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The model validation conducted by external auditors and/or supervisory authorities of a bank’s internal model to determine market risk capital requirements should, at a minimum, include the following steps:
(1)
Verification that the internal validation processes described in [10.17] are operating in a satisfactory manner;
(2)
Confirmation that the formulae used in the calculation process, as well as for the pricing of options and other complex instruments, are validated by a qualified unit, which in all cases should be independent from the bank’s trading area;
(3)
Confirmation that the structure of internal models is adequate with respect to the bank’s activities and geographical coverage;
(4)
Review of the results of both the bank’s backtesting of its internal models (ie comparison of value-at-risk with actual P&L and HPL) and its PLA process to ensure that the models provide a reliable measure of potential losses over time. On request, a bank should make available to SAMA and/or to its external auditors the results as well as the underlying inputs to ES calculations and details of the PLA exercise; and
(5)
Confirmation that data flows and processes associated with the risk measurement system are transparent and accessible. On request and in accordance with procedures, the bank should provide SAMA and its external auditors access to the models’ specifications and parameters.
