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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank reviews its CFP and finds that the list of contingent funding sources includes a large secured facility whose collateral is already pledged to other counterparties in the base case. What is the most appropriate conclusion?

The facility's capacity is overstated. A CFP should count only funding that can actually be accessed, so capacity must be cut back to what the unencumbered, eligible collateral can support. Counting committed face value or counting it twice would overstate available liquidity.

  1. AThe facility should be counted at full face value because it is committed
  2. BThe facility's available capacity is overstated and should be reduced to reflect unencumbered collateral actually availableCorrect
  3. CThe facility should be removed only if it is unsecured
  4. DThe facility should be counted twice, once for each counterparty

Explanation

Contingent sources must be realistically accessible. Collateral already encumbered cannot support additional borrowing, so the usable capacity must be reduced to what unencumbered eligible collateral supports. Face value ignores this, and double counting is clearly wrong.

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