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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank's operational risk team is building a loss event taxonomy. A trader enters a transaction into the system with the wrong counterparty because of a keying error, and the trade later settles incorrectly, causing a loss. Under the Basel event-type classification, which category best fits this event?

The event belongs in Execution, delivery and process management. A keying error that books the wrong counterparty and leads to a settlement failure is an unintentional process failure. It involves no deliberate misconduct, no client suitability issue and no system outage, so the other categories do not apply.

  1. AInternal fraud
  2. BExecution, delivery and process managementCorrect
  3. CClients, products and business practices
  4. DBusiness disruption and system failures

Explanation

Data entry errors, incorrect counterparty records and settlement failures are standard examples of the Execution, Delivery and Process Management event type. There is no intent to defraud, so internal fraud is wrong. No system outage occurred, so the business disruption category is also wrong.

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