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FRM Part II · FRM Exam Part II · Case Study: Third-party Risk Management

Which statement best describes the purpose of pre-contract due diligence on a prospective critical vendor?

Pre-contract due diligence evaluates the vendor's financial condition, controls, resilience and compliance record before the bank commits. It informs the selection and contract terms but neither shifts accountability to the vendor nor removes the need for ongoing monitoring afterward.

  1. ATo transfer legal accountability for the outsourced activity to the vendor
  2. BTo evaluate the vendor's financial condition, control environment, resilience and compliance record before committing to the relationshipCorrect
  3. CTo replace the need for ongoing monitoring after the contract is signed
  4. DTo determine the vendor's fees and service credits

Explanation

Due diligence assesses whether the vendor can deliver safely: financial strength, controls, business continuity, security and regulatory compliance. Accountability cannot be transferred, it does not replace monitoring, and fee setting is a commercial negotiation.

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