FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management
A bank licenses a vendor's proprietary pricing model and the vendor refuses to disclose its code, citing intellectual property. Which response is most consistent with supervisory guidance on model risk management?
The bank should keep the vendor model in its inventory and validate it as far as it can through benchmarking, outcomes analysis and sensitivity tests, adding compensating controls and limits. Vendor models remain the bank's responsibility, so it cannot simply accept the vendor's assurances or exempt the model.
- ARely on the vendor's validation report and exempt the model from internal validation
- BInclude the model in the inventory and validate it as far as possible using benchmarking, outcomes analysis and sensitivity testing, with compensating controlsCorrect
- CProhibit use of any vendor model regardless of materiality
- DTreat the model as low risk because the vendor is responsible for its accuracy
Explanation
Guidance states vendor models remain the bank's responsibility and must be validated. Where the code is opaque, the bank should use ongoing monitoring, benchmarking, outcomes analysis and compensating controls, and understand the model's limitations. Exemption or blanket prohibition is not required.
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