4.6.1
| A modelling decision is defined as a deliberate choice that relates to each step of the model life-cycle. In particular, key modelling decisions relate to (i) the model strategy, (ii) the choice of data, (iii) the analysis of data, (iv) the methodology and the development process, (v) the calibration, and (vi) the implementation of models. Such decision have material impacts on model outcomes and have financial implications. Consequently, institutions must implement a clear governance process around these decisions.
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4.6.2
| All parties involved in making decisions required at any step of the model life-cycle must be identified and recorded in the model documentation. Within an institution, individuals may hold several of these roles (i.e. several responsibilities), with the exception of model validation which must remain independent from the other roles. At a minimum, the following roles must be identified for each model:
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| | (i) | Model owner, |
| | (ii) | Model developer, |
| | (iii) | Model validator, |
| | (iv) | Model user, |
| | (v) | Modelling data owner, and |
| | (vi)
| Model Oversight Committee members.
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4.6.3
| Institutions must establish a Model Oversight Committee, to whom the stakeholders mentioned at 4.6.2 are accountable. This committee must be established separately from existing risk management committees. Its scope must cover all models across the institution, with the view to manage Model Risk in its entirety. The committee must convene regularly and at a minimum every quarter.
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4.6.4
| The Model Oversight Committee must provide substantiated decisions related to each step of the model life-cycle and in particular, strategic modelling options. Consequently, the committee members must have a minimum level of technical understanding to be able to contribute to those decisions.
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4.6.5
| The Model Oversight Committee must be accountable to Senior Management and the Board. The committee must provide an impartial view of the best modelling approach for the institution. It must remain independent from actual, potential or perceived interests of business lines. Therefore, the majority of the Committee members must not be from the business lines. If business views and risk management views related to modelling choices are irreconcilable, Senior Management must make a decision, be accountable for it and provide a clear rationale for it. The final decision must be in compliance with the requirements outlined in the MMS.
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4.6.6
| At a minimum, the Model Oversight Committee must hold the following responsibilities.
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| | (i) | Design the institution’s appetite for Model Risk to be approved by the Board, |
| | (ii) | Ensure that Model Risk is managed appropriately across the institution, |
| | (iii) | Escalate modelling decisions when necessary, |
| | (iv) | Oversee the objective and strategy of each model, |
| | (v) | Approve the development of new models, |
| | (vi) | Request the development of new models when necessary, |
| | (vii) | Approve material modelling decisions throughout the model life-cycle, |
| | (viii)
| At the end of each cycle, review the validation results and make a choice amongst the options presented in the section 4.3 on model life-cycle. |
| Whilst some technical aspects of these responsibilities can be delegated to subcommittees, working groups and/or individuals, the Model Oversight Committee must remain the centralised forum where modelling decisions for the whole institution are discussed, made or proposed for escalation. Material modelling decisions must be ultimately approved by the Board.
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4.6.7
| Other subject matter experts across the institution and third party experts can contribute to each step of the model life-cycle depending on their field of expertise. They can be involved in model design, development and testing. However, their involvement must be viewed as consultative only.
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4.6.8
| The CRO is responsible for ensuring that Model Risk is managed appropriately. Consequently, as part of his/her duty, the CRO must ensure that:
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| | (i)
| Model Risk is appropriately identified, understood, estimated, reported and mitigated across the institution. |
| | (ii)
| The governance for model management is efficient and appropriate to the size and complexity of the institution. |
| | (iii)
| The Model Oversight Committee is functioning appropriately and meets the responsibilities outlined in article 4.6.6. |
| | (iv)
| Material modelling decisions are approved by the Board (or the Board Risk Committee). The Board is adequately informed of Model Risk, the status of model management and the performance of models. |
| | (v) | A suitable escalation process is in place through the institution and up to the Board. |
| | (vi)
| The institution employs adequate resources to meet the demands of model management and, where required, escalate identified gaps to Senior Management and/or the Board. |
| | (vii) | He/she is fully familiar with the requirements articulated in the MMS. |
| | (viii)
| He/she has sufficient technical understanding to form an opinion about the modelling decisions with material financial implications. |
| | (ix)
| He/she is sufficiently informed of material modelling decisions, in such a way that he/she can articulate a view about the suitability of these decisions. |
| | (x)
| Particular attention is given to the quality, completeness and accuracy of the data used to make decisions based on models.
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