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FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management

A bank implements a validated pricing model in a new production system. Outputs differ from the developer's prototype for several test trades. Under sound implementation practice, what should the bank do FIRST?

The bank should investigate and resolve the differences through implementation testing, for example against an independent replication, before release. Guidance requires showing that the system faithfully implements the intended model; masking gaps with a scalar or relying on users to find errors leaves implementation risk unaddressed.

  1. AInvestigate and resolve the differences through implementation testing, such as comparing to an independent replication, before releaseCorrect
  2. BRelease the model and rely on users to flag errors
  3. CScale outputs by a constant so averages match the prototype
  4. DTreat the prototype as wrong and delete its records

Explanation

Implementation includes verifying that code and system integration faithfully reproduce the intended model, including parallel runs and benchmarking against independent replication. Fixing averages with a scalar masks errors, and releasing first shifts risk to users.

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