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FRM Part II · FRM Exam Part II · Intraday Liquidity Risk Management

Which of the following best reflects the principle that a bank should manage and mobilise collateral as needed to obtain intraday credit?

The bank should know where its collateral is held, whether it is eligible and how long it takes to move, so it can mobilise it quickly for intraday credit. Blanket pledging, misplaced holdings or immobile collateral weaken its ability to meet intraday needs.

  1. APledge all eligible collateral to the central bank each morning, regardless of needs, to avoid operational effort
  2. BHold collateral only in the legal entity that has the least payment activity
  3. CUnderstand where collateral is held, its eligibility and the time needed to move it, so that it can be mobilised to meet intraday needsCorrect
  4. DRely on collateral that cannot be transferred during the business day since it is the safest

Explanation

Banks should know the location, legal entity, eligibility and mobilisation timing of collateral so that intraday credit can be obtained when needed, including in stress. Pledging everything blindly can trap collateral and hamper flexibility, and collateral that cannot be moved or sits in the wrong entity does not support intraday needs.

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