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

Under SR 11-7, which of the following is classified as a 'model' that falls within the scope of model risk management?

A model is a quantitative method that applies statistical, economic or financial theories and assumptions to convert input data into quantitative estimates. Simple arithmetic tools, policy documents and hardware do not meet this definition, so they fall outside the model risk framework.

  1. AA quantitative method that applies statistical, economic or financial theory and assumptions to turn input data into quantitative estimatesCorrect
  2. BAny spreadsheet that sums balances without assumptions or estimation
  3. CA paper-based policy manual for credit approvals
  4. DA hardware server hosting the trading platform

Explanation

SR 11-7 defines a model as a quantitative method, system or approach that applies statistical, economic, financial or mathematical theories, techniques and assumptions to process input data into quantitative estimates. A simple summation, a policy manual and hardware do not involve this estimation, so they are not models by that definition.

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