FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management
A bank's VaR model passes all tests in development. During implementation, the production system truncates a risk factor's time series because of a data feed format difference, so reported VaR is understated. Which control would have most directly detected this problem under supervisory guidance?
Implementation testing that compares production outputs with developer results on identical inputs would most directly detect the truncation. The flaw lies in system integration and data handling, not in model theory, so sensitivity analysis or inventory reviews would not find it.
- AA higher confidence level for the VaR calculation
- BAdditional sensitivity analysis on the model's theoretical assumptions
- CSystem integration and implementation testing that compares production outputs with the developer's test results using the same inputsCorrect
- DAnnual senior management review of the model inventory
Explanation
The problem is an implementation error, not a theory flaw. Guidance calls for testing that the code and systems work as intended, such as parallel runs comparing production output with the development version on identical data. Changing confidence level or reviewing the inventory would not reveal the truncation.
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