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FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud

After a major rogue-trading loss, a post-mortem finds that the bank's risk system showed persistent large margin and cash funding requests for a desk reporting near-zero net risk. Management dismissed the alerts as timing issues. Which lesson is best supported?

Unexplained gaps between reported low risk and large funding or margin demands are red flags that should be independently investigated. They may indicate fictitious hedges or hidden positions, so dismissing them as timing issues allows fraud to continue and losses to grow.

  1. AUnexplained divergence between reported low risk and high funding or collateral flows is a red flag requiring independent investigationCorrect
  2. BLow reported VaR confirms that the desk's controls are effective
  3. CFunding requests are a treasury matter and are irrelevant to operational risk
  4. DMargin calls should be reduced by netting them against the desk's reported profit

Explanation

A desk with supposedly hedged, low-risk positions should not generate large unexplained funding needs. Such inconsistency suggests unreported or fictitious positions and should trigger independent escalation. Treating low VaR as proof of control ignores that the inputs may be manipulated.

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