FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk
A bank outsources its customer data hosting to a cloud provider. A risk manager notes that the provider itself relies on a small number of subcontractors for data-center operations. Which outsourcing risk does this most directly illustrate?
This illustrates sub-outsourcing, or fourth-party, risk. The bank depends on the cloud provider, which depends on its own subcontractors, so the bank has limited visibility and control over those parties. Contracts should require disclosure and approval of material subcontracting and flow-down of obligations.
- ASub-outsourcing (chain) risk, where the bank has limited visibility over fourth-party dependenciesCorrect
- BPure market risk arising from changes in interest rates
- CModel risk arising from an inaccurate VaR calculation
- DLiquidity risk arising from deposit withdrawals
Explanation
When the provider relies on subcontractors, the bank faces sub-outsourcing or fourth-party risk, with reduced transparency and control. The other options describe different risk categories unrelated to the dependency chain.
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