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FRM Part II · FRM Exam Part II · Case Study: Third-party Risk Management

Following a vendor failure, a bank's review finds its contract lacked exit provisions, audit rights and incident notification timelines. At which stage of the third-party risk lifecycle was the principal weakness located?

The weakness lay in the pre-onboarding stage of due diligence and contract negotiation. Exit clauses, audit rights and incident notification timelines must be agreed in the contract, so their absence reflects a failure at that stage of the third-party lifecycle.

  1. AContract negotiation and due diligence before onboardingCorrect
  2. BQuarterly financial reporting
  3. CInternal staff training on phishing
  4. DCapital allocation for market risk

Explanation

Exit provisions, audit rights and notification terms are set during due diligence and contracting. The other options belong to unrelated processes and would not fix missing contractual protections.

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