Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to Banks' Financial Instrument TradingChapter 7 : Use of Internal Models29. External validation |
The validation of the accuracy of models by external consultants and/or the Registrar shall as a minimum include:
| (1) | Verifying that the internal validation processes described in regulation 25 are operating properly; |
| (2) | 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 shall be independent from the trading area; |
| (3) | ensuring that the structure of internal models is adequate with respect to the bank's activities and geographical coverage; |
| (4) | ensuring that the results of a bank's back-testing of its internal measurement system (that is, comparing value-at-risk estimates with actual profits and losses) in order to validate that the model provides a reliable measure of potential losses over time. This means that a bank shall make the results, as well as the underlying inputs to its value-at-risk calculations, available to the Registrar and/or external consultants on request; and |
| (5) | ensuring that data flows and processes associated with the risk-measurement system are transparent and accessible. In particular, it is necessary that the consultants and the Registrar are in a position to have easy access, whenever they deem it necessary and under appropriate procedures, to the specifications and parameters of the models. |