Engagement Goal:
A bank required an independent model validation of an internal risk and valuation system for structured finance securities such as Asset-Backed Securities (ABS), Mortgage-Backed Securities (MBS), Commercial MBS, Residential MBS, Credit Default Swap (CDS) on ABS and Total Return Swap on ABS.
Project Description:
Quaternion Quant Services provided an independent quantitative and qualitative validation of the bank's system used for marking and sensitivity analysis of structured finance securities. The bank's solution is based on a third-party vendor library and, therefore, the specifics needed to be taken into account. The validation included integration tests, input slider tests and consistency checks of the various marking metrics (yield, discount margin, Z-spread), the sensitivities (CD01, DV01) as well as WAL, duration and convexity. To validate that optionality is appropriately captured, we also performed consistency checks and benchmarks of the calculation of option adjusted spread (OAS) and its sensitivities (OAD, OAC). Quaternion delivered a full validation report in compliance with the bank's model governance policy.