Case Study Details

Overview

Risk Dynamics validated the Liquidity Risk Management Framework (LRMF) of a European Central Counterparty (CCP).

Purpose

CCPs qualified under the European Market Infrastructure Regulation (EMIR) are requested by the regulator to establish a comprehensive and robust liquidity risk management framework and to review it independently on an annual basis. In this context, Risk Dynamics was requested to review the LRMF for one of the largest European CCPs.

This assessment needed to cover the following: confirmation of compliance with regulatory requirements; both a qualitative and quantitative assessment of the framework specifically tailored to the client’s portfolio.

Approach

The Risk Dynamics team ensured validation comprehensiveness by following a customised approach to the review of frameworks. This assessment incorporated various components, such as:

  • Strategy
  • Governance
  • Model and Methodologies
  • Processes
  • Reporting and Review

Risk Dynamics examined all the components of the LRMF, which included:

  • Assessment of inputs (appropriateness, completeness, and overall accuracy)
  • Assessment of theory
  • Assumptions and methodologies (appropriateness, limitations, and soundness)

Furthermore, the team conducted a qualitative and quantitative validation of liquidity tools, focusing on:

  • Projection of operational net liquidity position
  • Projection of stressed net liquidity position
  • Calculation of liquidity risk concentrations
  • Execution of collateral and investment control checks

To conclude the validation, the team performed an assessment of regulatory compliance (EMIR) and a full review of the client’s implementation of former validation recommendations.

Outcome

Risk Dynamics’ comprehensive assessment strengthened the client’s confidence in its framework and the proposed structure created transparency on liquidity risk management practices within the institution. In addition, our team provided the client with key areas of enhancement through the review of framework implementation.

Throughout the engagement, the RD team provided several schemes and architecture of the liquidity risk monitoring process and related resolution plan, which resulted in an increase in effectiveness and transparency of the control process.

As a result of the engagement, the client established the completeness and appropriateness of the LRMF in its current use and context, gained insight and transparency into its limitations, and was provided with recommendations for improvement.

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SAM ISBISTER

Managing Director

ABOUT US

Why Risk Dynamics?

Risk Dynamics has unparalleled experience in model risk management and independent validation of risk models. We have supported financial institutions of all sizes, worldwide, since 2004.

Our focus and dedication to model validation services, our independence and benchmarks and proprietary tools and methodologies, combined with our ability to provide unbiased views across regions and regulatory regimes, is unique in the market.