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  • 1 Context and Objective

    • 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.
       
      1.1.2
             		To set out modelling requirements for licenced banks, the CBUAE has issued Model Management Standards (“MMS”) and Model Management Guidance (“MMG”). Both MMS and MMG should be read jointly as they constitute a consistent set of requirements and guidance, as follows:
       
       (i)
             		The MMS outline general standards applicable to all models and constitute minimum requirements that must be met by UAE banks.
       
       (ii)
             		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, the CBUAE recognises that alternative approaches can be envisaged on specific technical points. Whilst this MMG neither constitutes additional legislation or regulation nor replaces or supersedes any legal or regulatory requirements or statutory obligations, deviations from the MMG should be clearly justified and will be subject to CBUAE supervisory review.
       

    • 1.2 Objectives

      1.2.1
             		Both the MMS and MMG share 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.
       
      1.2.2
             		The MMG outlines techniques based on commonly accepted practices by practitioners and academics, internationally. The majority of its content has been subject to consultation with numerous subject matter experts in the UAE and therefore it also reflects expected practices amongst UAE institutions.
       

    • 1.3 Document Structure

      1.3.1
             		Each section of the MMG addresses a different type of model. The MMG is constructed in such a way that the numbering of each article is sequentially and each article is a unique reference across the entire MMG.
       
      1.3.2
             		Both the MMS and the MMG contain an appendix summarising the main numerical limits included throughout each document respectively. Such summary is expected to ease the implementation and monitoring of these limits by both institution and the CBUAE.
       

    • 1.4 Scope of Application

      1.4.1
             		The MMG applies to all licensed banks in the UAE, which are referred to herein as “institutions”.
       
      1.4.2
             		The scope of institutions is consistent across the MMS and the MMG. Details about the scope of institutions are available in the MMS.
       
      1.4.3
             		Branches or subsidiaries of foreign institutions should apply the most conservative practices between the MMG and the expectations from their parent company’s regulator.
       
      1.4.4
             		Institutions with a parent company incorporated in the UAE should ensure that all their branches and subsidiaries comply with the MMG.
       

    • 1.5 Requirements and Timeframe

      1.5.1
             		The implementation timeframe is consistent across the MMS and the MMG. Further details are available in the MMS.
       

    • 1.6 Scope of Models

      1.6.1
             		The MMG focuses on the main credit risk models entering the computation of the Expected Credit Loss in the context of the current accounting requirements, due to their materiality and their relevance across the vast majority of institutions. The MMG also provides guidance on other models used for the assessment of interest rate risk in the banking book and net present values.
       
      1.6.2
             		The MMG does not impose the use of these models. The MMG outlines minimum expected practices if institutions decide to use such models, in order to manage Model Risk appropriately.
       
      1.6.3
             		As model management matures across UAE institutions, additional model types may be included in the scope of the MMG in subsequent publications.
       
      Table 1: List of model types covered in the MMG
       
      Model type covered in the MMG
      Rating Models
      PD Models
      LGD Models
      Macro Models
      Interest Rate Risk In the Banking Book Models
      Net Present Value Models