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FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities

Which feature of client asset protection rules is most important for safeguarding investors if an investment firm becomes insolvent?

Segregating client assets from the firm's own, with accurate records of each client's holdings, is most important. It lets assets be identified and returned in an insolvency instead of being absorbed into the failed firm's estate, whereas reuse or commingling exposes clients to firm credit risk.

  1. ASegregation of client assets from the firm's own assets, with accurate records identifying each client's holdingsCorrect
  2. BAllowing the firm to reuse client securities freely to raise its own funding
  3. CPooling client cash with the firm's operating cash for liquidity efficiency
  4. DRelying on the firm's credit rating as assurance of asset safety

Explanation

Segregation and accurate records let client assets be identified and returned if the firm fails, rather than being treated as part of the insolvent estate. Free reuse, commingling and reliance on ratings all expose clients to the firm's credit risk.

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