Article 47
Model Validation
1.
A CCP shall conduct a comprehensive validation of its models, their methodologies and the liquidity risk management framework used to quantify, aggregate, and manage its risks. Any material revisions or adjustments to its models, their methodologies and the liquidity risk management framework shall be subject to appropriate governance, including seeking advice from the risk committee, and validated by a qualified and independent party prior to application.
2.
A CCP’s validation process shall be documented and at least shall specify the policies used to test the CCP’s margin, default fund and other financial resources methodologies and framework for calculating liquid financial resources. Any material revisions or adjustments to such policies shall be subject to appropriate governance, including seeking advice from the risk committee, and validated by a qualified and independent party prior to application.
3.
A comprehensive validation shall, at least, include the following:
(a)
an evaluation of the conceptual soundness of the models and framework, including developmental supporting evidence;
(b)
a review of the ongoing monitoring procedures, including verification of processes and benchmarking;
(c)
a review of the parameters and assumptions made in the development of its models, their methodologies and the framework;
(d)
a review of the adequacy and appropriateness of the models, their methodologies and framework adopted in respect of the type of contracts they apply to;
(e)
a review of the appropriateness of its stress testing scenarios in accordance with Chapter VII and Article 52;
(f)
an analysis of the outcomes of testing results.
4.
A CCP shall establish the criteria against which it assesses whether its models, their methodologies and liquidity risk management framework can be successfully validated. The criteria shall include successful testing results.
5.
Where pricing data is not readily available or reliable, a CCP shall address such pricing limitations and, at least, adopt conservative assumptions based on observed correlated or related markets and current behaviours of the market.
6.
Where pricing data is not readily available or reliable, the systems and valuation models used for this purpose shall be subject to appropriate governance, including seeking advice from the risk committee, and validation and testing. A CCP shall have its valuation models validated under a variety of market scenarios by a qualified and independent party to ensure that its models accurately produces appropriate prices, and where appropriate, it shall adjust its calculation of initial margins to reflect any identified model risk.
7.
A CCP shall regularly conduct an assessment of the theoretical and empirical properties of its margin model for all the financial instruments that it clears.