SR 11-7

Implement SR 11-7 compliance using ​ValidMind.

Follow this detailed, step-by-step guide which will:

1. Walk you through the practical steps required to implement end-to-end compliance using ​ValidMind.

2. Link to supporting documentation and training for specific product features.

3. Focus on actionable implementation rather than just explaining requirements.

Overview

SR 11-7 (Supervisory Guidance on Model Risk Management)¹ provides comprehensive guidance to financial institutions on developing and maintaining a robust model risk management framework. By emphasizing the three lines of defense model and the concept of “effective challenge” — SR 11-7 ensures that models are rigorously questioned and tested.

¹ Board of Governors of the Federal Reserve System:
SR 11-7: Guidance on Model Risk Management

This guide is organized around the expectations for the three main areas outlined in SR 11-7:

1. Model development, implementation, and use

2. Model validation

3. Governance, policies, and controls

1. Model inventory setup

Purpose

Establish a comprehensive model inventory aligned to SR 11-7 requirements.

Steps

1. Establish model definition criteria:

   • Define what constitutes a model in your organization.
   • Document inclusion and exclusion criteria.
   • Classify models by type and purpose.

2. Configure inventory fields:²

   • Set up materiality and tiering fields.
   • Add fields for model purpose and business use.
   • Configure risk rating classifications.

3. Populate the inventory:³

   • Register existing models.
   • Document model ownership and stakeholders.
   • Track model lifecycle status.

² Manage model inventory fields

³ Working with the model inventory

2. Model development documentation

Purpose

Document models according to SR 11-7 development standards.

Steps

1. Configure documentation templates:⁴

   • Select or create templates aligned to SR 11-7.
   • Include sections for purpose, design, theory, and logic.

2. Document purpose, design, theory, and logic:⁵

   • Clearly state the model’s intended use.
   • Document the theoretical basis.
   • Explain design choices and methodology.

3. Document data quality and relevance:

   • Assess and document data sources.
   • Evaluate data quality and limitations.
   • Document data transformations.

4. Track assumptions and limitations:

   • Document all model assumptions.
   • Identify known limitations.
   • Establish conditions under which the model should not be used.

⁴ Working with document templates

⁵ Working with model documentation

3. Testing and outcomes analysis

Purpose

Test models for accuracy, robustness, and stability per SR 11-7 requirements.

Steps

1. Run automated testing using the ValidMind Library:⁶

   • Execute accuracy tests.
   • Run robustness and stability tests.
   • Document test results.

2. Perform sensitivity analysis and benchmarking:

   • Test model sensitivity to input changes.
   • Compare against benchmarks or challenger models.
   • Document performance boundaries.

3. Evaluate limitations and assumptions:

   • Test assumption validity.
   • Identify conditions where performance degrades.
   • Document testing coverage.

⁶ Run tests and test suites

4. Independent validation (effective challenge)

Purpose

Implement independent validation aligned to SR 11-7’s “effective challenge” concept.

Steps

1. Configure validation workflows:

   • Set up validation initiation triggers.
   • Define validation scope and requirements.
   • Establish independence requirements.

2. Prepare validation reports:⁷

   • Use validation report templates.
   • Document validation activities.
   • Summarize findings and conclusions.

3. Track findings and remediation:⁸

   • Document validation findings.
   • Assign remediation owners.
   • Track remediation progress.

⁷ Preparing validation reports

⁸ Working with artifacts

5. Ongoing monitoring and periodic review

Purpose

Implement ongoing monitoring per SR 11-7 requirements.

Steps

1. Set up monitoring workflows:⁹

   • Configure monitoring frequency.
   • Define monitoring metrics.
   • Establish escalation procedures.

2. Configure performance tracking and alerts:

   • Set up performance dashboards.
   • Configure threshold-based alerts.
   • Document alert response procedures.

3. Schedule periodic reviews:¹⁰

   • Establish review frequency by model tier.
   • Configure review reminders.
   • Document review requirements.

⁹ Ongoing monitoring

¹⁰ Setting up workflows

6. Governance, policies, and controls

Purpose

Establish governance framework aligned to SR 11-7.

Steps

1. Configure role-based access:¹¹

   • Set up roles for three lines of defense.
   • Configure permissions by role.
   • Ensure appropriate segregation of duties.

2. Configure approval workflows:¹²

   • Set up model approval processes.
   • Define approval authorities.
   • Configure escalation paths.

3. Enable audit trail and compliance reporting:¹³

   • Configure activity logging.
   • Set up compliance dashboards.
   • Generate audit reports.

¹¹ Manage permissions

¹² Working with analytics

¹³ Working with analytics

Implementation checklist

• Model definition criteria established
• Model inventory configured and populated
• Documentation templates aligned to SR 11-7
• Testing framework implemented
• Validation workflows configured
• Ongoing monitoring established
• Three lines of defense roles configured
• Approval workflows in place
• Audit trail enabled