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FRM Part II · FRM Exam Part II · Risk Identification

During an RCSA workshop, a trading operations manager rates the residual risk of trade settlement failures as 'low' because 'the reconciliation control has never failed'. The operational risk team notes that the control was last tested three years ago, and internal loss data show two settlement-related losses last year. What is the most appropriate response by the second line?

The second line should challenge the rating, require evidence of control testing, and compare the assessment with loss data and key risk indicators. A stale control test and recent losses contradict the manager's optimistic view, so unsupported self-assessments should not be accepted or arbitrarily overridden.

  1. AAccept the rating because the manager owns the process and knows it best
  2. BChallenge the rating, require evidence of control testing, and reconcile the assessment against loss data and KRIsCorrect
  3. CRaise inherent risk to the maximum so residual risk becomes high regardless of controls
  4. DRemove the risk from the RCSA because losses are tracked in the loss database

Explanation

Self-assessments are prone to optimism bias and must be challenged using evidence such as control testing results, loss events and indicators. Accepting the rating ignores contradicting data. Arbitrarily maxing inherent risk and dropping the risk from the RCSA are not evidence-based and misuse the process.

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