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FRM Part II · FRM Exam Part II · Risk Reporting

An operational risk manager reviews a key risk indicator (KRI) for failed trade settlements. The thresholds are: green below 20 fails per week, amber 20 to 39, red 40 or more. Recent weekly values are 12, 18, 26, 33, 38. No threshold is breached into red. Which reporting action is most appropriate?

The manager should escalate the amber status and rising trend to management. KRIs are meant to give early warning, and values climbing from 12 to 38 against a red threshold of 40 signal deterioration that should prompt action before a breach occurs.

  1. AReport the KRI as green because the average of the five weeks is below 40
  2. BEscalate the adverse trend and amber status to management, as the indicator is moving toward the red thresholdCorrect
  3. CRemove the KRI because it has not produced a loss
  4. DWait until the red threshold is breached before reporting to avoid false alarms

Explanation

KRIs serve as early warnings; the series rose from green to amber and is approaching red (38 vs 40). Reporting trend and threshold status lets management act before a breach. Averaging (about 25.4, itself amber) hides the trend, and waiting for red defeats the forward-looking purpose.

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