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  • CA-14.8 CA-14.8 External Validation of Models

    • CA-14.8.1

      Before granting its approval for the use of internal models by a conventional bank licensee, the CBB requires that the models be validated by both the internal and external auditors of the conventional bank licensee. The CBB will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

      January 2015

    • CA-14.8.2

      The internal validation procedures to be carried out by the internal auditor are set out in Section CA-14.3. As stated in that Section, the internal auditor's review of the overall risk management process must take place at regular intervals (not less than once every six months). The internal auditor must make a report to senior management and the board of directors, in writing, of the results of the validation procedures. The report must be made available to the CBB for its review.

      January 2015

    • CA-14.8.3

      The validation of the models by the external auditor must include, at a minimum, the following steps:

      (a) Verifying and ensuring that the internal validation processes described in Section CA-14.3 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 must be independent from the trading area;
      (c) Checking and ensuring that the structure of the internal models is adequate with respect to the conventional bank licensee's activities and geographical coverage;
      (d) Checking the results of the conventional bank licensee's back-testing 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.
      January 2015

    • CA-14.8.4

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

      January 2015

    • CA-14.8.5

      Conventional bank licensees are required to ensure that external auditors and the CBB'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.

      January 2015