In our last blog, we discussed the importance of banks defining what is and is not material to an internal model methodology before receiving regulatory approval and launching a large-scale transformation program.  Once materiality has been properly defined, the next key consideration is how to establish a clear, tangible set of deliverables that point to the target state solution and demonstrate effectiveness.   Ideally, these should be tracked by a central program management function, with progress reported to stakeholders on a regular basis. 

In program tracking, an over-reliance on qualitative reporting can result in a subjective and often overly optimistic view of progress.  Quantitative measures—agreed upon at the inception of the program—can help decrease this bias.

Progress metrics should be defined for all stages of the IMM process, such as data sourcing; onboarding and reconciliation; pricing, simulation and valuation modeling; and collateral and netting set aggregation. One approach to tracking these and other elements is to leverage a matrix that looks at all stages of the process using a consistent understanding of the exposure population, such as asset class or product type, across measurements.  This helps the program management team have a base standards of comparison across the IMM process and can then easily identify bottlenecks and move quickly to remediation. 

Another way to measure progress is to use a consistent measurement approach across all work streams to create a composite metric for the entire program.  For example, a straightforward representation of progress, such as a percentage complete against work stream milestones, can be supported by tracking within project plans.  A holistic measurement approach helps the bank to forecast IMM completion for the remainder of the project. However, for the percentage complete to be accurate and useful, it is important that milestones are clearly defined and the work effort to completion be well-understood by the program.

We have found that using a combination of front-to-back and composite metrics allows an organization to have a clear and detailed view of tracking IMM progress.  The front-to-back view allows for identification of trouble spots and bottlenecks, while the composite view creates a framework for progress benchmarking and forecasts of actual delivery.  These quantitative progress tracking methods should complement and agree with qualitative details of work efforts, with each providing insight and yielding different benefits. 

In our next blog, we will look at the implementation of a robust control framework.

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

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