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

A validator reviewing a vendor-supplied market risk model finds the vendor will not disclose its code or detailed methodology. Which action is most consistent with supervisory guidance?

The bank should still validate the vendor model using whatever is available, such as benchmarking, sensitivity analysis and outcomes analysis, and document limitations with compensating controls. Proprietary status does not exempt a model from validation, and vendor assurances alone are insufficient.

  1. AExempt the model from validation because it is proprietary
  2. BRely solely on the vendor's own validation report
  3. CValidate using available means such as benchmarking, sensitivity testing and outcomes analysis, and document limitations and compensating controlsCorrect
  4. DBan the model from use under all circumstances

Explanation

Guidance states vendor models are still subject to validation and the bank should require vendor documentation and testing evidence. Where transparency is limited, banks should use outcomes analysis, benchmarking and sensitivity testing and apply compensating controls. Exempting or relying only on the vendor ignores this.

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