CPS 226 / ISDA SIMM

Datalysis has assisted several leading Australian financial institutions to reconfigure their business operating models to support the use of ISDA SIMM to calculate initial margins for non-centrally cleared derivatives. We have also assisted these organisations to respond to APRA's CPR226 RFI. Our engagements have covered:

• Readiness reviews: ‌Reviews the client's intended solution for CPS226 compliance, the current portfolio of in-scope derivatives and the role of third party vendors. Feedback is provided against requirements and status of peers.
  
• ‌Compliance Traceability: Produce a detailed compliance traceability matrix for all of CPS226 (including Risk Mitigation Standards and VM).
  
• ‌Testing methodology: Ensure that the client has a clear plan and pathway to complete model validation, bench-marking and back-testing to ISDA/APRA standards. This includes understanding what resources are required to conclude testing. 
  
• ‌Model governance: Work with client to develop a model governance framework (including RACI).
  
• Section C support: ‌Assist client to complete Section C of APRA CPS226 RFI Response by ‌either providing a Test Approach Methodology or assisting the client to test the ISDA SIMM calculation system. Datalysis can utilise its own tools to accelerate this work (See Technical Services).
  
• ‌Draft Approval Submission: Recommend approach for the client's CPS 2226 RFI submission and what inclusions/format are relevant to each ARPA response section.
  
• ‌Knowledge Transfer: Ensure client is able to independently maintain CPS226 compliance.
  

• Initial margin monitoring: CPS226 requires captured entities that choose to use ISDA SIMM as their initial margin calculation method to continually monitor the results for potential initial margin shortfalls that may arise due to unusual market conditions and/or portfolio construction. Datalysis has assisted clients by equipping them to be able to identify risks-not-in-SIMM (RNIS) or ISDA SIMM risk weights that are too low and the potential shortfalls. These methods were then incorporated into an operating model which includes roles and responsibilities as well as escalation paths and processes.
• Model governance:Many of our clients captured under CPS226 had existing model governance frameworks which covered how internal valuation, or other proprietary investment models, should be developed, controlled and reviewed. These existing governance frameworks were internally focused and did not consider the heightened interest that APRA places on the control of ISDA SIMM.  To ensure a high level of governance of the ISDA SIMM  model used by our clients Datalysis introduced key control concepts from ISDA relating to risk and quantitative models as well as principles from CPS226. Frameworks were introduced to incorporate regular model appropriateness testing, revision validation, roles and responsibilities and escalation paths. 
• Organisational structure: CPS226 requires affected organisations to nominate a model owner that is responsible for ongoing compliance. The nominated person is usually located in the front office of the organisation and has existing responsibilities for other models and the procedures governing them. Datalysis has assisted several clients in the superannuation to meet the CPS226 requirements by mapping their existing organisational structure against each requirement and assigning named resources and roles to each. This is achieved through the development of a compliance traceability matrix used in conjunction with a RACI (responsibility matrix). In many cases it has highlighted the need for changes to be made to the existing organisational structure and in some instances, where there are no existing resources or business areas, these would need to be created.

Acadia IMEM and Claris CHARM: CPS 226 / ISDA SIMM 

APRA covered entities wishing to use ISDA SIMM or another internal model to calculate initial margin need to seek approval from APRA to use that model. In making a submission for approval an APRA covered entity is required to validate through testing the performance of several outputs of the covered entities ISDA SIMM platform. 

Most banks and superannuation funds use Acadia IMEM for collateral management and many, in parallel, use Clarus CHARM for deep-dive analysis of collateral evolution. When responding to APRA CPS226 RFI covered entities need to provide evidence that the systems they use perform consistently with ISDA SIMM.

Datalysis has performed validation, on behalf clients, of both of these systems covering range of items including:

• Providing evidence that ISDA SIMM has been implemented per the ISDA documentation through unit tests, and/or an independent implementation.
  
• Assessment that risk factor sensitivities conform to the ISDA SIMM specifications, demonstrating that the sensitivities are fit for purpose across varying market conditions.
• Verifying the accuracy of the CRIF file.
  

Calypso: New Product Implementation Review

Datalysis was requested to review the testing performed by a leading Australian bank for the implementation of new Alternative Reference Rate (ARR) curves such as GBP SONIA, HKD HONIA, the resultant cross-currency curves as well as AONIA bonds and SOFR futures.

The review covered:

• Appropriateness of approach given the client's business model, risk appetite, client set and risk platform.
• Appropriateness of testing performed.
  
• Appropriateness of conclusions derived from test results.
  
• Consistency of configurations of curves and products with respect to leading Australian banks.
  
• Identification of items that may require further testing.
  
• Suggested improvements to testing approach.