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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A trading desk breaches its approved VaR limit for the third consecutive week. Under a well-functioning three lines of defense structure, which action is the most appropriate responsibility of the second line?

The second line should independently escalate the repeated limit breach to senior management and the board risk committee and require the desk to remediate or cut positions. Real-time monitoring and escalation are its role; internal audit's periodic review is too late, and the desk cannot self-police.

  1. ARaise the desk's limit so the breach no longer occurs
  2. BIndependently escalate the breach to senior management and the board risk committee and require remediation or position reductionCorrect
  3. CWait for internal audit's annual review to address the issue
  4. DAsk the desk head to decide privately whether the breach matters

Explanation

The second line independently monitors limits and escalates breaches with authority to require remediation. Raising the limit or leaving the decision to the desk undermines control. Waiting for audit is too slow, since audit is periodic assurance, not real-time oversight.

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