IHS Markit and Oliver Wyman are launching the Markit Modellability Model (M3) – a rigorous methodology that allows firms to assess the modellability of the risk factors in their trading books. The technique can be used by firms for Quantitative Impact Studies (QIS) and to accelerate Internal Models Approach (IMA) waiver applications and address the significant ambiguity in the regulatory text.
A core component of M3 is the method used to segment continuous market data objects (e.g.IR curves) into buckets so that real price observations can be counted to assess risk factor modellability.
In this paper we present a sample of preliminary results from M3 using data across rates and credit for real-price observations in 2015 from MarkitSERV, our market-leading confirmation/ affirmation platform. The results showed:
- As expected, highly liquid yield curves are modellable at short, medium and long tenors
- Medium-liquidity yield curves (1,000 – 10,000 transactions per year) display a range of modellability results. Non-modellable sections of these curves are commonly due to seasonal trading patterns
- CDS curves are generally modellable around the 5Y tenor point, but not across the whole curve