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  • CA-9.8 CA-9.8 External validation of models

    • CA-9.8.1

      Before granting its approval for the use of internal models by a bank, the Central Bank will require that the models are validated by both the internal and external auditors of the bank. The Central Bank will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

      October 07

    • CA-9.8.2

      The internal validation procedures to be carried out by the internal auditors are set out in Section CA-9.3. As stated in that Paragraph, the internal auditor's review of the overall risk management process should take place at regular intervals (not less than once every six months). The internal auditor shall make a report to senior management and the Board of Directors, in writing, of the results of the validation procedures. The report shall be made available to the Central Bank for its review.

      October 07

    • CA-9.8.3

      The validation of the models by the external auditors should include, at a minimum, the following steps:

      (a) Verifying and ensuring that the internal validation processes described in Section CA-9.3 are operating satisfactorily;
      (b) Ensuring that the formulae used in the calculation process as well as for the pricing of options and other complex instruments are validated by a qualified unit, which in all cases should be independent from the trading area;
      (c) Checking and ensuring that the structure of the internal models is adequate with respect to the bank's activities and geographical coverage;
      (d) Checking the results of the bank's backtesting of its internal measurement system (i.e. comparing value-at-risk estimates with actual profits and losses) to ensure that the model provides a reliable measure of potential losses over time; and
      (e) Making sure that data flows and processes associated with the risk measurement system are transparent and accessible.
      October 07

    • CA-9.8.4

      The external auditors should carry out their validation/review procedures, at a minimum, once every year. Based on the above procedures, the external auditors shall make a report, in writing, on the accuracy of the bank's models, including all significant findings of their work. The report shall be addressed to the senior management and/or the Board of Directors of the bank, and a copy of the report shall be made available to the Central Bank. The mandatory annual review by the external auditors shall be carried out during the third quarter of the calendar year, and the Central Bank expects to receive their final report by 30 September each year. The results of additional validation procedures carried out by the external auditors at other times during the year, should be made available to the Central Bank promptly.

      October 07

    • CA-9.8.5

      Banks are required to ensure that external auditors and the Central Bank's representatives are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the models' specifications and parameters as well as to the results of, and the underlying inputs to, their value-at-risk calculations.

      October 07