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FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk

Which element is MOST appropriate to include in a written contract with a provider of a critical outsourced service?

A sound contract for a critical service defines scope and service levels, grants audit and information rights, sets confidentiality and security duties, and provides termination and exit arrangements. Terms allowing unilateral changes, blocking regulator access, or loading all error losses on the bank are inconsistent with guidance.

  1. AA clause allowing the provider to change service levels unilaterally without notice
  2. BDefined scope and service-level expectations, rights to audit and obtain information, data confidentiality and security obligations, and termination and exit provisionsCorrect
  3. CA prohibition on regulators accessing the provider's records
  4. DA requirement that the bank bear all losses caused by provider errors

Explanation

Sound contracts define scope, performance standards, audit and information rights, confidentiality and security, business continuity, and termination/exit. Unilateral changes, blocking regulator access and shifting all losses to the bank run counter to guidance.

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