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

A bank licenses a vendor-supplied market risk model whose code and methodology details are proprietary. How should the bank approach validation under supervisory guidance?

The bank should validate the vendor model as far as it can, using vendor-provided evidence, benchmarking and outcomes analysis, and add controls for areas it cannot inspect. Proprietary opacity does not remove the bank's responsibility, and vendor assurance cannot replace the bank's own validation.

  1. AExempt the model because the vendor has validated it
  2. BValidate only the output reports, as internal use is irrelevant
  3. CDelay validation until regulators request it
  4. DValidate as far as possible, using vendor evidence, benchmarking, and outcomes analysis, and put in place controls for areas it cannot examineCorrect

Explanation

Guidance says vendor models must be validated like internal ones; the bank should require developmental evidence from the vendor, perform ongoing monitoring and outcomes analysis, and use benchmarking and compensating controls where opacity limits review. Relying solely on vendor validation or waiting for regulators is inadequate.

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