Risk management

Model validation: independent, effective challenge of risk models

An independent model validation that provides independent, effective challenge for Eurex Clearing’s risk models is essential for robust risk management. Our comprehensive model validation framework with strong governance ensures effective identification of potential model risks related to models used at Eurex Clearing AG. 

As a second line of defense in the Risk Management team, Model Validation plays a central role in identifying and managing model risks. Model Validation reports directly to the Chief Risk Officer (CRO) of Eurex Clearing, ensuring independence from other areas of risk management (e.g. model development). Additionally, model validation has an alternative reporting line to the Chair of the Supervisory Board of Eurex Clearing. 

Model validation uses several validation tools and instruments to effectively challenge and assess whether models are adequate for their intended use. Validations are performed regularly and ad-hoc if required e.g. before a new model or model change is implemented.  

The models in scope Model validation are defined by the Model Risk Policy. In this scope, we can find various models such as Margin models, Credit & Liquidity Stress Testing or Collateral Haircut models. Each model that is important for the CCP is in the spotlight of the Model Validation Team. 

To validate the proper functioning of these models, Model validation defines and executes both qualitative and quantitative tests. Quantitative tests can take the form of backtesting, sensitivity testing or scenario analysis and determine whether parameters, assumptions or model use are adequate.