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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank suffered a large loss from a complex structured product. The post-mortem found: the business unit's models were validated only by its own developers; senior management received only aggregated risk numbers; and the new-product approval process was bypassed because the product was described as a 'variation' of an existing one. Which single remedy addresses the root cause common to all three findings, namely gaps in enterprise-wide governance and challenge?

The best remedy is to establish independent model validation, give senior management granular risk reporting, and enforce new-product approval for material variations. All three findings reflect missing independent challenge and transparency, which a VaR confidence change or more capital would not fix.

  1. ARaise the VaR confidence level from 99% to 99.9%
  2. BEstablish independent model validation, require granular risk reporting to senior management, and enforce new-product approval for material variationsCorrect
  3. CIncrease the capital allocated to the structured products desk
  4. DOutsource the trading desk's risk monitoring to the product developers

Explanation

Each finding reflects a missing independent challenge: self-validation, opaque reporting and bypassed approval. The integrated remedy fixes all three. A higher VaR confidence level or extra capital does not fix governance gaps, and giving monitoring to developers worsens independence.

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