Institutions must put in place a rigorous process to ensure that models are independently validated either by an internal dedicated team or by a third party provider, or both. If model validation is assigned to a third party, institutions remain the owners of validation reports and must take appropriate action upon the issuance of these reports.
10.2.2
In order to ensure its independence and efficiency, the party responsible for model validation (“validator”) must be able to demonstrate all the following characteristics. If the validator does not possess all of those, the validation reports must not be considered independent and/or robust enough and therefore must not be used for decision-making.
(i)
Advanced understanding of model methodologies and validation techniques, that is sufficiently mature to allow the formulation of independent judgement.
(ii)
The expertise and freedom to express, hold and defend views that are different from the development team and from management. The ability to present those views to the Model Oversight Committee, Senior Management and the Board.
(iii)
The ability to perform independent research and articulate alternative proposals.
10.2.3
The internal audit function is responsible to verify that model validation is performed appropriately by the assigned party, following a regular audit cycle. At a minimum, the audit function must cover the following scope:
(i)
Review the governance surrounding the internal validation process and assess its independence in light of the MMS.
(ii)
Form a view regarding the suitability of the depth and scope of the work performed by the validation team, also in light of the MMS.
(iii)
Review the relevance, frequency and effectiveness of the validation process. At a minimum, the auditor must review the list of findings issued by the validator and assess if the timing necessary for remediation is appropriate.
10.2.4
The internal audit function should employ third party experts to assist on technical matters until it can demonstrate that it can perform an adequate review of the model validation process without technical support. If the audit team employs supporting experts, it remains the sole owner of the conclusions of the audit report.