikeliness to pay, past due criterion and the criteria for return to the non-defaulted status. Lastly, it addresses briefly the challenges related to the use of external data – particularly for those institutions that use IRB only.

IFRS 9 Expected Loss Model Validation

This expert input focuses on the validation of Expected Credit loss model validation; more specifically, it explains why it is a good idea now, after the scramble to have IFRS 9 compliant models in time, to consider validation. This input addresses the challenges of a methodological review of all models, and more specifically, it addresses the review of selected variables – macroeconomic factors, obligor characteristics, etc. It shows how to make the best use of the new ability to compare the outcomes of the models against the observed losses. In addition, this article tackles another challenge: the review of data quality – particularly of the modelling data set and new data.

Private Equity: is valuation fair?

This Expert input concerns itself with the valuation of Private Equity, an intriguingly difficult topic, but also one well worth exploring, considering just how large a portion of the equity takes the form of a private equity. It shows why the private equity is an interesting prospect for investors and in what way the independence of the valuation is desirable and demanded by regulators. It also depicts how investing in private equity is often conducted and what such an approach entails for the investor. Lastly, it depicts various techniques used to estimate a private equity value and how the preferred technique is chosen depending on the information available.

Basel Rules and their European Counterparts

A number of our customers were slightly unclear about the way Basel rules are translated into the European framework. This expert input took it on itself to examine how BCBS standards get translated into European Legislature and what their European counterparts are. To some extent, some confusion is understandable. European lawmakers – after all - make many changes, so much so that the European law is in fact materially non-compliant with Basel standards. This article examines the way in which the main component of the new (but pre December 2019) Basel standards are likely going to differ once implemented in the European Union. More specifically, the article examines the leverage ratio, Net Stable Funding Ratio and FRTB. The adoption of 2017 BCBS document may have rendered parts of this paper obsolete.

Machine Learning in Risk Management

This Expert input works as an overview of the basis of most available machine learning techniques and serves as a great stepping stone to get into the intricate world of ML. Whilst mostly written with credit risk in mind – offering some advice for the use of machine learning to help us model Expected credit loss and its components (PD, LGD, EAD), the list of the potential techniques depicted steps far beyond this relatively singular use and examines a multitude of approaches, ranging from Supervised ML (Decision trees, Artificial Neural networks, etc.) through ensemble ML (Random forests, Gradient boosting), to unsupervised ML (Deep learning, Clustering methods, etc.). The input concludes with several general tips and tricks regarding machine learning.

IFRS 17 and its impact on the insurance sector

This Expert input gives a basic overview of IFRS 17 and how it is going to be different from the current standards (IFRS 4). We note that there are some similarities between some of the aspects of Solvency II and IFRS standards and examine them, as well as the differences. Furthermore, there are predictions on how the standards are going to influence the operations of insurers and their contracts. Since the insurers are likely to implement IFRS 17 in concert with IFRS 9, the expert input also focuses on how this joint implementation is likely to proceed, what the main challenges are and why it is ultimately a good decision to implement them together.