Long Dated Repo Mark to Market Validation

Challenge

Recent market events have shone the spotlight on products that have less liquidity than was implied from their secondary market activity during more benign periods.  Structured credit products did of course come under particular attention from regulators and politicians, however, our client also wanted to assess other markets that may not have sufficient mark to market transparency.
In particular, our client’s risk management function was concerned that the long dated credit repo market suffered from a lack of standard market curves; lack of third party data sources and multiple pricing drivers which made validation of mark to market levels challenging.

Solution

  • CPRA analysed the client data and decided to utilise its application, benchMARK, to assess the internal consistency of the repo marks by identifying benchmark trades and measure the degree of divergence of internal marks from these benchmark trades.
  • benchMARK allowed easy identification of internal marks that diverged significantly from benchmark trades and provided summary statistics of the amount of divergence.  Users, via an intuitive GUI, could change the criteria of the benchmark trades and the aggregation level of the summary statistics.
  • The solution was light touch, as it integrated on top of existing risk data systems.

Result

benchMARK allowed rapid and straightforward validation of the repo mark to market levels.  A graphical output allowed the client to quickly identify marking patterns or behaviour which was inconsistent, it also identified a directional trade bias that warranted further investigation.