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

Under sound risk governance practices for a financial institution, which of the following best describes the primary responsibility of the board of directors in relation to risk?

The board's main risk role is to approve the firm's risk appetite and oversee senior management's implementation of a consistent risk framework. Operational tasks like computing VaR or choosing trades are management responsibilities, and tying audit pay to trading profits would compromise independence.

  1. AApproving the firm's risk appetite and overseeing that senior management implements a risk framework consistent with itCorrect
  2. BCalculating daily VaR figures for each trading desk and reporting them to regulators
  3. CSelecting individual trades for the trading book to ensure they fit the risk limits
  4. DSetting the compensation of the internal audit staff based on trading profits

Explanation

The board sets the tone and approves risk appetite and strategy, then oversees management's implementation. Day-to-day tasks such as VaR calculation and trade selection belong to management and risk functions. Linking audit pay to trading profits would undermine audit independence.

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