The European Banking Authority’s (EBA’s) draft guidelines on internal governance (EBA/CP/2020 released in December 2020) provide investment management firms with a consolidated guidance on the principle of proportionality of risk, governance framework, and risk culture and control mechanisms.

Given the recommendations and advisory on a ‘three lines of defence model’ for model risk management (MRM), we believe buy-side firms will be subjected to a framework aligned with the SR 11-07 guidelines. Posited by the US Office of the Comptroller of the Currency (OCC), these guidelines had revolutionised MRM at the sell-side firms.

Investment firms have been asked to create a sliding-scale approach depending on the size, scale and complexity of their businesses. The guidelines especially demand that firms with balance sheet size €100 million apply the principle of proportionality when managing enterprise risk.

Through this note, we present the pillars that would form pivot points for a sliding-scale approach, as investment firms look to adopt a more comprehensive MRM framework. We also present a roadmap that could be a useful starting point for buy-side firms to establish an independent, competent and compliant model risk function.