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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

During a market disruption, money market funds stop buying a bank's commercial paper, and the bank cannot roll maturing paper. Which action is most consistent with sound contingency management of nondeposit funding?

The best response is to use pre-arranged committed backup lines and a buffer of liquid assets, supported by funding diversified across instruments, investors and maturities. This replaces lost commercial paper without adding more rollover risk, unlike shifting to overnight funding or waiting passively for central bank help.

  1. ARely exclusively on the commercial paper program and expand it after the disruption ends
  2. BDraw on pre-arranged committed backup lines and liquid asset buffers while having diversified funding by investor type and maturityCorrect
  3. CConvert all remaining funding to overnight borrowing to lower cost
  4. DWait for the central bank to announce support before taking any action

Explanation

Sound practice is to diversify market funding across instruments, investors and maturities, and to hold liquid assets and committed backup facilities that can replace lost CP. Overnight borrowing increases rollover risk, and relying on a single program or on an uncertain central bank response is imprudent.

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