All NPV models should be included in the scope of the validation exercise undertaken by the institution and in line with the principles articulated in the MMS and, in particular, the validation checks related to deterministic models.
7.5.2
The validation process should cover, at a minimum, the assumptions, inputs and usage of the general NPV methodology. In addition, the review should cover specific valuations deemed material on a sample basis to ensure that the choice of inputs are coherent with the principles articulated in the general NPV methodology documentation.
7.5.3
The general principles of the NPV computation methodology should be reviewed on a regular basis. The choice of inputs and assumptions in the context of material valuations should be reviewed for each material restructuring events.
7.5.4
The validation exercise should ensure that the model inputs reflect accurately the legal terms of both the original agreement and the new agreement. It should also ensure that the model outputs meet economic and business intuitions. This is particularly relevant for restructurings over a long time horizon where material uncertainty arises. Finally, the validation exercise should pay particular attention to the calibration of the credit spread premium in the context of a deterioration in the obligor’s creditworthiness.