Model Frameworks and Management

Sanjay Sharma and John Beckwith

“Mathematics finally developed a financial model to accurately compare apples and oranges. Any two kinds of fruit can be compared, although guavas still cause minor rounding errors” – Graham Parke

FRTB prescribes rigorous standards for IMA model framework eligibility and validation. The qualitative requirements are more comprehensive than the general standards being practiced in the industry at the time of writing, even by large banks. Currently, internal model frameworks at banks have historical legacies across numerous technology architectures, model library configurations and data integrations. Banks will need to reevaluate them to conform to FRTB standards, and avoid surprises in the form of IMA disapprovals or regulatory application turn-backs. Banks that are following the SA framework may consider applying for IMA approval for selected RTDs, and would be required to create model validation, management and governance frameworks. This chapter is intended to provide an in-depth view of a robust model framework in the context of FRTB. It is directed towards banks and trading desks that are considering opting for FRTB, as well as for existing IMA banks that have to adapt the