Canada: OSFI Releases Draft Guidance On Model Risk Management

On December 21, 2016, the Office of the Superintendent of Financial Institutions (OSFI), released for comment a new draft Guideline E-23 on enterprise-wide model risk management (Guideline). The draft Guideline aims to address the increasing reliance by financial institutions on internal models in management decision making and sets out OSFI's minimum standards for managing and controlling model risk. The comment period closes on February 28, 2017 and the Guideline, in its final form, is scheduled to take effect on November 1, 2017.

To control and mitigate the risk associated with the use of internal models, the draft Guideline will require financial institutions to establish an enterprise-wide framework, based on the three lines of defence, that will implement prudent practices for model development, review, approval, modification and de-commissioning.

If adopted as drafted, the Guideline will apply to banks, trust and loan companies, and foreign bank branches (Institutions). OSFI notes that the Guideline will take into consideration the potential operational burden of the new guidance on small and medium-sized Institutions. To this end, the draft Guideline distinguishes between internal models-approved institutions (IMAIs) and other standardized institutions (SIs). IMAIs are Institutions that have received OSFI approval to use an internal model for regulatory-capital purposes, while all other Institutions are considered SIs. OSFI's expectations regarding IMAIs, SIs, as well as foreign bank branches and foreign bank subsidiaries, are as follows:

  • IMAIs: IMAIs are subject to all of the requirements of the draft Guideline.
  • SIs: OSFI notes that SIs "should strive to comply" with the Guideline but, at a minimum, must maintain an inventory of all models that are in use, identify and assess the "most material models" from a model risk perspective, and comply with governance and control requirements set out in OSFI's other existing guidelines in respect of models.
  • Foreign Bank Branches: OSFI expects foreign bank branches to demonstrate that their models related to counterparty risk exposures are a part of group risk policies that are subject to oversight by the foreign bank's home jurisdiction. The draft Guideline is not clear on whether the new requirements will apply in any other respect to home-office approved models used by foreign bank branches.
  • Foreign Bank Subsidiaries: OSFI expects foreign bank subsidiaries that rely on parent institution-approved material models to demonstrate that such models are fit for intended purpose within their model risk-management processes. The level of process required should be commensurate with the nature, size, complexity, and risk profile of the foreign bank subsidiary in Canada.

The draft Guideline sets out the following key elements for an enterprise-wide model risk-management framework:

  • Materiality Assessment: Institutions should implement a model risk materiality classification scheme. The Guideline's requirements will apply in respect of IMAIs to "any model that could materially impact the risk profile of an institution" and in respect of SIs to "material models that pose the most significant risks".
  • Model Development: Prior to model development, model users (the first line of defence) should identify and document a business rationale for the new model or for changing an existing model and should follow a model-development process established by the institution.
  • Independent Review: Institutions should have model-review processes in place, independent from model development and model users, as a second line of defence to check whether models are sound and fit for their intended purpose.
  • Approval: Institutions should have a dedicated model approver or model risk committee to approve new models and any material model modifications to existing models.
  • Ongoing Monitoring: Models should be subject to a periodic review with a frequency that is consistent with their materiality assessments. The responsibility for ongoing monitoring falls on model users and owners (first line of defence) and reviewers (second line of defence). For models whose deficiencies have the greatest potential to generate immediate and material losses, Institutions are expected to use various measures, such as back testing, discriminatory analysis, stress-testing, and sensitivity analysis, in their ongoing validation and review process.
  • Modifications and Decommission: Institutions should establish a process for managing model modifications and decommissioning.
  • Internal Audit: Internal audit, as the third line of defence, should assess the overall effectiveness and adequacy of the model risk policy and determine compliance by the various stakeholders with that policy.
  • Model Inventory and Documentation: Institutions should maintain an up-to-date inventory of all models in use and recently decommissioned. OSFI also expects that Institutions will maintain a thorough documentation during a life cycle of a model, which must be itemized in the model inventory.
  • Outsourcing: Adopting a third-party vendor product for models or data does not eliminate the need to apply the process for vetting, approval, ongoing validation, decommissioning and overall documentation outlined in the draft Guideline, as would be conducted for in-house developed models and data sources. Institutions should have ultimate accountability for all outsourced activities, in accordance with OSFI's Guideline B-10, and should seek access from the vendor to adequate technical documentation related to the model to understand how the model is designed, calibrated and operating. Where access to documentation is restricted due to vendor's proprietary intellectual property, these restrictions must be demonstrated to OSFI's satisfaction. Consideration will therefore need to be given as to how these proprietary restrictions are articulated in vendor agreements.

The draft Guideline will supplement — not replace — model-specific guidance set out in OSFI's existing guidelines, such as in the Capital Adequacy Requirements Guideline A1 (in respect of capital models for credit risk, operational risk, and market risk), Guideline B-12 (in respect of interest-rate risk in the banking book), Guideline E-19 (in respect of internal capital adequacy assessment process), and Guideline E-22 (in respect of margin requirements).  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
12 Sep 2017, Seminar, Toronto, Canada

Please join us as we take an in-depth look at the legislation and the impact on the industry.

14 Sep 2017, Seminar, Toronto, Canada

Change, stress and uncertainty are ever]present factors in todayfs legal environment, and specific aspects about the practice of law make it difficult to thrive in the profession long term. Luckily, there are specific research]based strategies that have been shown to help lawyers thrive and lead to more effective ways to manage stress and pressure.

5 Oct 2017, Seminar, Toronto, Canada

Blakes is proud to host our New to In-House Series, designed to bring together junior and mid-level in-house counsel for a candid exchange of insights to highlight and address some of the challenges and opportunities facing in-house lawyers in their roles today.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.