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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A treasury team finds that collateral is held in several legal entities and custodians, so it cannot quickly be moved to cover a margin call in another entity. Which collateral management weakness does this best illustrate?

This illustrates fragmented collateral with poor visibility and limited transferability across entities. Assets exist but cannot be mobilized quickly where the margin call arises, so centralized collateral management and real-time inventory tracking are needed. It is not wrong-way, funding-source or hedge basis risk.

  1. AExcess wrong-way risk in the bank's derivative book
  2. BFragmented collateral with poor visibility and transferability across entitiesCorrect
  3. COver-reliance on unsecured interbank borrowing
  4. DBasis risk in the bank's interest rate hedges

Explanation

Collateral trapped in separate entities or custodians limits the bank's ability to mobilize it where needed. This is a collateral fragmentation and transferability problem, requiring centralized visibility and optimization. The other options describe different risks.

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