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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A bank's trader enters a trade in the wrong direction because of a keying error. The position loses USD 2 million when the error is corrected after the market moves. How should this loss be classified?

The loss is an operational risk loss because its cause was a human keying error, a failed process or people event. Although market movement determined the size of the loss, operational risk classification follows the root cause rather than the channel through which the loss was realised.

  1. AMarket risk loss only, because the loss came from price movement
  2. BOperational risk loss, because it resulted from a failed process or human errorCorrect
  3. CCredit risk loss, because the counterparty was exposed
  4. DStrategic risk loss, because it affects business objectives

Explanation

The root cause is a human error in execution, which is an operational failure, even though the loss crystallised through market movement. Classifying by the market move would ignore the cause. It involves no counterparty default, so credit risk does not apply.

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