This was a presentation at the 6th Annual Stress Testing conference on 2 Dec 2011 in London.

1. PRODUCT TAXONOMY &
MODEL RISK MANAGEMENT:
‘Putting the beans back into coffee’
Markus Krebsz
6th Annual Stress Testing Conference
30 Nov - 2 Dec 2011, London

2. PRODUCT TAXONOMY
‘Putting the beans..
..back into coffee’ 2

3. DEFINITION & STRUCTURE
Τάξις = taxis (meaning 'order' or 'arrangement') and νόμος = nomos (meaning 'law’)
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4. WHY?
Risk modeling &
Stress testing
Valuation &
P+L explain
PRODUCT
Certification &
Model control
Risk Reporting &
Management
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5. OBJECTIVE ‘COMPLETE MENU’
 Fully classified product suite across the firm:
i.e. Fixed Income, Equities, F/X, Structured Rates & Credit, Commodities divisions
 Ability to model Risks & monitor Model performance:
Models, Model data, Product certifications, Valuation adjustments and P+L explain 5

6. OBJECTIVE (External / Regulatory drivers)
 Bank for International Settlements/ Financial Stability Board:
Senior Supervisors Group’s white paper of the “Observations on developments in risk
appetite frameworks and IT infrastructure” – Dec . 2010
 Financial Services Authority (UK):
- ‘Dear CEO letter’ entitled “Valuation and product control” – Aug. 2008
- New assessment framework for prudent valuation to promote a more systematic
approach to the assessment of valuation uncertainty and prudent valuation.
- BIPRU 7.10 – Use of VaR-models prescribing 4 different types of products
- FSA is also likely going to assess granular judgmental analysis by firms at product level.
 Dodd-Frank act (US):
introduces several new concepts to derivatives processing:
- Taxonomy, identifies the type of traded product (e.g. simple EQ option)
- Unique product identifiers (UPI), identifies traded product (e.g. a 5Y-USD-LIBOR
interest rate swap) – but not necessarily a specific contract
- Standardised product, i.e. derivatives products that have standard terms and
are listed on an execution platform
 International Swaps and Derivatives Association 6

7. CONCEPTUAL MODEL
Important:
 Mandatory vs. Product-specific nodes
- Mandatory nodes apply to all products, regardless of the asset class
- Product-specific nodes are not always populated
 Product-specific vs. Trade-specific features
- a Cappuccino to ‘drink-in’ vs. ‘Take-away’  the product is the same
 Based on observable trade facts & the lowest level of ‘product’
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8. CLASSIFICATION APPROACH
Vanilla Structured Exotic
< Flow products > < Templated > < Non-templated >
‘Locked-down’ Building blocks Freely scripted
= Tea-Bag = Hot water + Espresso = Cappuccino with Soy milk,
+ Semi-skimmed milk fair-trade coffee, sugar-free
Hazelnut syrup and…
System-compiled Template-driven Human-compiled
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9. TAXONOMY DEVELOPMENT CYCLE
Determine Identify Develop draft
requirements concepts taxonomy
Scope?; Purpose? ; Type of content Where and what is the content?; Develop upper taxonomy levels:
format?; Target audience & users?; Perform content inventory; Start broad, not deep; Bottom up
Business objectives? Conduct user interviews and/or top down approach
 Business case document,  Identify “high value”  Establish common rules
Scope statement, Project plan, content for: Taxonomy format,
Issue log Structure & Relationship,
Guidelines & standards
Review with SMEs Refine Apply taxonomy Manage & Maintain
& Users taxonomy taxonomy
to content
Identify appropriate SMEs for Iterative process; Incorporate Integrate taxonomy globally Establish taxonomy ownership,
taxonomy validation user feedback; Living/growing across firm with existing governance & Change control
tool, i.e. never finished applications; Associate process; Conduct periodic review
 Does structure make taxonomy terms with to establish if it still “fits”
sense?  But: stop when good products; Address links to
Does it go too deep? “enough” and Observe other concepts  Documentation, Ongoing
Are all major products balance: Value vs. detail  Provide guidelines for review, approval and change
included? use, application and implementation, Version control
Are there any gaps? training for users
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10. CHALLENGES
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11. BENEFITS
 Meeting a large selection of cross-functional requirements enabling
- Model control & Stress testing
- Model certifications
- Product control
- Management of Trading mandate
- P+L explain
- Proper valuation adjustments and management of model reserves
 Greater transparency and comparability of (derivative) products
 Post-trade transparency is ticking the Regulators’ ‘boxes’
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12. CLOSE
Thank you very much
for your attention, contribution and listening today!
________________________________________
________________________________________
CONTACT:
+ 44 (0) 79 85 065 045
www.riskguide.net www.markuskrebsz.info 12

13. Markus Krebsz
Subject matter expert : Rating agencies & Securitisation
• Freelance Consultant with nineteen years experience in banking & financial institutions - thereof ten years covering rating agencies
• Credit rating advisor for the World Bank as part of various large-scale projects involving GSEs of several African & Asian nations
• Industry expert in credit rating agency as well as Structured finance-related issues and frequent speaker on international conferences
• Author and passionate reviewer/editor of several risk workbooks
• Frequent contributor to various industry working groups consulting regulators, exchanges and central banks
Publications
• ‘Securitisation & Structured Finance post Credit Crunch: A Best Practice Deal Lifecycle Guide’, John Wiley & Sons Inc., Apr. 2011
• ‘Product Taxonomy: A Key Tool for Understanding Risk/Return within the Banking Framework’ Qfinance chapter, exp. Jan 2012
• ‘Investor Requirements for 2011 and beyond: Due diligence and Risk analysis in a post-crisis world’, Euromoney Yearbook chapter
• Workbooks of the Chartered Institute for Securities & Investments (CISI): ‘Derivatives’ (Senior Reviewer), ‘IT in Investment
Operations’, (Senior reviewer), ‘Operational Risk’ , (Senior reviewer) & ‘Risk in Financial Services’, (Technical Reviewer)
• ‘Frontiers of Risk management – Chapter 14: Credit rating agencies and the IRB approach’, Euromoney Book, 2007
• Numerous special, research and criteria reports on Fitch Rating’s website as Performance & Rating analyst, Aug 2004 to Oct 2006
• SAP Risk Analyzer Manual (in-house publication, in German), Jan 2002
Professional qualifications & affiliations Assignments (Past & current)
• Individually Chartered Member of the Chartered • The World Bank
Securities and Investment Institute (CISI) • Deutsche Bank & UBS
• Bachelor of Banking Services and Operations, CCI • Lloyds Banking Group
• ‘Train the Trainers’ Certificate • Bank of Scotland Treasury
• ‘Banking in Britain’ Certificate • The Royal Bank of Scotland Group
• German Banking Certificate (‘Bankkaufmann’) • HypoVereinsbank / Unicredit
• Volunteer at and Member of the Professional Risk • Dresdner Bank
Manager’s International Association (PRMIA) • Primary insight (Subsidiary of Bear Stearns)
• Member of the Global Association of Risk • De Matteo Monness (Subsidiary of Goldman Sachs)
Professionals (GARP)
• Fitch Ratings
www.markuskrebsz.info / www.markuskrebsz.co.uk • Vista Research (Subsidiary of Standard & Poor’s)
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14. APPENDIX: Further references
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15. FURTHER REFERENCES
Book:
Krebsz, Markus. Securitization and Structured Finance post Credit Crunch: A Best
Practice Deal Lifecyle Guide, Wiley, 2011.
Some chapters are available to browse/read online at Google books:
http://books.google.com/books?id=28mO9cjAWwsC&printsec=frontcover&source=g
bs_atb#v=onepage&q&f=false
Articles:
Bank for International Settlements (BIS) Financial Stability Board. “Observations on
developments in risk appetite frameworks and IT infrastructure.” BIS, December 23,
2010. Online: www.fsa.gov.uk/pubs/other/ssg_2010.pdf
Bennett, M. “Financial securities ontology.” Hypercube Ltd., May 2007. Online:
www.hypercube.co.uk/docs/ontologyexploration.doc
International Swaps and Derivatives Association (ISDA). “Product representation for
standardized derivatives.” White paper, April 14, 2011. Online:
www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission_04
2111_706_0.pdf
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16. FURTHER REFERENCES (cont.)
International Swaps and Derivatives Association (ISDA). “Implementation plan for
unique product identifiers.” June 30, 2011.
Online: www.fpml.org/_wgmail/_eqdwgmail/pdfRK0ZIeMu8T.pdf
Sants, H. “Dear CEO: Valuation and product control.” Financial Services Authority,
August 13, 2008. Online: www.fsa.gov.uk/pubs/ceo/valuation.pdf
Whittaker, M., and Breininger, K. “Taxonomy development for knowledge
management.” Presented at World Library and Information Congress, 74th IFLA
General Conference and Council, Quebec, Canada, August 10–14, 2008.
Online: http://archive.ifla.org/IV/ifla74/papers/138-Whittaker_Breininger-en.pdf
Websites:
HandCoded Software Ltd.: www.handcoded.com
Enterprise Data Management (EDM) Council’s “Semantics Repository.”
www.edmcouncil.org/sec_semantics.aspx
Taxonomy Strategies—information management consultancy that specializes in
applying taxonomies, metadata and automatic classification:
www.taxonomystrategies.com
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17. AND FINALLY…
More on Asset/product classification, Risk
& rating models, Model risk and Analytical
tools is in my latest book ‘Securitization
and Structured Finance post Credit
Crunch – A Best Practice Deal
Lifecycle Guide.’
A special offer for a 30% discount (of the
RRP) for orders is currently available
for a limited time only,
if the order is placed directly at the
publisher's website www.wiley.com
and the promotion code 'VA817' is
entered.
Thank you for your interest.
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