Backtesting of Future Risk Factors, An Open-Source Approach to Validation Case Study

Case study outline and results

This case study outlines part of a project recently undertaken in the XVA Division of a global investment Bank.

The Bank was looking to replace specific functionalities of its counterparty credit risk (CCR) engine. In this context a Proof of Concept (PoC) project was started to verify that the Open-Source Risk Engine (ORE) would be a viable choice, i.e. that with ORE business as well as regulatory requirements would be adhered to in a more robust and cost effective manner than the current solution. As part of the PoC, the client wanted to validate that ORE’s risk factor evolution framework – a key component to modelling CCR would be robust to market moves over an extended period of time. To validate ORE’s applicability for risk factor evolution within the context of potential future exposure a thorough backtesting analysis was undertaken. This case study walks through an example of the backtesting and validation exercise, demonstrating ORE’s capabilities as a viable tool for calculating and historically backtesting risk factor evolutions. In conclusion the study demonstrates that ORE is an excellent robust solution which can be utilized by the industry as a productive risk management system. It offers cutting edge comprehensive capabilities in the quantitative risk domain in a transparent and flexible way. ORE can assist financial institutions in navigating regulatory requirements with precision and transparency all at a fraction of the cost of other systems.

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