At Arrayo, we engaged in a comprehensive Model Risk Management project, addressing two vital aspects. First: vetting internal and third-party models for compliance with the Federal Reserve Board SR 11-7 (Supervisory Guidance on Model Risk Management). We performed thorough tests to evaluate these models under both normal and stressed market conditions. Second: creating up-to-date documentation for a proprietary model, catering to user reference and internal audit review.

Challenge

Our client, a prominent financial institution, sought a robust Model Risk Management solution to ensure compliance with regulatory guidelines and enhance the transparency of their proprietary model.

Before partnering with Arrayo, the client faced several challenges. They needed to validate their internal and third-party models in accordance with SR 11-7, and required a detailed assessment of assumptions, conceptual soundness, performance monitoring, and outcomes analysis. Additionally, they sought to create comprehensive documentation for their proprietary model, serving as a reference for users and facilitating internal audit reviews.

Delivery

Arrayo led a collaborative effort involving model developers, market risk experts, head office oversight, and support personnel from vendors to effectively address the client’s challenges. Our approach comprised the following key steps:

• Model Vetting and Assessment: We meticulously assessed each model, documenting assumptions, limitations, conceptual soundness, performance monitoring, and outcomes analysis according to internal model risk standards. The documentation was presented in standardized templates.
• Comprehensive Documentation: For the proprietary model, we produced a professional report, incorporating a step-by-step explanation of important procedures and defining key terms that were previously implicit. The report included an exhaustive listing of configuration files and visual aids, such as screenshots showing configuration details and functionalities.

Value

Arrayo’s meticulous approach to model vetting and assessment resulted in a comprehensive understanding of the client’s internal and third-party models. By meticulously documenting assumptions, limitations, conceptual soundness, performance monitoring, and outcomes analysis according to internal model risk standards, we significantly enhanced the management and control of model risk. Our efforts led to the identification of previously unknown limitations and bugs in the models, providing the client with a clear roadmap for remediation. As a result, the client gained greater confidence in the integrity and accuracy of their models, ensuring compliance with regulatory guidelines, including the Federal Reserve Board SR 11-7.

The professional reports created for each model became valuable assets for the client. These reports, based on standardized templates, can be readily deployed upon request by regulatory authorities. The thorough documentation of model assessments and outcomes ensures transparency in risk management practices and serves as a crucial resource during regulatory reviews. Arrayo’s contribution in producing these reports empowers the client with the tools they need to demonstrate model risk management excellence and maintain regulatory compliance.

The proprietary model’s documentation was significantly improved by Arrayo’s expert team. We included a step-by-step explanation of important procedures, defined key terms explicitly, and provided an exhaustive listing of configuration files. Visual aids, such as screenshots, were incorporated to clearly illustrate configuration details and functionalities. Our efforts transformed the documentation from aspirational language to factual descriptions, reflecting the current implementation and enhancing transparency. The enhanced documentation ensures that internal audit and other stakeholders have clear insights into the model’s methodology and functioning, facilitating effective communication and understanding.

Throughout the project, Arrayo gained valuable insights into Model Risk Management practices. Our experience in model vetting, testing, and documentation has equipped us with refined methodologies for future engagements. The lessons learned, including effective testing approaches and documentation techniques, will be instrumental in providing even more efficient and effective solutions for our clients in future Model Risk Management initiatives. We are committed to leveraging our expertise to continuously improve and innovate in the field of Model Risk Management.

At Arrayo, our unwavering commitment to excellence in Model Risk Management enabled us to deliver significant value to our client. By thoroughly vetting and documenting models, we strengthened their risk controls and ensured compliance with regulatory guidelines. The collaboration with our team provided them with robust solutions to effectively manage model risk and enhance transparency.