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FRM Part II · FRM Exam Part II · Integrated Risk Management

After a trading loss, a review finds that a senior trader consistently exceeded limits, and the risk team knew but did not escalate because the trader was the firm's top revenue producer. Which lesson from risk failures does this case most directly illustrate?

The case illustrates weak independence and authority of the risk function. The risk team saw limit breaches but did not escalate because the trader generated high revenue, showing that control functions must be able to challenge the front office without commercial pressure.

  1. AInsufficient VaR model calibration frequency
  2. BWeak independence and authority of the risk function relative to the front officeCorrect
  3. COverreliance on external credit ratings
  4. DInadequate disaster recovery site capacity

Explanation

The risk team observed breaches but deferred to a profitable trader, showing that the control function lacked independence and the standing to challenge. Model calibration, ratings and recovery capacity are not the issue in the facts given.

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