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.
• 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.
Associate Director, Specialised Solutions
Sriram Kovil leads the Mathematical Modelling sub-group under the Specialised Solutions practice at Acuity Knowledge Partners. He primarily works with banks and asset managers, providing support for derivatives pricing/valuation, model research/enhancements, financial market risk analysis, model risk management and model validation. He has over 11 years of experience across service lines, including risk analytics, model validation, data analytics, statistical modelling and software development. Sriram holds a master’s degree in Operations Research from Columbia University, with a specialisation in Financial Engineering
Senior Associate, Specialised Solutions
Devin Kandage is a senior associate within the Specialised Solutions team at Acuity Knowledge Partners. He has over three years of experience in quantitative research, working with a diverse group of clients, spearheading process automation, supporting a benchmark index provider by conducting research on emerging market bond liquidity, supporting investment research through investment and technical analyses in addition to several other ad-hoc projects that include data cleaning, web scraping and training incoming quants analysts. He has a first class degree in Economics and Finance from the University of London. He is also a CFA level III candidate.
Tyra De Silva
Analyst, Specialised Solutions
Tyra De Silva is part of the Specialised Solutions team at Acuity Knowledge Partners. She supports a benchmark index provider by conducting research on emerging market bond liquidity. She also contributes to various ad-hoc tasks varying from investment research to in-house python projects. She has prior experience in developing economic analyses, financial advising and M&A. Tyra graduated cum laude from The University of Tampa with a degree in Economics and a minor in Finance.
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