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

A bank uses a vendor valuation model for structured products. The vendor releases a version update that changes the calibration routine without detailed documentation. Which action is most consistent with sound model risk management?

The bank should treat the vendor update as a model change, assess its impact, test it before use, and update validation and documentation in proportion to materiality. The bank retains responsibility, so it cannot rely on vendor assurances or defer review to the annual cycle.

  1. ADeploy the update immediately because the vendor is responsible for its quality
  2. BTreat the change as a model change: assess its impact, test it before use, and update validation and documentation as neededCorrect
  3. CWait until the next annual review, since vendor changes do not require interim action
  4. DDeploy the update only if the vendor guarantees performance in writing

Explanation

Vendor model changes should be managed under the bank's change control. The bank needs to understand the change, test its effect on outputs, and revalidate in proportion to materiality. A vendor guarantee or waiting for the annual cycle does not meet this expectation.

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