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FRM Part I · FRM Exam Part I · The Governance of Risk Management

In the three lines of defense model, which activity belongs to the second line?

The second line of defense is the independent risk and compliance function, which challenges the business's risk assessments and monitors aggregate exposures. Business managers taking risk are the first line, while internal audit providing independent assurance on the framework is the third line.

  1. AA trading desk manager setting position sizes within approved limits
  2. BAn independent risk function challenging the business's risk assessments and monitoring aggregate exposuresCorrect
  3. CInternal audit testing whether the risk framework operates effectively
  4. DExternal auditors certifying the financial statements

Explanation

The first line (business units) owns and manages risk; the second line (risk management and compliance) oversees, challenges and monitors; the third line (internal audit) provides independent assurance. Setting position sizes is first line, and testing framework effectiveness is third line. External auditors are outside the model.

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