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

A bank's trading desk uses a vendor pricing model whose code is proprietary. Which approach is most consistent with supervisory guidance on model implementation and use?

Vendor models still need the bank's own validation: obtain available developmental evidence, test with the bank's data, benchmark against alternatives and monitor performance. The bank cannot rely only on the vendor's report, exclude the model from inventory, or necessarily demand source code.

  1. ARely entirely on the vendor's validation report since the code cannot be reviewed
  2. BTreat it as outside the model inventory because the bank did not build it
  3. CRequire the vendor to disclose all source code before any use, or reject the model
  4. DTest the model with the bank's own data, benchmark it against alternatives, and monitor outcomes, while obtaining as much vendor information as feasibleCorrect

Explanation

Vendor models fall under the same framework. Banks should obtain developmental evidence, run their own testing and benchmarking and monitor ongoing performance. Full source code disclosure is not required, and relying only on the vendor is insufficient.

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