Skip to content

FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank wants to manage the risk that collateral posted to counterparties during stress will drain its liquidity buffer. Which practice is most appropriate?

The bank should estimate additional collateral calls under stress, such as downgrade triggers and adverse price moves, and hold liquidity buffers against them. Collateral requirements are contingent and can jump in stress, so assuming they stay constant would understate potential liquidity outflows.

  1. AEstimate additional collateral calls under stress scenarios, such as rating downgrades and market moves, and hold buffers against themCorrect
  2. BAssume collateral requirements remain constant because contractual terms are fixed at inception
  3. CRely exclusively on unsecured funding to meet any margin calls
  4. DHold collateral only in the single most liquid asset class to simplify operations

Explanation

Collateral calls can rise sharply under downgrades or adverse market moves through thresholds and margin triggers. Stress-testing these contingent outflows allows the bank to size buffers appropriately. Assuming constant requirements ignores contingent triggers.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity and Reserves Management: Strategies and Policies shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity and Reserves Management: Strategies and PoliciesFree diagnostic mock

More Liquidity and Reserves Management: Strategies and Policies questions