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Model Validation Framework – FRTB (Fundamental Review of the Trading Book)
A Tier 1 South African bank engaged Riskworx to build an FRTB model validation framework to support a new Risk Engine implementation, as part of the bank’s Basel IV programme. The scope included performing a regulatory Quantitative Impact Study (QIS) and reviewing the methodology, modelling, and assumptions.
Riskworx performed an independent assessment of the client’s FRTB implementation, assessing the vendor system, including the models, against the framework detailed in BCBS265 (Fundamental review of the trading book: A revised market risk framework). The Riskworx team built a toolset that performed independent FRTB calculations to support the testing and validation exercise. The results of these calculations were validated against the regulations, and the reviewed assumptions and functionality.
Post validation, the client was provided with recommendations on how to achieve alignment with the Basel regulations and framework: what they should have done and what could be improved. The solution vendor changed their model in accordance with these guidelines, to ensure that they produce the expected results.
“The Riskworx team built a toolset that performed independent FRTB calculations to support the testing and validation exercise.”
The client has a model and a process that aligns with the FRTB regulations, understands the underlying requirements and assumptions clearly and is better equipped to interpret the model results.