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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A trading desk repeatedly breaches its limits, and the CRO's escalation goes to the head of the desk's business line, who also determines the CRO's bonus. Which governance weakness is most directly illustrated, and what is the best remedy?

The weakness is compromised independence of the risk function, because the CRO's escalation and bonus depend on the business line being monitored. The remedy is to have the CRO report to the CEO or board risk committee, with compensation set independently, so breaches can be challenged without conflict.

  1. ACompromised independence of the risk function; the CRO should report to the CEO or board risk committee, with compensation set independently of the business lineCorrect
  2. BExcessive board involvement; the board should delegate limit setting entirely to desk heads
  3. CPoor data aggregation; the firm should purchase a faster risk engine
  4. DOver-reliance on VaR; the firm should abolish position limits

Explanation

When the CRO's pay and escalation path depend on the business line being monitored, the second line cannot challenge effectively. The remedy is a reporting line to the CEO and board risk committee, with independent compensation. Technology or abolishing limits does not address the conflict of interest.

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