Banks embarking on a regulatory-driven transformation program―involving a great deal of change to systems, processes and procedures―should demonstrate a clear linkage between the regulatory requirements and how the bank will deliver on those requirements.  A comprehensive operating framework outlining the areas and/or capabilities involved in the Internal Model Method (IMM) process can help the bank show that it has a sound IMM infrastructure. 

In this context, the purpose of a Target Operating Model is to allow a bank to be operational in a business as usual (BAU) mode while satisfying IMM requirements.  The framework aligns the regulatory requirements to bank-defined performance criteria and thresholds, also allowing the bank to demonstrate compliance both to regulators and to its internal audit function.  The Target Operating Model outlines what is currently being done while describing changes to processes, systems, policies and procedures. 

Communication can be critical for achieving buy-in for the Target Operating Model.  The model’s guiding principles should be explained to all work streams to articulate how the model relates to each of them.  A matrix outlining people, process, technology, models and data can help illustrate the framework’s purpose and how it can be put into practice.  And, in order to address the concept of data quality across trade, reference and market data, the model should include a data lineage component stressing data completeness and accuracy.  Evidence of control points should be collected within a central repository for audit traceability, and a technical architecture diagram should be developed to provide a visual representation of the target platform. 

Given the key role that bank subject matter specialists (SMSs) play in defining the Target Operating Model, all SMS capabilities should be mapped, with those who will serve as a direct contact and those who are responsible for signing off clearly designated.  This facilitates the collection of performance criteria and metrics.  The Target Operating Model should be reviewed on a semi-annual basis to confirm that it is still relevant. 

In the final blog in this series, we will look at the elements of a regulatory communications strategy supporting an IMM compliance program. 

For more information, see SlideShare deck: “Considerations for an Effective Internal Model Method Implementation

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