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

Which use of counterparty stress test results is best supported by supervisory expectations for large dealer banks?

Stress results should inform credit limits, collateral and margin terms, concentration management, and capital and liquidity planning. They complement rather than replace regular exposure measures such as potential future exposure, and should not be treated as a stand-alone reporting exercise.

  1. ATreating them solely as a regulatory reporting exercise separate from business decisions
  2. BInforming credit limits, collateral and margin terms, concentration management and capital and liquidity planningCorrect
  3. CReplacing day-to-day exposure measures such as potential future exposure
  4. DCalibrating only the trading desk bonus pool

Explanation

Supervisors expect stress tests to complement, not replace, regular exposure measures and to feed into limits, collateral terms, concentration management and capital and liquidity planning. Treating them as pure reporting or linking them to bonuses misses their risk management role.

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