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Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks' Financial Instrument Trading

Chapter 7 : Use of Internal Models

29. 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.