SOURCE: marcus evans

marcus evans

February 16, 2016 14:54 ET

Enhancing Relationships Between Model Developers and Validators in Order to Improve Business

Interview With Carol Cheng, Senior Director of Quantitative Solutions, Capital Market Risk Management at CIBC

TORONTO, ON--(Marketwired - February 16, 2016) - Model risk management has become very important across North America. After Letter 11-7 was introduced in the US, and changes were made to model risk practices, there are indications that Canada will have a similar regulation soon, making model risk management a priority for financial institutions in Canada.

Carol Cheng, Senior Director of Quantitative Solutions, Capital Market Risk Management at CIBC, has recently spoken with GFMI about topics to be discussed at the upcoming Model Risk Management- Canadian Edition Conference:

What are the key challenges in model development today?

CC: Similar to most other model development functions today, we are facing various challenges. These include:

  • Meeting heightened regulatory requirements for model risk management, on an on-going basis
  • Keeping up with new modeling techniques and fast evolving industry practices
  • Balancing the need for business and modeling ideology
  • Handling the relationship with various stakeholders and external parties, such as business, users, validation function, internal audit, vendors and regulators who all have competing priorities

What advice can you offer on how to improve communication between model developers and model validators?

CC: First, we all need to recognize that both model developers and model validators have important roles to play in order to identify and control models risks at each institution. Developers should keep validators informed of pipelines, business background and potential model limitations. As the second line, validators need to be aware of the limitations on systems/infrastructures that developers face.

They need to plan and execute the reviews to allow timely resolutions of significant concerns. Regular meetings to discuss potential issues can help. In addition, same as in everyday life, mutual respect, open-minds and active listening can help improve communication.

What is the main role of internal audit when it comes to aligning goals across the functions?

CC: My understanding is that internal audit's role is to assess the effectiveness of the design and operation of model risk management processes throughout the model life cycle. As the third line of defence, internal audit needs to review all areas of model risk management and identify and report any deficiencies to management. Given the full picture that auditors have across the functions, they can really add value to help address silos, gaps and/or unnecessary overlaps in various processes, and to improve healthy collaborations across teams.

How can model risk controls be improved?

CC: Above all, a healthy risk culture is the key to control model risks at each institution. It includes, but is not limited to:

  • Having effective corporate governance, where board and senior management set the tone and are supportive
  • Having adequate policies and framework that clearly define principles, accountabilities and processes for model risk management
  • Improving communication to ensure that relevant stakeholders are on the same page when it comes to understanding what the material model risks are, and having effective processes and tools to track and, as appropriate, address/mitigate the risks throughout all three lines of defence

What do you think you will gain from the conference?

CC: It is an opportunity for me to exchange ideas with others on how to handle common issues and improve communication across different lines. I look forward to learning from other participants on model risk governance and controls, as well as gain a better understanding of industry practices.

Carol Cheng is a Senior Director of Quantitative Solutions, Capital Market Risk Management at CIBC. She is responsible for the governance framework around market risk and counterparty credit risk models as part of first line of defence. She is also responsible for model development/analytics. Prior to her current position, Carol worked as Director, Model Validation Oversight at ScotiaBank for all model validation activities across the bank and for related framework for second line of defence. She also worked as Director, Internal Audit, responsible for assessing all model risks, and market risks and counterparty credit risks in the trading and treasury activities. She worked at OSFI for 5 years on regulatory model approval for market risk and capital markets supervisory review/examinations for the Big 6 Canadian Banks.

Join Carol Cheng at the Model Risk Management Conference, March 7th-9th, 2016  in Toronto, ON, Canada. View the conference agenda to check out Carol's case study topic.

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