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FRM Part II · FRM Exam Part II · Early Warning Indicators

Which practice best ensures that early warning indicator breaches lead to timely management action?

The best practice is to define thresholds, owners, escalation paths and pre-agreed responses tied to the contingency funding plan. This makes breaches actionable and timely, whereas annual reporting, desk discretion or very wide thresholds delay or suppress the warning.

  1. AReporting breaches only in the annual risk report
  2. BDefining clear thresholds, assigned owners, escalation paths and pre-agreed responses linked to the contingency funding planCorrect
  3. CAllowing each trading desk to decide whether a breach is relevant
  4. DSetting thresholds so wide that breaches rarely occur

Explanation

Indicators are only useful if breaches trigger defined escalation and responses, ideally linked to the contingency funding plan with clear ownership. Infrequent reporting, desk discretion and very wide thresholds all undermine timeliness and reduce the value of early warnings.

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