Ey Quant Masterclass

EYQuant
Masterclass
& Networking
Event
Welcome!
Your hosts for the day
Frank De Jonghe
Partner, FSO Leader QAS

PhD Physics, Quantum Field
Theory
16 years in Advisory
Prior Internal Audit analyst,
fund manager
2 recent projects:
Page 3
Building an internal model for

market risk under SII
Upgrade IRB infrastructure
(policies, models, processes)
Sonja Koerner
Partner, FS Advisory
PhD Physics, MSc Mathematical
Finance
15 years in Advisory
Joined consultancy straight
from academia
Recent / current projects:
FRTB impact analysis and

strategic programme delivery
MR
and
CCR
regulatory
compliance, remediation and
capital optimisation
A day for you!
Organising the event: The EY FSO Quantitative Advisory

Services (QAS) team
Things to do today:
Page 4
Pick up some technical knowledge

Ask questions
Find out more about trends in our profession
Reflect on how to be more effective and impact the broader
agenda as a quant
Ask questions (repeat)
Meet interesting peers
Have fun
Agenda and practicalities
11.00 11.15: Introducing the Day Vista (9th floor)
11.15 13.15: Masterclasses
Trends in xVA Vista (9th floor)
by Prof. Damiano Brigo
Host: Sonja Koerner
Disruption in credit modelling: the triple witching hour of regulation,

analytics & IFRS 9 - Room 04/05/16/17 (9th floor, Eastside)
by Beatriz Sanz Saiz, Rajeev Bansal, Anna Draganova, Henrik Axelsen
Host: Frank De Jonghe
13.15 14.00: lunch outside Vista (9th floor)
Page 5
14.00 15.00: Workshops
ROOM:
Room 04/05/16/17 (9th floor,

Eastside)
Vista (9th floor)
14.00 14.30 Use and abuse of consensus Model Risk Management: A

pricing services
case study
Erik Van der Straeten
Henrik Axelsen
14.35 15.00 Operational risk modeling
after the abolition of AMA
Dave Cowan
Stress Testing and some of

its modeling challenges
Michelle He
Weve prepared content, but feel free to contribute, to influence the

debate
15.00 15.15: You deserved a coffee break outside Vista (9th floor)
Page 6
15.15 16.15: Panel discussion: From Quant expert to leader in

the financial industry - Vista (9th floor)
16.15 16.30: Closing plenary - Vista (9th floor)
by Frank De Jonghe
16.30 - : Networking drink Mulberry Restaurant (ground floor)
Page 7
EY Quant Master Class Market Risk Trends in xVA

(presentation Prof. Brigo in separate document)
Page 8
EY Quant Master Class Credit Risk - Disruption in credit
modelling: the triple witching hour of regulation, analytics & IFRS 9
Page 9
A new lease of life for Credit Risk
Early indicators
RF2
RF1
RF6
12m to default
RF3
IRB
IFRS9
RF7
RF4
Acquisition
RF5
Longer term variables

Circumstantial factors
Page 10
Landscape of fintechs active in credit

Company
Country Market segment
Affirm
US
Consumer loans
Prospr
US
P2p lending
LendingClub
US
P2p lending
Avant
US
Wonga
UK
Consumer loan
Kreditech
GER
Personal Loans
Approach to scoring
Lookup online profile (linkedin, other,..)
Try to answer the question is the person who they pretend to be
Nearly no data required for subscription (social security number).
They do get additional data from credit bureaus, other lending companies, banks,.
Web data: IP address, geography, browser type etc..
Similar to prospr
Big data, "thousands of variables"
Same application form as Prospr and Affirm
"Social Media data
Cell phone usage, rental info.
"more than 8000 data points"
Little disclosures on data used. Described as user's "unwittingly leaked data"
(speculative):
products used to visit the website. IP address, source leading to website.
Customer way of filling application (type, type, technology used,)
Facebook data is asked for
Other online data (house value, genealogy databases, online business information)
Use of online data
Same as above.
-transaction history (income, sale, online tools used)
-user feedback rating, online presence, likes, responsiveness,
"thousands of data points".
TO qualify: 1 year history, 100k revenu, and owner credit score above 500
Kabbage
US
Business loans
OnDeck
US
Business Loans
SoFi
US
Student Loans
Klarna
SW
Consumer loans
Basic info: E-mail and delivery adress, size of the purchase, time of the day, device used,
Credit Rating
Claim to use 12,000 variables.

Social media to confirm lender identity , university, contact details,..
Create online "trusted network
Education, employment, past due, stability of employment history, Cash flow, FICO score
Lenddo
China
Ant Financial
Services
China
Paypal
US
Consumer loans,
Business loans
Transaction data (business loans)
ZestFinance
US
Credit rating
Use of smartphones and social networks.

Financial information, technology usage"
Claim to reduce the default rate by 40%
NeoFinance
US
Automobile loan
Number and nature of FB & Linkedin, contacts, employment history

Other social media content
Page 11
Data gathered at
application +
credit bureau
Trusted network
Use of transaction
data
Trusted network
data
Speakers
Data & Analytics
Beatriz Sanz Saiz, Partner

Head of EYs
Data Analytics Center of Excellence
IFRS 9
Rajeev Bansal, Director

Anna Draganova, Manager
Targeted Review of Internal Models
Henrik Axelsen, Partner

Head of EU Government Institutions
Page 12
Data and Analytics
Page 13
Advanced Analytics
London2016
http://advancedanalytics.ey.net/
DID YOU KNOW THAT?
6.8 billion
ACTIVE MOBILE
SUBSCRIPTIONS
96% of the
worlds
population
2.7 billion
INTERNET USERS IN
THE WORLD
39% of the
worlds
population
Page 15
7 Exabytes every 2 days

SINCE THE DAWN OF CIVILIZATION UNTIL 2003,
THE HUMAN RACE PRODUCED FIVE BILLION GB OF
DATA. NOW WE ARE PRODUCING SEVEN EXABYTES
EVERY TWO DAYS
And the pace is accelerating
6 billion TB
THE VOLUME OF DATA GENERATED
OR PROCESSED IN 2016 WILL EXCEED
8 ZETTABYTES
Increasing to 40 zettabytes by 2020
Sensors
Hadoop
Reporting
Digital
Computing Science
Data scientist
Velocity
Geospatial Analytics
Machine
Learning ADVANCED
ANALYTICS
Enterprise
Intelligence
Page 16
Page 16
Hub
Cloud
Web
Analytics
Predictive
Analytics
Business
Intelligence
Database
https://www.youtube.com/watch?v=l95h4alXfAA
WHY IS ADVANCED ANALYTICS DISRUPTING THE WORLD ?
Page 17
THE NEW VALUE CHAIN OF ADVANCED ANALYTICS
Value Chain: From data to Analytics
Value Chain translated into a big data world
Page 18
CAPABILITY GROWTH: NEW SKILLS
Data Engineers
Data Scientists
Data and Analytics Specialist
Page 19
Data Visualizers
USE CASE
Smart Cities: Analytics applied for real time decision making
Page 20
In today's city, people, things, companies, governments, etc

generate digital data on almost anything they do
0
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Sao Paulo (Brazil)
Page 21
But only 5% of the available digital information is currently being

used*
1
0
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1
Source: The Economist 2014 . Being used means understandable/treatable by a machine
Page 22
0
1
1
1
Sao Paulo (Brazil)
Information can be extracted, combined, analysed, processed and

fed back into the city for an intelligent use
Real Time Data Exchange Platform
Government
Page 23
Citizens
Companies
Strong link to the city, and plenty of sensors!
48 million customers
17,500 ATMs
7,500 Branches
500,000 Point of
Sale Terminals
30M cards
Buenos Aires (Argentina)
24 mill transactions/day
Source: Total number of transactions includes Internet banking
Page 24
scoring
job
default
origin
language
mortgage
Page 25
e-banking
telephone
status
income
transactions
payments
deposits
date
relationships
loans
address
currency
ATM cards
time
preferences
location
transfers
details
Age
stock
expenses
products
credit
salary
which provides key information to qualify a city, a street or

an activity and use it to generate new services. Banks have
access to the real time economy
The streets of Madrid
Page 26
Real time understanding
Visitors presence
+
Flickr pictures
Average payment
+
Big spenders ratio
Students
Repeat payment
+
+
Twitter
Repeat Foursquare
+
Foursquare
Page 27
Example: street and PoS exploration in Barcelona
Page 28
Understanding about the performance of the Business
Restaurant Y
Restaurant x
Alvarez de Baena 4
Zurbano 31
Restaurant z
Presidente Carmona 2
Restaurant M
Ferraz 2
Restaurant M
Miguel Angel 29
/table
Men: 91%
Visitors
38%
Men: 82%
Men: 76%
City
31%
City
49%
Visitors
25%
Visitors
Province
60%
9%
Province
13%
36% 36%
34%
26%
43%
24%
5%
18-2930-4445-60 >60
73%
4% 1% 1%
20%
6% 3% 1%
Province
17%
40%
42%
33%
48%
11%
18-29 30-44 45-60 >60

83%
70%
21%
Page 29
18-29 30-44 45-60 >60
Men: 68%
Visitors City
31% 52%
City
Province 58%
20%
30%
5%
2%
Visitors
22%
City
56%
Province
18%
37%
Men: 82%
19%
18%
4%
18-29 30-44 45-60 >60

72%
12% 2% 3% 1%
9%
18-2930-4445-60 >60 Age

68%
21%
3% 3% 1%
17%
5% 7% 2%
Creating add value to the Customers
Share of buyers: 13%

Share of income: 10%
Ratio income/buyers: 0,76
Average transaction: 37
Share of buyers: 1,6%

Share of income: 1,5%
Share of buyers: 7,8%

Share of income: 7,6%
Total transactions in Gran Va Madrid : 24.372#

Total income Gran Va Madrid: 1.125.771
What for?
Page 31
Distribution Strategy
Page 32
Public Service Design
Page 33
Understand the impact of an event, right when it happens
Page 34
Evidences
Real time
Page 35
The journey has already started
Page 36
IFRS 9
Page 37
Agenda
IFRS9 overview
IFRS9 vs IAS 39: Whats new?
12m ECL: key areas of adjustments
Lifetime ECL: modelling approaches
IFRS9 key concepts
Transfer Criteria
Behavioural lifetime for revolving products
Probability-weighted Expected Credit Loss
The journey to date
Page 38
IFRS 9 Overview
This diagram presents general approach to IFRS9 Expected Credit Losses

(ECL) models
Stage 1
Loss allowance
updated
at each reporting
date
Stage 2
12-month ECL
(credit losses that result from

default events that are possible
within the next 12-months)
Stage 3
Lifetime ECL
Credit risk has increased significantly since initial
recognition
Lifetime ECL
criterion
(whether on an individual or collective basis)
Credit-impaired
Interest revenue
recognised
EIR on
amortised cost
EIR on
gross carrying
amount
EIR on
gross carrying
amount
(net of credit allowance)
Change in credit risk since initial recognition
Improvement
Deterioration
At initial recognition all assets are recognised in stage 1, however some may move to stage 2 very quickly.
Criteria for transition from stage 1 to stage 2: significant increase in credit risk
Criteria for transition from stage 2 to stage 3: objective evidence of impairment
Page 39
IFRS9 vs IAS39
Whats to leverage & whats to build?

IAS 39
IFRS 9
Good Book
IBNR provision:
Emergence
Period length
expected loss
Good Book
12m Expected
Loss
ECL =
PD LGD EAD D (1
To build
To leverage
Quality
Existing IRB and Stress Testing

modelling frameworks can serve
as components of the IFRS 9
Impairment solution:
Deteriorated
Lifetime expected
loss
Impaired
Lifetime
expected loss
Page 40
Impaired
Lifetime
expected loss
IFRS9 introduces new

concepts which require
development from scratch:
Transfer Criteria
Behavioral lifetime for

revolvers
Probability-weighted
ECL
Point-in-time IRB models
Stress Testing models
Existing forecast
techniques
Existing infrastructure:
Key areas of adjustments
A pre-requisite is to have an IRB default definition that includes more than 90 days past due default trigger.
Best practice is to align the IFRS9 credit impairment definition to the IRB default definition
Effective interest
Point-in-time rate as discount
calibration
rate
IRB
Expected
loss
IFRS9 12-month
expected credit
loss
IFRS9 specific adjustments:
Reversal of conservatism:
Page 41
Regulatory floors
Pipeline lending
Downturn adjustments
Prepayment/overpayment models
Discounting to the reporting date
Recoveries from other sources than

collateral
EAD cap for revolving products
Lifetime Modelling
Level of
complexity
Parameter
Key considerations
PD
Retail portfolios
Lifetime PD models represent 12m PD term structures which reflect expected movements in
default risk over the lifetime of the exposure. Key components to consider:
Vintage analysis
Seasoning
Macroeconomic effects
LGD
Retail Secured
Forecasts of future collateral valuations
Time to realisation of collateral
LGD
Retail Unsecured
Forecasts of future recovery rates
EAD
Retail Secured
Amortisation schedule
Prepayments
Overpayments
Changes in utilisation rates
EAD
Retail Unsecured
Page 42
High
Low
New Concepts:
Transfer Criteria
Key Requirements
Comparison of credit risk at reporting vs

origination
Pre-emptive
Forward-looking
Emerging industry trends
Cure period deemed good practice
Relative thresholds e.g. + 20 bps AND x 1.5
Thresholds being determined based on

scenario analysis, expert judgment and will
be refined during parallel run process
Limited reliance on low risk default

expedient
Stage 2
composition
Retail
PD
assessment
Backstops
Page 43
Primary driver: Consensus on a

Variation of PD approach, with debates
around using a 12M PD variation
approach as a proxy of a of lifetime PD
approach for certain portfolios
Commercial/Wholesale
Primary driver: Strong consensus on a

Variation of lifetime PD approach
Secondary driver: Watchlist / Early

warning sign process
>30 DPD backstop
forbearance
New Concepts:
Behavioral lifetime for revolvers
IFRS 9 .5.5.20: For revolving facilities, ...measure ECL over the period an entity is exposed to credit risk and
expected credit losses would not be mitigated by credit risk management actions, even if that period extends beyond
the maximum contractual period
Stage 1:
Current trend is to use a 12M lifetime even if the behavioral life is shorter
Stage 2/3:
ITG Steer: Behavioural life for facilities expected to revert to stage 1 or remain in stage 2 + time to
default and collect for those to transfer to stage 3
Lifetime can be capped to the date of the next credit review provided that is at least as thorough as that
which took place on origination
Bank # 1
Capped at the time when the

next credit review is
performed: 1 year
Page 44
Bank # 2
Use behavioral life, capped at

the time of next thorough
credit review
Bank # 3
Capped at the time the next

credit review is performed: 3
years
New Concepts:
Probability weighted ECL

This is an evolving area and current thinking may change. Importance to set up a
strong governance on multi-scenario approach
Number of banks
Emerging trends:
Majority of banks consider discrete number of scenarios
basket approach to determine multi-scenarios:

coherent scenarios that contain a number of variables
rather than model each variable in isolation.
Supplement the multi-scenario approach with an

adjustment to reflect situations which are not easily
modelled, such as Brexit
Single staging allocation based on either probability

weighted PD or most likely scenario PD
1
4
1
Discrete number of scenarios (3-5 scenarios)

Monte Carlo simulation
Variation of a Monte Carlo simulation
Scalar approach
Page 45
The journey
IASB issues
IFRS9 which
enters in force in
Jan 2018
Jul 2014
Basel Committee
issues Guidance
on accounting
for ECL
February 2015
1st ITG: Key topics:

- Date of initial
recognition
- Period to measure ECL
Page 46
April 2015
3rd and final ITG: Key topics:

- Probability weighted ECL
- Behavioral lifetime of revolvers
- Cash flows from debt sale
Sept 2015
Dec 2015
2nd ITG: Key topics:

- Use of absolute thresholds in
Staging
- 12m vs. lifetime PD
assessment
- EAD cap for revolvers
BBA meetings on
probability weighted ECL
calculation
Jan 2016
Basel committee issues

Guidance on credit
risk and accounting for
expected credit losses
(G-CRAECL)
Today
2016-2017
FASB to issue the Current

Expected Credit Loss
(CECL) model. The USGAAP
equivalent of IFRS9
Page 47
Motivation for ECB Model Review
Academic Research Supports the Suspicion

Regulators have been significantly influenced by academic research such as that based on German
Anacredit-style data. The research showed that when comparing banks using internal models to banks
using the standardized approach (SA), the former would have higher actual default rates, have
identified the risk at underwriting and charged a higher interest rate, yet reported lower RWA levels.
The Limits of Model-Based Regulation, Markus Behn, Rainer Haselmann, Vikrant Vig,
August 2014
Page 48
Main areas of focus for the supervisor
Targeted Review of Internal Models (TRIM) objectives
Model governance framework
Robust re-assessment of overall regulatory compliance of previously approved models.

Establishment of best practices, in particular for areas where regulation is unclear or
supervisory practices vary.
Confirmation of adequate conservativeness in the risk models and hence RWAs.

Actionable remediation plans, at industry and individual institution level, geared
towards convergence and compliance.
The review will focus mainly on credit

risk, market risk and counterparty credit
risk.
Initial critical areas of focus:
Model governance
Capital Requirements Regulation and

Directive (CRR and CRD) compliance
Documentation quality
Data quality and statistical robustness
Preparation is critical as TRIM has already started and will continue to dominate the agenda for the next years.
In 2016, the ECB starts reviewing the significant

SSM banks internal models into an unprecedented
effort to reassess compliance and issues, and
understand best practices
This will have deep and far-reaching impact on
credit, market and counterparty risk models
and management.
Design phase
Execution starts
Execution
H1 2016
H2 2016
2019
2018
2017
As the largest area in scope, the main focus is on credit risk, however other risks are also included in the review.
The review will be based on the EBA draft Regulatory Technical Standards (RTS) on supervisory practices for Internal Ratings-Based approach (IRB), and also aligned to model lifecycle
requirements as per Federal Reserve Board guidance and emerging regulation, such as IRB revamp.
Definition of
default and loss
Risk quantification
Management
of changes to
the rating
systems
Stress test
Internal
governance
and validation
Design,
operational
details
documentation
of rating
systems
Use test and

experience test
Data
maintenance
Assignment of
exposures to
exposure
classes, grades,
pools
Implementation
plan and PPU
Own funds
requirements
calculation
Requirement for
equity exposures
Implementation plan and permanent partial use: Consistent implementation, clear responsibilities and decisionmaking process.
Internal governance and organisational matters: Relevant procedures and policies are subject to management attention in full detail;
organisation, governance and independence of validation.
Role of internal audit: Focus on audit strategy and whether internal audit is focusing on the material aspects of rating systems.
Validation framework: Organisation of validation function vs. Credit Risk Control Unit (CRCU), procedures for facilitating independence of
validation, decision process on validation results, including follow up on actions decided, validation policies and size of validation teams.
Use test and experience test: Making the use test tangible and proving output role in risk management, credit approval and decisionmaking.
Definition of default: Materiality thresholds, triggers, specific adjustments, cure rate.
Model change: Responsible organisational body and process, justifications and frequency of changes, including materiality thresholds,
notifications and reasons for model change.
Data quality management: Banks need defined data quality standards setting objectives and scope of data quality management process
concerning completeness, accuracy, consistency, timeliness; consider alignment with BCBS 239.
Third-party involvement: Detailed requirements when banks outsource rating model operations or data.
Assignment of exposures to exposure classes, grades, pools: understanding of automated and manual assignment to classes;
particular focus on specialised lending.
Consider the wider context: new BCBS CP362 and IFRS 9
BCBS consults on changes to the advanced internal ratings

based approach (A-IRB) and the foundation internal
ratings-based approach (F-IRB).
Proposed changes include measures aimed to reduce the

complexity, improve comparability and address excessive
variability, including scope reduction of eligible
exposures.
What do you need to do now?
These may impact the efficiency and effectiveness of models

which need to be calibrated with future regulation in mind.
In parallel, the very significant impact on models will stem

from the IFRS 9 transition, with a more dynamic, forwardlooking view on credit risk. Even in case of reduced IRB scope,
IFRS 9 must be implemented.
Organize and anticipate the review process

internally
Document models and governance in detail,

pick your battles as regulation is evolving
Prioritise resources to focus on core areas
Across the modelling wall
Page 50
Keep focus on the common foundations of all the credit

related projects
Page 51
Workshops
Page 52
Use and abuse of consensus pricing services

Erik van der Straeten
Page 53
Problem setting
Lack of observability
Typical example: CMS spread options

Option on the difference between two CMS rates (e.g. 2y & 10Y)
Correlation is crucial parameter
Range of typical market quotes, term up to 10Y, strike 0% or ATM
http://www.markit.com/Product/Totem
Page 54
Consensus pricing solution?

High coverage
Page 55

How?
Contributors submit prices over a wide range (of strikes and terms)
The service may use cleansing routines
A consensus price is calculated
When the contributor's price is inside certain thresholds, the

contributor receives the consensus price and other statistics like
Standard deviation
Number of contributors
These are model prices, no trade prices. No info whether these

prices are sourced from market makers or whether the contributor
actually has positions in the product in scope
Page 56

How?

Standard deviation

Q1: Would you calibrate models using consensus prices?
Page 57
Accounting & Consensus pricing
Page 58
Setting the scene

Extracts from IFRS13
A fair value measurement assumes that the asset or liability is

exchanged in an orderly transaction between market participants
to sell the asset or transfer the liability at the measurement date
under current market conditions.
A fair value measurement assumes that the transaction to sell the asset or transfer
the liability takes place either:
(a) in the principal market for the asset or liability; or
(b) in the absence of a principal market, in the most advantageous market for the
asset or liability.
Even when there is no observable market to provide pricing information about the
sale of an asset or the transfer of a liability at the measurement date, a fair value
measurement shall assume that a transaction takes place at that date, considered
from the perspective of a market participant that holds the asset or owes the liability.
That assumed transaction establishes a basis for estimating the price to sell the asset
or to transfer the liability.
Page 59
Setting the scene

Extracts from IFRS13
In all cases, an entity shall maximise the use of relevant observable

inputs and minimise the use of unobservable inputs to meet the
objective of a fair value measurement, which is to estimate the price
at which an orderly transaction to transfer the liability or equity
instrument would take place between market participants at the
measurement date under current market conditions.
The Standard defines fair value on the basis of an 'exit price'

notion
Accounting value is a trade price

Page 60
Problem setting
Lack of observability
Typical example: CMS spread options

Option on the difference between two CMS rates (e.g. 2y & 10Y)
Correlation is crucial parameter
Range of typical market quotes, term up to 10Y, strike 0% or ATM
Page 61
Fair value hierarchy
Fair value hierarchy increased the visibility of illiquid parameters

(disclosure in the financial statements)
Classification from level 1 to 3 (from direct observable inputs, via

corroborated inputs to non-observable inputs)
A separation of price uncertainty between
liquidity on inputs
complexity from a mathematical modelling point of view
Difference in interpretation between what is risky for accounting

purposes (misstatement) and risky for traders (P&L losses)
Level 3 may have higher risk for misstatement
Trader can be active in what is for another trader an illiquid market
Page 62
Fair value hierarchy
Fair value hierarchy increased the visibility of illiquid parameters

(disclosure in the financial statements)
Classification from level 1 to 3 (from direct observable inputs, via

corroborated inputs to non-observable inputs)
Difference in interpretation between what is risky for accounting

purposes (misstatement) and risky for traders (P&L losses)
Level 3 may have higher risk for misstatement
Trader can be active in what is for another trader an illiquid market
Q2: Can own trades be used as corroborative evidence to warrant

a level 2 classification?
Page 63

Reminder

Standard deviation

Page 64

How?

Standard deviation

Q3: Can consensus prices be used as corroborative evidence to
warrant a level 2 classification?
Page 65
Consensus pricing and IPV
IPV is the process by which market prices or inputs are verified for
accuracy (inputs are sourced independently from the desk)
Differences between desk pricing and IPV results may result in the
build up of specific reserving
At several banks consensus pricing is used in the IPV process next to

market quotes
Page 66
IPV is the process by which market prices or inputs are verified for
accuracy (inputs are sourced independently from the desk)
Differences between desk pricing and IPV results may result in the
build up of specific reserving
At several banks consensus pricing is used in the IPV process next to

market quotes
Q4: Would you consider to use consensus pricing to calculate

model reserves?
Page 67
Page 68
Bloomberg
BVAL for bond pricing
Score 8-10: only available with direct market observations (trade,

executable, contributor)
next stage in calculation process is via most correlated peers
Volatility surfaces for equity
yellow/gray color where grey denotes extrapolation
However, yellow coloring does not mean that the index/stock is traded
(can be obtained via quotes only)
Page 69
Bloomberg
BVAL for bond pricing
Score 8-10: only available with direct market observations (trade,

executable, contributor)
next stage in calculation process is via most correlated peers
Volatility surfaces for equity
yellow/gray color where grey denotes extrapolation
However, yellow coloring does not mean that the index/stock is traded
(can be obtained via quotes only)
Q5: Do you consider the Bloomberg services as more accurate

info as compared with consensus prices?
Page 70
One-way markets
The Bermudan swaption market is an example of a one-way market
Bermudan swaptions are in plento of legacy books without active

trading
When no other information is available to you, you may be tempted

to use consensus pricing to calibrate your models
Remember, no trading behind the consensus prices
Page 71
One-way markets
The Bermudan swaption market is an example of a one-way market
Bermudan swaptions are in plenty of legacy books without active

trading
When no other information is available to you, you may be tempted

to use consensus pricing to calibrate your models
Remember, no trading behind the consensus prices
Q6: What are the controls and checks you apply (or expect to be
applied)?
Page 72
Model Risk Management: A case study

Henrik Axelsen
Page 73
What is a model?
Page 74
Model Governance
Page 75
MRM Roadmap for improvement
Executive summary
Governance Vision
Model
universe
Embedding
model risk
MRM
procedures
MRM policy
rollout
Establish a robust decision, information and impact

governance for models and parameters yielding
transparency and proper impact forecasting
Establish quarterly coordinated meetings with brands
Establish proper 2nd level defense on model framework
Review opportunities for decentralising formal model
ownership to major brands
2013
Year 2
Inventory and
dashboards
H2 2012
Year 1
H1 2012
Page 76
Operational risk modeling after the abolition

of AMA Dave Cowan
Page 77
The future of OpRisk modelling

Agenda
Background
The past
Problem statement
Solutions adopted
Lessons learned
The future
Page 78
Problem statement
What questions remain to be answered?
Where do quant fit in?
The future of OpRisk modelling

Background
Basel II
SMA
Introduction of Operational risk.

Allowed banks to construct internal
models to calculate pillar one
capital
Removal of internal
models. Focus on
simplicity, comparibility
and risk sensitivity
Page 79
No models!
Why involve quants?
The past: Basel II world
Page 80
Problem statement: Calculate minimum capital for pillar one
Scope:
Calculation:
The risk of loss resulting from

inadequate or failed internal
processes, people and systems or
from external events
Capture potentially severe tail

events, achieving a soundness
standard comparable to a 99.9%
confidence interval over a one
year period
Aim:
Page 81
Drive better risk management
Data limitations and constraints
Backward looking components
Internal data:
External data:
Limited, inhomogeneous, left truncated, out of sample, reporting bias

Mixed data, size & reporting bias, left truncated, not scalable
Forward looking components
Scenarios
BEICFs
Page 82
Poorly defined, judgemental, varying practice

Judgemental, poorly defined, not rigorous
Solutions adopted & endless debates
Industry generally converged on LDA
Endless debates
We had a tour via Baysean networks and robust statistics
Gaussian copula vs t-copula vs Vine copulas (no evidence)

Goodness of fit techniques (KVM, AD, AD2UP....)
MLE vs w/pMLE vs pOLS fitting (not much difference)
EVT vs parametric distributions (opposing basis)
Truncated vs non-truncated distributions (added sensitivities)
Spliced vs non-spliced distributions (16 paramenter distributions!)
Integration of scenarios (Double Baysean integration with MCMC?)
Over complicated unstable models that nobody can explain or justify!
Page 83

Lessons learned
The madness is in the method
Einstein was right
Improving risk management or demonstrating technical skills?
If you cant explain it simply, simply dont do it
Von Neumann said it better:
Page 84
There's no sense in being precise when you don't even know what you're
talking about
The future: SMA World
Page 85
Problem statement: The regulator took the toys away
Scope:
Calculation:
The risk of loss resulting from

inadequate or failed internal
processes, people and systems or
from external events
Business component * loss multiplier
Aim:
Page 86
Simplicity, comparibility, Risk

sensitivity
What questions remain to be answered?
Its all about managing losses down !
Page 87
SMA World
Where do the quants fit in to all of this?
Page 88
SMA World
Page 89
SMA World
Cause
People
Event
Effect
Process
Systems
Page 90
External
Stress Testing and some of its modeling

challenges Michelle He
Page 91
Stress testing overview
Area
Description
Problem
Statement
Increasingly stringent regulatory demand on stress testing data granularity and

quality, governance, methodology etc
Limited internal capacity in banks on target operating model, resourcing, data
availability, modelling, technology etc.
Disconnection with business values: banks not getting appropriate return and
incentives from investments
EY
Objectives
Perform as market leader in PRA stress testing by leveraging our hand-on

experience with UK banks and regulator relationship;
Act as key vendor for EBA stress testing, required for 120+ European banks for
FY16
Continue our footprint in CCAR and HKMA stress testing
Develop trusted relationship with regulators
EY Market
Offerings
example
Overall program management, including strategy, governance

Stress testing modelling (risk, finance, treasury) development, validation and
documentation
Technology: Data model, system solution strategy, implementation support, data
validation / consolidation / reconciliation tool, and MI analytics
Policy and methodology;
Page 92
Stress testing and loan forecasting methodologies summary

Key consideration is to link multi-year macro-economic factors to risk
parameters (PD/LGD/EAD)
Top-down
1. Management overlay (expert judgment)

2. Loss curve, e.g. by vintage (not for RWA)
1. Direct regression
PD
(Part 1)
2. Credit index approach

3. Single factor approach
1. Uplift multiplier\scalar
PD
(Part 2)
2. Log-odd shift
3. Forecast transition matrix or roll rate
LGD
(Part 1)
1. Direct regression
2. PD-LGD correlation
3. Flat downturn LGD (for stress testing)
LGD
(Part 2)
1. Log-odd shift (for unsecured)
EAD
Balance sheet assumption
Page 93
2. Collateral index (for secured)
EY framework on PD stress test and loan forecast
Part 1: forecast segment-level default by linking to macro factors;

Part 2: apply at facility or grade level
Model Step
Description
Identify
calibration
segments
Break portfolio into segments

(product, sector, geography,
etc) for modelling PD
Link macro
factors to
segment
default rate
Establish link through standard

techniques (direct regression,
PCA regression, single factor
model, etc)
Forecast
segment
default rate
using scenario
Predict forward portfolio default

rate using Barclays macroeconomic scenario for
provisioning
Apply at
facility or
grade level
Calibrate facility or credit grade

level PDs so that the average
PD for the segment meets the
forecasted target in each year
(log-odd, transition matrix
approach)
Build
cumulative PD
at facility or
grade level
Page 94
Use the applied annual PD

series at the detailed level to
build cumulative PD curve
Illustration
Part 1 (step 1-3): forecast segment-level default
rate
Part 2 (step 4-5): apply at facility or credit grade

level
To help protect y our priv acy , PowerPoint has block ed automatic download of this picture.
Panel Discussion From Quant to Leader
Page 95
The ability to lead increases in significance as you

progress through your career journey
QAS Technical Skills
Leadership Skills
Individual contributor
Page 96
Leading through others
Leading through Vision
Closing Plenary
Page 97
Concluding remarks
Demand for modelling, and more generally, problem solving, skills

remains, but
dont seek a competitive edge in repetitive, mundane tasks.
Robotics and off shore centres are challenging this status quo
quickly.
Financial crisis led to simplification of financial
products and modelling approaches, but
expectations w.r.t. the control environment around modelling is
increasing, so work volumes are not declining for people who
understand the models
Page 98
Concluding remarks
Follow the trends in analytics, things that were only theoretically

possible 10y ago, are rapidly becoming reality
Quant modelling in the financial services industry is as much art as
science.
Go beyond modelling, use your problem solving skills to make an
impact on your environment.
ALWAYS see end2end, what is the model used for, what is it based
on.
Defend your views and ideas.
Be parsimonious.
Page 99
A model should be as complex as needed,

but not more
The real world:
A model with attention for every detail:
A rough model capturing the essence:
Page 100
A word from our sponsor
EY FSO Quantitative Advisory Services

Uniquely integrated operation in audit &
advisory world
230 quants in the FSO region, with regional
centers in London, Frankfurt and Brussels
High degree of cross border integration and
mobility, including across Atlantic and with offshore centres like Bangalore
Looking for 100 extra colleagues on 3y
horizon
Current hot topics: IFRS 9, FRTB, TRIM,
stress testing, Model Risk Management, xVA
(including x=Pru), analytics, managed services
in quant space,
Page 101
Contacts
Frank De Jonghe
Sonja Koerner
Partner Risk & Actuarial

frank.de.jonghe@be.ey.com
Partner FS Advisory
skoerner@uk.ey.com
Oana Butnariu
James Shaikh
Senior Recruiter
oana.butnariu@be.ey.com
Page 102
Recruitment Manager
jshaikh@uk.ey.com
Thank you !
Page 103

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EYQuant

Your hosts for the day

Partner, FSO Leader QAS

Building an internal model for

FRTB impact analysis and

A day for you!

Organising the event: The EY FSO Quantitative Advisory

Pick up some technical knowledge

Agenda and practicalities

11.00 11.15: Introducing the Day Vista (9th floor)

11.15 13.15: Masterclasses

Trends in xVA Vista (9th floor)

by Prof. Damiano Brigo

Host: Sonja Koerner

Disruption in credit modelling: the triple witching hour of regulation,

by Beatriz Sanz Saiz, Rajeev Bansal, Anna Draganova, Henrik Axelsen

Host: Frank De Jonghe

13.15 14.00: lunch outside Vista (9th floor)

Agenda and practicalities

14.00 15.00: Workshops

Room 04/05/16/17 (9th floor,

Vista (9th floor)

14.00 14.30 Use and abuse of consensus Model Risk Management: A

Stress Testing and some of

Weve prepared content, but feel free to contribute, to influence the

Agenda and practicalities

15.15 16.15: Panel discussion: From Quant expert to leader in

16.15 16.30: Closing plenary - Vista (9th floor)

16.30 - : Networking drink Mulberry Restaurant (ground floor)

EY Quant Master Class Market Risk Trends in xVA

EY Quant Master Class Credit Risk - Disruption in credit

modelling: the triple witching hour of regulation, analytics & IFRS 9

A new lease of life for Credit Risk

Longer term variables

Landscape of fintechs active in credit

Country Market segment

Use of online data

Claim to use 12,000 variables.

Transaction data (business loans)

Use of smartphones and social networks.

Number and nature of FB & Linkedin, contacts, employment history

Data & Analytics

Beatriz Sanz Saiz, Partner

Rajeev Bansal, Director

Targeted Review of Internal Models

Henrik Axelsen, Partner

Data and Analytics

DID YOU KNOW THAT?

7 Exabytes every 2 days

And the pace is accelerating

Increasing to 40 zettabytes by 2020

WHY IS ADVANCED ANALYTICS DISRUPTING THE WORLD ?

THE NEW VALUE CHAIN OF ADVANCED ANALYTICS

Value Chain: From data to Analytics

Value Chain translated into a big data world

CAPABILITY GROWTH: NEW SKILLS

Data and Analytics Specialist

In today's city, people, things, companies, governments, etc

Sao Paulo (Brazil)

But only 5% of the available digital information is currently being

Source: The Economist 2014 . Being used means understandable/treatable by a machine

Sao Paulo (Brazil)

Information can be extracted, combined, analysed, processed and

Real Time Data Exchange Platform