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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

After a limit breach at a fund, the CRO escalates to the board's risk committee, but the CEO had previously granted informal exceptions to the limit without documentation. What is the most appropriate governance response?

The best response is to formalise an exception policy requiring documented approvals, time limits and reporting to the risk committee. This preserves the limit's discipline and transparency, whereas verbal exceptions, desk self-assessment or deleting the limit would erode risk governance.

  1. AFormalise an exception policy with documented approval, time limits and reporting to the risk committeeCorrect
  2. BRemove the limit so that no breaches can occur
  3. CAllow the CEO to continue granting verbal exceptions for flexibility
  4. DHave the trading desk decide whether its own breaches need escalating

Explanation

Limits remain meaningful only if exceptions follow a controlled, documented process with defined authority, duration and board visibility. Removing limits or leaving exceptions informal weakens control, and self-escalation by the desk lacks independence.

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