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External Validation

C 164/2018 Effective from 29/9/2018
  1. 22. The validation of the accuracy of a Bank’s models by an independent appropriately qualified specialist at a minimum (e.g. an external auditor) must include the following steps:
    1. a. Verifying that the internal validation processes are operating in a satisfactory manner;
    2. b. Ensuring 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 must be independent from the trading area;
    3. c. Checking that the structure of internal models is adequate with respect to the Bank’s activities and geographical coverage;
    4. d. Checking the results of the Bank’s back testing of its internal measurement system (for example, comparing model estimates with actual profits and losses) to ensure that the model provides a reliable measure of potential losses over time. A Bank must make the results as well as the underlying inputs to its model calculations available to the independent specialist; and
    5. e. Making sure that data flows and processes associated with the risk measurement system are transparent and accessible. In particular, it is necessary that the independent specialist has access as required to the model’s specifications and parameters.