The Trade Lifecycle: Behind the Scenes of the Trading Process

23

Mathematical Model and Systems Validation

Dr Geoff Chaplin, Reoch Credit Partners LLP

 

 

This chapter discusses the implementation of a credit derivatives system. Much of what is covered here is relevant to other systems and is written in as general a form as possible. On the other hand some aspects are less relevant for some applications - for example the implementation of market-accepted models for single name CDS valuation requires little emphasis on the testing of the mathematical model

23.1 TESTING PROCEDURES

The following describes current practice within risk-control departments of banks and large hedge funds and is commonly used with regard to internal (self-written) and external (off-the-shelf or bespoke) systems and models used for valuation and risk reporting. Without approval at this level trading desks for example, are generally not allowed to trade using the trading desk’s systems and models. An exception applies at start-up of a new desk - generally a limited trading approval is given which may restrict the number of deals, their size, duration of trading period, and other aspects of the transactions. This limited trading approval gives the desk and other departments within the bank time and experience to set up management procedures and ensure transactions are properly booked, reported and controlled throughout all aspects of the deal. It should also be borne in mind that the testing process is not an attempt to annoy traders and stand in the way of product ...