12.The Board-approved policies must provide for an independent review by the internal audit function of the market risk measurement system at least annually. The review must include both the activities of the business trading units and of the independent risk management function. At a minimum, a review must specifically address the following:
a.The organization of the market risk management function, adequacy of the documentation of the market risk management system and process and the approval process for risk pricing models and valuation systems used by front-and back-office personnel;
b.The scope of the market risks captured by the market risk measurement system’s models; the accuracy and appropriateness of the risk measurement system (including any significant changes); the accuracy and completeness of position data; the accuracy of calculation and risk transformation calculations; integration of market risk measures into daily risk management; accuracy and appropriateness of volatility and correlation assumptions and (if using the historical simulation approach) calculations of historical rate movements; and the integrity of the management information system with respect to market risk;
c.The verification of the consistency, timeliness and reliability of the data sources used to run internal models, including the independence of such data sources;
d.The validation of any significant change in the market risk measurement process, including the evaluation of conceptual/methodological soundness, as well as developmental evidence;
e.Evidence of ongoing model monitoring, including process verification and benchmarking;
f.The verification of the model’s accuracy through frequent back-testing of outcomes analysis, including key internal parameters; and
g.The process used to produce the calculation of market risk capital.