BCBS 2.5 Comprehensive Risk Measure
CRM required a 99.9% tail risk to be calculated on complex structured assets, arguably one of the most quantitatively demanding requirements from BIS.
It was an immense challenge for the affected trading desks (and the local regulator teams).
Addressing the regulatory demands
The regulator’s CRM requirement had to be interpreted, fulfilled and a solution implemented in a practical manner.
A directly relevant skill set was required as the underlying assets were complex, as was the CRM methodology.
Developing and implementing the solution
We supported the development and determination of the methodology for the 99.9% simulation of correlation credit instruments.
We carried out analysis and review of historical market data, including cleaning routines, for simulations.
We developed a testing framework and suitable test portfolio that fairly represented the client’s portfolio risk.
Analysis of output of market evolution programs to ensure validity of results and market realism.
We carried out an assessment of the drivers of the calculated CRM figure.
We supported the design and production of the reporting requirements for CRM including diagnostics and CRM-explain reports.
Our client successfully delivered the CRM solution and obtained regulatory approval for the approach.
Our market expertise was integral to the successful delivery of the project.