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

An asset manager's ERM framework uses the three lines model. The risk function independently challenges a trading desk's valuation methodology and reports directly to the board risk committee. Which line does the risk function represent, and what is the key reason this arrangement strengthens the framework?

The risk function is the second line. It independently oversees and challenges the first line's risk-taking and reports to the board, without being accountable for business results. The first line owns risk and P&L, and the third line, internal audit, provides separate assurance.

  1. AFirst line, because it is closest to the day-to-day risk-taking activity
  2. BThird line, because it provides independent assurance to the board on the effectiveness of controls
  3. CSecond line, because it provides independent oversight and challenge of risk-taking without being responsible for the business resultsCorrect
  4. DSecond line, because it owns the risks and is accountable for the desk's profit and loss

Explanation

The second line (risk management and compliance) sets frameworks, monitors, and challenges the first line independently. The first line owns risks and results; the third line (internal audit) gives assurance on the overall system. Owning P&L would compromise the risk function's independence.

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