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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 is the responsibility of the second line?

The second line of defense develops risk policies and frameworks and independently monitors and reports exposures, challenging the first line. Day-to-day risk ownership and trading belong to the first line, while independent assurance to the board is the role of the third line, internal audit.

  1. AOwning and managing risks day to day within a business unit
  2. BProviding independent assurance to the board on the effectiveness of controls and risk management
  3. CDeveloping risk policies, setting limits frameworks and independently monitoring and reporting risk exposuresCorrect
  4. DExecuting trades within assigned limits

Explanation

The second line is the independent risk management and compliance function, which designs the framework, monitors exposures and challenges the first line. Owning risk and trading are first-line activities. Independent assurance to the board is the third line, typically internal audit.

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