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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A bank's trading desk uses a third-party AI model whose internal logic is not disclosed by the vendor. The model risk team is concerned about explainability and accountability under existing supervisory expectations. Which approach best aligns with sound governance?

The bank should apply its full model risk management framework, with independent validation, ongoing monitoring and documented limits on use, even though vendor transparency is limited. Accountability for AI outputs stays with the firm and cannot be transferred to the vendor or waived because the model is proprietary.

  1. AAccept the vendor's performance claims, since accountability for the model's outputs transfers to the vendor under the contract
  2. BApply the bank's model risk management framework to the model, including independent validation, ongoing monitoring and documented limits of use, even if full transparency is unavailableCorrect
  3. CExempt the model from validation because it is proprietary and cannot be inspected
  4. DUse the model only for decisions with no financial impact, without any documentation

Explanation

Regulators expect the firm to remain accountable for AI used in its activities, including third-party models. Existing model risk frameworks apply: independent validation, monitoring, benchmarking and defined use limits, compensating for opacity. Contractual transfer of accountability and validation exemptions are not accepted.

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