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           B.6 External Validation


Part B - Use of internal models to measure market risks

B.6 External Validation

The validation of models' accuracy by external auditors and/or supervisory authorities should at a minimum include the following steps:
  1. verifying that the internal validation processes described in B.2 (h) are operating in a satisfactory manner;

  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 should be independent from the trading area;

  3. checking that the structure of internal models is adequate with respect to the bank's activities and geographical coverage;

  4. checking the results of the banks' back-testing of its internal measurement system (i.e., comparing value-at-risk estimates with actual profits and losses) to ensure that the model provides a reliable measure of potential losses over time. This means that banks should make the results as well as the underlying inputs to their value-at-risk calculations available to their supervisory authorities and/or external auditors on request;

  5. making sure that data flows and processes associated with the risk measurement system are transparent and accessible. In particular, it is necessary that auditors or supervisory authorities are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the models' specifications and parameters.

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