(g) Matters relating to external validation
From time to time the Registrar may require that a process of external validation be conducted in respect of the accuracy of the models of a bank that obtained the approval of the Registrar to adopt the internal models approach for the measurement of the bank's exposure to market risk, which external validation—
| (i) | may be conducted by external consultants, external auditors, the Registrar or such other person as may be specified in writing by the Registrar; |
| (ii) | as a minimum, shall provide reasonable assurance to the Registrar that— |
| (A) | the internal validation processes envisaged in regulation 39(14)(b) are duly functioning; |
| (i) | in the calculation of the bank's risk exposure and required amount of capital and reserve funds; and |
| (ii) | in the pricing of options and other complex instruments, |
are regularly validated by a qualified unit, which unit shall in all cases be independent from the relevant trading areas;
| (C) | the structure of the said internal models is adequate in relation to the bank's activities and geographical coverage; |
| (D) | based on the results of, amongst other things, the backtesting process of the bank's internal measurement system, during which process the bank's value-at-risk estimates are compared to actual profits and losses, it is concluded that the models provide a reliable measure of potential losses that may be suffered by the bank over time, for which purposes, when requested, the bank shall make available the results of and the underlying inputs to its value-at-risk calculations; |
| (E) | data flows and processes associated with the bank's risk-measurement system are transparent and accessible, that is, whenever necessary and provided that the appropriate procedures have been followed, the bank shall ensure easy access to the specifications and parameters of the relevant models. |
Provided that the provisions of this paragraph (g) do not in any way derogate from the general requirement imposed on banks that wish to obtain the approval of the Registrar to adopt the internal models approach for the measurement of their exposure to market risk to ensure that the accuracy of their internal models is subject to a robust process of external validation.
[Proviso to regulation 28(8)(g) inserted by regulation 3(h) of Notice No. R. 261 dated 27 March 2015]
