FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk
A bank is negotiating a contract with a cloud service provider to host a critical payments application. Which contractual provision most directly allows the bank and its supervisor to verify that the provider is meeting its obligations?
Access and audit rights for the bank and its regulators, extending to relevant subcontractors, are the provision that lets them verify the provider's performance and compliance. Liability caps, pricing terms and unilateral location changes do not enable verification, and unannounced location changes weaken oversight.
- AA clause granting the bank and its regulators access and audit rights over the provider and its relevant subcontractorsCorrect
- BA clause capping the provider's liability at annual fees
- CA clause allowing the provider to change service locations without notice
- DA clause fixing the price for the full contract term
Explanation
Guidance on outsourcing expects contracts to give the institution and supervisors the right to access, inspect and audit the provider. A liability cap, free location changes or a fixed price do not provide verification; location changes without notice actually weaken oversight.
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