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

A bank's SLA for a card-authorization service has a monthly fee of USD 400,000. Service credits are: 5% of the fee if availability is below 99.9% but at least 99.5%; 10% if below 99.5% but at least 99.0%; 25% if below 99.0%. In a 30-day month (43,200 minutes) the provider suffered two outages of 150 minutes and 90 minutes. What credit is due, and what is the bank's main residual issue?

The credit is USD 40,000. Total downtime of 240 minutes gives availability of about 99.44%, which falls in the 10% tier, and 10% of USD 400,000 is USD 40,000. The main residual issue is that such credits are typically small compared with the bank's actual losses and reputational damage.

  1. AUSD 40,000; credits fully cover the bank's losses
  2. BUSD 100,000; the bank must terminate immediately
  3. CUSD 20,000; credits are an exclusive remedy, so no other recovery is possible
  4. DUSD 40,000; credits are likely small relative to the bank's operational losses and reputational harmCorrect

Explanation

Downtime is 240 minutes. 240/43,200 = 0.556%, so availability is 99.444%. That is below 99.5% but at least 99.0%, so the 10% tier applies: 0.10 x 400,000 = USD 40,000. The 5% tier (USD 20,000) misreads the band. Credits are usually modest compared with losses from failed transactions and customer harm, so they do not replace resilience planning.

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