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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 production system. Outputs from the production system differ materially from the developer's prototype on the same inputs. Which action best reflects sound practice for implementation?

The bank should test the production implementation against the developed model, using parallel runs and code or logic review, resolve the discrepancies, and only then approve use. Implementation errors are a source of model risk, so differences must be explained before reliance rather than ignored or deferred.

  1. AAccept production output because the system is more recent
  2. BTest the implementation against the developed model through parallel runs and code and logic review, resolve the differences, and only then approve useCorrect
  3. CAdjust the prototype to match production without investigation
  4. DWait for outcomes analysis after a year of live use to detect any problem

Explanation

Implementation risk arises from coding errors, data feed issues or system differences. Guidance expects testing that the production version matches the intended design, including parallel testing, before reliance. Matching without investigation hides errors, and waiting a year leaves risk unmanaged.

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