How can I tell if our risk reports contain gross errors or mistakes?

Problem

With all of the steps involved in generating a risk report, there are ample opportunities to make a mistake. Often these are not easy to detect because they appear innocuous.

  • Positions may be loaded successfully to the wrong model.
  • A model may have all of the required inputs but the inputs are transposed (a put instead of a call).
  • The identifier is valid but not the right one (i.e. the wrong commodity future – June instead of July).
  • A column name for a risk statistic may be mislabeled (VaR instead of Expected Loss).
  • The analysis date of the risk statistics is different than the date on the investor risk report, or the report is simply pointing to a preliminary run instead of the final run.

None of these scream out but they can create a lot of confusion and uncertainty that erodes confidence in the risk process. They can lead to increased maintenance and support expenses, as resources are needed to diagnose and remediate seemingly random problems, all too frequently.

Solution

Red Swan’s independent Risk Audit Service examines the entire risk process from the input data, to model choices, statistic configurations, report settings and final report production. It is designed to identify mistakes that may potentially cause gross errors in reported risk and recommend remediation steps together with areas for improvement such as modeling decisions, report configurations or database integrity.

Result

Chief Risk Officers, Risk Committees and Investors have the assurance that risk reports they rely on have been vetted by an independent third party with sufficient expertise, and that proper steps are in place to identify and remediate material errors. Minor issues can usually can be resolved internally. However, in the event these are due to systemic design limitations, Red Swan can implement proven model risk solutions designed to reduce the likelihood of errors in the overall risk process, together with ongoing auditing and remediation services to keep your risk reports in compliance.