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FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk

A bank's senior management is approving a new outsourcing of cloud data hosting for its risk systems. Which sequence of management activities best reflects the risk management life cycle described in the guidance?

The correct sequence is risk assessment, then due diligence in selecting the provider, then contract negotiation, then ongoing monitoring, and finally termination planning. Management must decide whether outsourcing is appropriate and vet the provider before binding the bank to contractual terms and monitoring.

  1. AContract negotiation, risk assessment, due diligence, monitoring, termination planning
  2. BRisk assessment, due diligence in selecting the provider, contract negotiation, ongoing monitoring, and termination planningCorrect
  3. CDue diligence, ongoing monitoring, risk assessment, contract negotiation, termination planning
  4. DContract negotiation, ongoing monitoring, due diligence, risk assessment, termination planning

Explanation

The life cycle begins with assessing whether and how to outsource (risk assessment), then selecting the provider via due diligence, negotiating the contract, monitoring on an ongoing basis, and planning for termination or exit. The other orders place contracts or monitoring before the decision and selection work, which is illogical.

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