Model risk management and investment firms: Delivering on the quest for a streamlined process

A robust model risk management (MRM) process is becoming a priority for financial institutions given increased regulatory scrutiny. The Federal Reserve’s SR11-7 and the European Central Bank’s TRIM guides are two pieces of regulation that apply. We note that investment firms are increasingly incorporating the MRM framework into their investment and risk management processes as they become progressively more dependent on model-based decisions.

This insights paper discusses how investment firms are setting up MRM processes and frameworks, and the challenges they often face in this endeavor. The paper also recommends ways of alleviating these challenges by augmenting onshore MRM teams with offshore staff equipped with the right talent and skillset to help drive cost efficiencies, meet submission deadlines and ensure a robust validation phase that can be improved with technology.

Key Takeaways

• Firms are dealing with the challenges of implementing a robust MRM process and are still exposed to
  model failure and regulatory consequences.
• Firms value proper validation and documentation frameworks to ensure better model transparency .
• Firms are leaning on technology, consultants and offshore support to augment specialist skillsets and
  streamline documentation to meet submission timelines .
• Firms can achieve greater accountability and transparency to help investment managers strengthen
  their fiduciary responsibility towards clients.

The authors gratefully acknowledge the valuable contributions from Chamara Gunetileke and Debdutta Mandal.

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