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FRM Part II · FRM Exam Part II · The Evolution of Stress Testing Counterparty Exposures

Which practice best reflects sound governance of a counterparty credit risk stress testing program?

Regular scenario review, active challenge of assumptions by senior management and the board, and documented limitations reflect sound governance. Scenarios designed only by desks, results hidden from the board, or one-off validation weaken independence, usefulness and relevance as portfolios and market conditions evolve.

  1. AScenarios are set solely by the trading desks that hold the exposures
  2. BResults are shared only with the risk function to avoid distraction of the board
  3. CScenarios are reviewed regularly, senior management and the board challenge assumptions, and limitations are documentedCorrect
  4. DThe program is validated once at implementation and not revisited

Explanation

Sound governance involves board and senior management oversight, independent challenge of scenarios and assumptions, regular review as portfolios and markets change, and documentation of limitations. Desk-only scenarios create conflicts, restricted distribution prevents action, and one-time validation becomes stale.

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