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  • 1 Context and Objectives

    • 1.1 Regulatory Context

      1.1.1
             		The Risk Management Regulation (Circular No. 153/2018) issued by the Central Bank of the UAE (“CBUAE”) on 27th May 2018, states that banks must have robust systems and tools to assess and measure risks. In particular, when models are used, they must be managed appropriately to support decision-making.
       
       (i)
             		Article 2.1: “A bank must have an appropriate risk governance framework that provides a bank-wide view of all material risks. This includes policies, processes, procedures, systems and controls to identify, measure, evaluate, monitor, report and control or mitigate material sources of risk on a timely basis (…).”
       (ii)
             		Article 4.1: “A bank must have systems to measure and monitor risks which are commensurate with the risk profile, nature, size and complexity of its business and structure.”
       (iii)
             		Article 4.3: “Where a Bank uses models to measure components of risks, it must have appropriate internal processes for the development and approval for use of such models and must perform regular and independent validation and testing of the models (…).”
       
      1.1.2
             		Consequently, the Model Management Standards (“MMS”) present modelling practices that must be implemented by banks in the UAE, if they decide to employ models for decision-making. These standards are based upon practices deemed appropriate within the financial industry internationally with consideration of local circumstances. The MMS therefore represent the minimum requirements to be met within the UAE.
       

    • 1.2 Objectives

      1.2.1
             		Models are an integral part of decision-making within UAE banks for risk management, business decisions and accounting. Banks employ models to comply with several regulatory and accounting requirements, including, but not limited to: (i) IFRS9 accounting requirements, (ii) capital forecasting, (iii) Pillar II capital assessment, (iv) regulatory stress testing requirements, (v) risk management of capital market activities and (vi) valuation adjustments. In addition, banks employ models to manage their business effectively, for instance with pricing models, portfolio management models and budgeting models.
       
      1.2.2
             		When using models to support decisions, banks are exposed to potential losses occurring from making decisions based on inappropriate models or the incorrect usage of models. This potential loss and the associated adverse consequences are referred to as Model Risk. Further details are provided in the definition section.
       
      1.2.3
             		In light of this large and complex landscape, the MMS has three key objectives. The first objective is to ensure that models employed by UAE banks meet quality standards to adequately support decision-making and reduce Model Risk. The second objective is to improve the homogeneity of model management across UAE banks. The third objective is to mitigate the risk of potential underestimation of provisions and capital across UAE banks.
       

    • 1.3 Document Structure

      1.3.1
             		The MMS are accompanied by the Model Management Guidance (“MMG”), which expands on technical aspects by model type. Both the MMS and MMG should be read jointly as they constitute a consistent set of requirements and guidance, as follows:
       
       (i)
             		Part I of the MMS outlines general standards applicable to all models. They represent the key components of the Model Management Standards.
       (ii)
             		Part II of the MMS outlines specific requirements for the application of the standards. Both Part I and Part II constitute the minimum requirements to be met by a model and its management process so that the model can be used effectively for decision-making.
       (iii)
             		The MMG expands on technical aspects that are expected to be implemented by UAE banks for certain types of models. Given the wide range of models and the complexity of some models, the CBUAE recognises that alternative approaches can be envisaged on specific technical points. However, deviations from the MMG should be clearly justified and will be subject to CBUAE supervisory review.
       
      1.3.2
             		The MMS is constructed in such a way that all points are mentioned sequentially and each point is a unique reference across the entire MMS. Throughout the document, the requirements associated with ‘must’ are mandatory, while those associated with ‘should’ are strongly recommended as they are regarded as robust modelling practice. The articles of the MMG are all articulated with ‘should’.
       
      1.3.3
             		Both the MMS and the MMG contain an appendix summarising the main numerical limits included throughout each document, respectively. The summary is expected to ease the implementation and monitoring of these limits by institutions and the CBUAE.