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

Which statement about the frequency and scope of model validation is most consistent with supervisory guidance on model risk management?

Validation should be repeated periodically and whenever material changes occur in the model, products or market conditions, with its depth and frequency scaled to the model's risk and materiality. It is not a one-off exercise, nor uniform across all models, nor triggered only by regulators.

  1. AValidation is a one-time exercise before first use
  2. BValidation should be repeated periodically and when material changes occur, with depth and frequency commensurate with model riskCorrect
  3. CValidation frequency should be identical for all models regardless of use
  4. DValidation is needed only when regulators request it

Explanation

Guidance requires periodic revalidation (at least annual review is typical) and validation after significant changes in the model, products, market conditions or exposures. Rigor should be proportional to the model's materiality and risk, so uniform treatment is not required.

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