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

A bank uses a three-lines model. The trading desk's operations team has discovered that a model used for valuing exotic products produces results that appear inconsistent. Which assignment of responsibilities is consistent with an effective ERM framework?

The first line owns and manages risk, the second line independently oversees and challenges it, and internal audit as the third line gives independent assurance to the board. Merging these roles or reporting to the head of trading removes the independence the model depends on.

  1. AThe first line owns and manages the risk, the second line independently oversees and challenges, and the third line (internal audit) provides independent assuranceCorrect
  2. BThe second line owns the risk and the first line provides independent assurance
  3. CInternal audit manages the risk day to day and the first line challenges it
  4. DAll three lines share a single reporting line to the head of trading to ensure consistency

Explanation

In the three-lines model, business units (first line) own and manage risk, risk management and compliance (second line) set frameworks and challenge, and internal audit (third line) gives independent assurance to the board. Making the second line the owner, or having the lines report to the head of trading, destroys independence.

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