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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank's investment committee observes that the portfolio breached its internal early-warning trigger, set at 80% of the hard duration limit, but remains within the hard limit. What is the most appropriate response under a sound risk appetite framework?

The trigger should prompt escalation to senior management or the committee to review the causes and decide on action before the hard limit is reached. Ignoring it, liquidating everything, or raising the limit would defeat the purpose of an early-warning framework.

  1. AIgnore it because the hard limit has not been breached
  2. BEscalate to senior management or the committee, review the drivers and decide whether to act before the hard limit is reachedCorrect
  3. CImmediately liquidate the entire portfolio
  4. DRaise the hard limit so the trigger is no longer reached

Explanation

Early-warning triggers exist to prompt escalation and review before a hard limit is hit. Ignoring them defeats their purpose, liquidating everything is disproportionate, and raising limits to avoid triggers undermines governance.

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