About CompatibL

CompatibL Technologies was founded in 2003 to offer risk technology solutions to banks and asset CompatibL
Model Validation
managers. Since then CompatibL has established itself as the leading provider of quantitative software
and services for derivatives analytics, limits, and regulatory capital.

CompatibL has over 200 experienced developers and financial engineers and boasts a client base
of over 50 banks, central banks, supranationals and asset managers in the US, EMEA and Asia, including
4 out of 5 largest derivatives dealers. Over 140 major projects have been implemented across this client
base. CompatibL is headquartered in Princeton (United States) with the main delivery centres located
A new approach to model risk control
in London (UK), Warsaw (Poland) and Singapore.

www.compatibl.com
info@compatibl.com

Princeton (USA) London

CompatibL Technologies LLC
100 Overlook Center
Second Floor
Princeton, NJ 08540, USA
+1 (609) 919 0939
CompatibL Technologies Ltd
First Floor
100 Pall Mall
London, SW1Y 5NQ, UK
+44 (20) 3743 8800

Singapore Warsaw
CompatibL Pte. Ltd. CompatibL Sp. z o.o.
30 Cecil Street Prosta 32
19-08 Prudential Tower Second Floor
Singapore, 049712, Singapore Warsaw, 00-838, Poland
+65 6813 2067 +48 (22) 110 8005
About CompatibL Model Validation
CompatibL is a leading software vendor and consultancy that combines advanced CompatibL offers independent validation services across a wide range of valuation
application engineering with top quant expertise for the capital markets industry. and risk models, including formal regulatory validation reports as well internal
The company provides enterprise risk solutions and multi-asset analytics for front, middle reviews with actionable insights to mitigate models’ weaknesses and limitations.
and back office. CompatibL is also a leading provider of custom software development We have expertise in the latest quantitative research and model validation methodologies
services and model validation consultancy for the financial industry.  as well as implementation practices.

Our software is running in over 85 financial institutions worldwide, including 4 of the 5 CompatibL has teams located in strategic global locations across Europe,
largest dealers, 33 central banks and some of the world’s largest asset managers North America, Asia working in close contact with clients. We also have experience
in the Americas, EMEA and APAC. Over the years, our products have won industry in long-term partnerships and have been working closely with the clients’ internal
recognition for their quality, performance and flexibility. teams for many years.

15+ 200+
years experience in-house experts, including quants,
in software development for software engineers, solution architects,
financial institutions UI/UX designers and analysts
in 4 branch offices

140 85
delivered enterprise software clients worldwide, including 4 Market Risk CompatibL Risk Alexander Sokol
projects and hundreds of quantitative of the 5 largest dealers, 33 central Technology Vendor Product of the Year Quant of the Year
consultancy and model validation banks and some of the world’s largest of the Year Award Award Award

engagements asset managers

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Why Choose CompatibL Technology behind
for Model Validation? the Validation
Today, there is significant emphasis on model risk management and validation. Our validation approach is based on the CompatibL Model Validation Platform,
A transparent and independent model review process is an integral part of modern which integrates into a single environment all the code necessary to specify, automate,
model vetting and model risk frameworks. run and report model tests for third party and proprietary models. It can be used not only
to produce a formal model validation report, but also as a benchmark or challenger model
As a vendor of market and credit risk software, CompatibL has hands-on experience to assess the accuracy of the primary model.
and expert judgement in all aspects of model QA and review processes. Over the years,
we validated hundreds of models and software solutions for banks and asset managers CompatibL Model Validation Platform is focused on model validation, rather than model
across multiple model types with applications to valuation and risk management. development, and provides a wide range of functionality out-of-the-box, saving the validation
This knowledge and experience enabled us to develop an innovative, rigorous team the time and expense of creating these components during the project. It supports
and cost-effective approach to model validation.  a variety of model input formats, including those of mainstream vendors and provides a set
of common statistical acceptance tests, instrumentation for running regression tests,
and a comprehensive set of tools to produce reports on individual test cases and consoli-
date them into a model validation report template for internal or regulatory use. 
Advantages of Model Validation
with CompatibL
A Wide Variety of Models
Cost savings Highly qualified expert Independence
Our approach reduces the costs team Rely on independent high-quality The platform provides a rich spectrum of single-asset and multi-asset hybrid
compared to a traditional vali- Benefit from access to a wide model validation performed models to assess the impact of model choice on prices and risk measures, providing
dation approach as we reuse range of quantitative and tech- by a team with extensive an additional dimension to model risk assessment.
standard validation code compo- nical resources and ensure that experience and a solid model
nents gathered over time in our top experts work on validating validation code framework.
model validation platform. models critical to your business.
CompatibL Model Validation Platform provides an open API and can be customized,
permitting non-standard models and alternative benchmarks to be used.
Benchmarking across a range of market practice models is encouraged by many
supervisory guidelines. It also helps to reduce the risk of implementation error
Documentation Experience with in-house Deep analysis of model and prevent mis-specification of the model. 
The documentation delivered and vendor models assumptions, limitations
during the validation process CompatibL has experience with  and output
is comprehensive and sufficient the leading quantitative model We don’t stop at producing
to independently reproduce types published in academic a model validation report
the calculation results. literature, and with the imple- and also help you to take
mentation of these models a wider view on model risk,
by software vendors, leading its origins and potential impact
to more effective and stream- on your business.
lined validation process.

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Model Coverage
Our expertise spans real-world and risk-neutral multi-factor and multi-asset Models supported by CompatibL Model Validation
risk models for most asset classes including interest rates, foreign exchange, Platform out of the box: 
equity, inflation, credit and commodities.
 Multi-curve real world and risk
neutral valuation, capital and PFE
models
 Advanced multi-currency CSA
and collateral simulations
 All major risk metrics and valuation
adjustments, including IM and MVA
 Capital optimization models
 Capital and regulatory metrics:
- Basel II, II.5, III, early IV
- IRRBB
- SA-CCR
- Regulatory MPOR
- ISDA SIMM
- FRTB for market and credit risk,
including the latest revisions
and consultative documents

Global regulatory standard coverage

Operational
Risk Basel II Basel IV

Market
Risk FRTB IRRBB
Basel II.5
Credit
Risk SA-CCR

Basel III
Systemic
Risk

ISDA SIMM
Margin

2006 2008 2010 2012 2014 2016 2018 2020 Timeline

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Structured Approach Benefits of the Structured Approach
When dealing with complex models, we first identify key components in their calculation flow Once each component has undergone independent testing and passed its strict
and consider them as independent unit models, each subject to rigorous individual testing.  acceptance criteria, we connect the components and run consolidated tests.
For each component we follow the validation methodology and steps shown below. We then verify the integrity of the model overall and ensure that all input and output
data are properly connected in the full model. 

Once we have ensured that the calculation flow works as expected, we perform tests
Traditional approach and analyze the entire model.

Monolith
Inputs Outputs
model

Monolith
Inputs Outputs
model
Validation

Validation
CompatibL approach Composite Model
Validation
Composite Model
Focus not only on the entire Unit tests for model components
model but also on its individual lead to easier to understand,
components more reliable test criteria
and implementation
Validation

Validation Validation
Components Components

Components Components
Inputs Outputs

Better isolation of model More clarity to remediation

Inputs Components Components Outputs weaknesses and identification actions, reducing the risk of delays
of error sources to model use in production
Components Components
Validation Validation

Validation Consolidation, Validation Validation

Consolidation, Validation

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Automation
Automation and open API of CompatibL Model Validation Platform provide the ability
to continuously retest the model as improvements are made and remediation action
is taken. Following validation project completion, it can be rerun for model updates
and new releases without CompatibL’s assistance. This enables continuous assessment
of the model risk on an ongoing basis with low recurring costs.
Compared to the traditional approach of using manual tests on hardcoded inputs and direct
integration with market data, our model replication approach enables a wider validation
scope, not limited by simple cases and analytical examples. If desired, it can be scaled
to a full live portfolio, providing ultimate confidence in the validation results.
Overall, our approach to the automation of model validation tests provides depth
and scale advantages over the legacy validation methodologies.
10 / CompatibL Model Validation
Validation Steps
CompatibL’s approach to model validation and verification includes
the following stages for a comprehensive and detailed review of the model
and its components.
Model specification stage:
• Analyze model documentation, verify its consistency, level of detail and correctness
• Analyze the relevant regulatory guidance and market practice, model choice
applicability and adequacy, and propose operationally feasible alternatives
• Identify and assess key model inputs and outputs, verify their completeness and proper
use of market data for a given model 
• Identify and assess key model assumptions and limitations, then compare
to other model alternatives
Validation specification stage:
• Identify and assess key validation assumptions and limitations, given input
and output data and possible operational constraints
• Review data scope, validation criteria and functional tests for model vetting
based on the results from the previous stage 
Testing stage:
• Run validation tests
• Assess the impact of model choice on material measures
Conclusion stage:
• Analyze individual test results, provide recommendations and conclusions
• Gather all findings into an executive summary and a highly detailed full validation report,
conforming to the relevant regulatory validation template when applicable
Delivery stage:
• Deliver validation documentation, reports, and supporting materials
• Deliver test code artifacts and detailed documentation that allows this validation
to be rerun in-house after project completion
CompatibL Model Validation / 11
Test Types
The first category of tests includes
tests that verify theoretical expectations
and asymptotic conditions. This category
is the starting point of any model validation
process, covering the most basic form
of validation. However, with advanced
models such tests are insufficient.
Overconfidence in validation results
obtained only from this first category
of tests can lead to material errors
due to operational or functional issues in more
complex real-world cases.
The second category includes independent
replication of the model and its components
from the first principles according to the model
specification. Such replication should give
identical or statistically close results, provided
the same input data is used in both production
and challenger environments.
The validation process followed by CompatibL’s
team embraces both categories of tests.
CompatibL Model Validation Platform provides
base models and statistics functionality for
the first category of tests, and many out-of-the-box
components for use by a replicating model
for the second category of tests.
The components are verified by a com-
prehensive set of internal tests, which can
be run as part of the validation project
deliverables to provide assurance of validation
code accuracy. We include standard
algorithms, such as American Monte
Carlo (AMC) and hybrid model calibration,
which are applicable across all asset
classes and risk factors and enable a wider
portfolio scope. The platform provides
lightweight and transparent API that reduces
the implementation costs. 

Quantitative Test Approach Challenger Platform Approach

Models

Analytic Asymptotic
Model Actual vs Expected
Semi-analytic Approximate
Models

Independently replicated
Model Actual vs Expected
Actual Actual Alternative
model outputs 1
Conclusion Conclusion
Test case 1: Inputs 1
Expected Expected Test case 1: Inputs 1 Actual Consolidated
model 1 outputs 1 model actual outputs
Expert + Consolidated Expert
judgement inputs judgement
Challenger Consolidated
Actual Actual Test case N: Inputs N open-source expected
model outputs N model outputs
Test case N: Inputs N
Expected Expected
model N outputs N

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Transparency and Openness
Unlike most model validation consultancies, CompatibL provides the source code for all
model validation tests, including the code in the CompatibL Model Validation Platform.
This gives you additional confidence in validation results, and further reduces operational
and model risk.
Model Documentation
Because complete and accurate model documentation is critical to model risk management,
we include the review of code structure and quality as part of the validation project.
We ensure that documentation is sufficient for users and decision makers to have complete
confidence in how the model operates, including its key inputs, outputs, assumptions
and limitations. When improvements are needed, we deliver enhanced documentation
with the validation report.

How we do it?

We verify that the existing We provide recommendations We deliver enhanced

model documentation meets in case of any documentation documentation with the
the regulatory guidelines. gaps or inconsistencies. validation report.

Professional presentation of the report

We use the professional LaTeX typesetting system used by most financial book publishers
to provide test result presentation within the report. We automate the generation of test case
documents to produce professional supporting documentation.
CompatibL contributes to the model validation community and supports ModVal.org, a free online
In our test-case templates and methodology review, we follow a unified document structure,
resource for regulatory and internal model validation. ModVal.org provides detailed calculation
which covers the following items.
walkthroughs and validation spreadsheets for some of the most complex regulatory calculations:

Internal Model Standardised Standardised Model review: Validation model review: Analysis and summary:
Basic Approach
Approach for market Approach for market Approach for CVA
for CVA (BA-CVA - Background, market practice - Detailed test descriptions - Detailed analysis of test results,
risk (IMA-TB) risk (SA-TB) (SA-CVA)
and methodology and complete inventory providing the foundation for
of the required input data report conclusions
- A thorough analysis of model
specifications, assumptions - Detailed instructions on - Model risk assessment
CompatibL has developed and presented several training courses to help model validation specialists and limitations how to perform tests and and conclusions
to broaden their expertise in the latest regulatory frameworks. Our experts can customize the training independently reproduce
program to suit the needs of your quants and model validation experts. their results

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