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FRM Part II · FRM Exam Part II · Contingency Funding Planning

Which practice best supports the usability of a bank's liquidity buffer in a CFP?

Regularly testing the monetisation of buffer assets through repo or sale, including operational and legal readiness, best supports usability. Concentration, counting pledged assets, or using book values would overstate the liquidity actually available in stress.

  1. AHolding all buffer assets in a single security to simplify monitoring
  2. BRegularly testing the ability to monetise buffer assets through repo or sale, including operational readiness and legal access to collateralCorrect
  3. CCounting assets pledged to central counterparties as part of the buffer
  4. DValuing the buffer at book value rather than stressed market value

Explanation

Periodic monetisation tests confirm the assets can be turned into cash in practice, including operations and legal access. Concentration, counting encumbered assets and using book value all overstate usable liquidity.

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