Red Swan Model Risk Solutions

Model Risk

Intrinsic Model Risk is a challenge with every risk system. The more complex the model, the higher the potential model risk.

Extrinsic Model Risk, caused by input data errors and model configuration mistakes, can compound model risk significantly and cause severe distortions to risk optics.

Model Risk Mitigation

Red Swan's consulting experts deploy our software solutions to configure risk models and processes for optimal performance.

By minimizing Extrinsic Model Risk, Red Swan improves the veracity and confidence of risk reporting.

Ongoing Challenge of Model Risk Management

Maintaining optimal performance requires constant vigilance and responsiveness to prevent excessive model risk from creeping back into reports.

Red Swan services provide ongoing maintenance, monitoring, diagnostics, and timely mitigation required to manage model risk effectively.

Model Risk
Model Complexity
Extrinsic Model Risk
Extrinsic Risk is model risk that can be controlled. With careful analysis and proprietary software, Red Swan experts mitigate model risk and monitor against its return.
Intrinsic Model Risk
Intrinsic Risk is model risk inherent in any risk system. Properly configured models should be as close to this level of model risk as possible. Red Swan makes it easier to accomplish.
Sovereign Debt

The Hidden Danger Of Model Risk

Risk management is an inherently unstable process due to continuous changes and growing complexity.

Portfolio holdings, models, market data, technology, reporting requirements, and risk personnel regularly change through the course of business.  This creates an ongoing maintenance challenge to keep the risk processes up-to-date and performing optimally.

Without proper attention, modeling errors and mistakes can compound, distorting optics to the point where risk output is no longer trusted by risk and portfolio managers, investors, or regulators.

This type of Model Risk catches many firms by surprise because they are not aware how severe it can be until it is a very serious and costly problem.   

Example Timeline of Model Risk Errors and Corrections

Risk report accuracy declines regularly in the course of business: Input/output data errors, model configuration, formatting, & validation errors all contribute to the degradation of risk reporting trustworthiness.

Red Swan Risk has been diagnosing and remediating Model Risk since 2008, directly targeting the sources of Model Risk.
  • Input/output data management and process automation
  • Model configuration, formatting, and validation
  • Ongoing monitoring, diagnostics, analysis and remediation
  • Version control, documentation and audit support
Market data error distorts reports
Increased sizing of option position exposes model error
New security types added to portfolio
Exchange-traded positions added using fast-fill model
Proxy rules added for positions that cannot be modeled
Exchange-traded mapping rules adjusted
Fully modeled positons added
Market data over-rides to fully modeled positions
New models configured
New models re-configured to new market data