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FRM Part II · FRM Exam Part II · Risk Mitigation

A bank relies on a single cloud provider for its core trading platform. A risk manager is asked to address concentration risk in this third-party arrangement. Which action most directly mitigates it?

A tested exit strategy and contingency plan with a viable alternative provider or in-house fallback most directly mitigates concentration risk. It addresses the dependence on a single vendor and lets the bank maintain critical services if the provider fails, unlike reporting, reports or liability limits.

  1. AAdding a clause requiring the vendor to send monthly performance reports
  2. BDeveloping a tested exit strategy and contingency plan, including a viable alternative provider or in-house fallbackCorrect
  3. CIncreasing the contractual liability cap to cover the vendor's fees
  4. DAsking the vendor to obtain an annual SOC report

Explanation

Concentration risk arises from dependence on one provider, so the key mitigant is the ability to continue operations if that provider fails, via tested exit and contingency plans with alternatives. Reporting, SOC reports and liability caps improve monitoring or compensation but do not reduce dependence or restore service.

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