GARP Financial Risk and Regulation (FRR) Series 2016-FRR Question # 10 Topic 2 Discussion
2016-FRR Exam Topic 2 Question 10 Discussion:
Question #: 10
Topic #: 2
A trader inadvertently booked a trade with incorrect information. A subsequent market move resulted in a profit for the bank. Why should the bank include this gain in its operational risk assessment process?
A.
To fully assess the impact of all operational risk events
B.
The bank should not include this event in its operational loss event data program as it is a market risk event
C.
It is an important input into the bank’s capital modeling process
D.
The bank should not include this event in its operational risk assessment process as it is not a loss event
Operational risk under Basel II includes gains and losses from process failures (e.g., incorrect trade booking). This event, despite resulting in a profit, stems from an operational error, making it relevant for assessing control weaknesses and potential future losses. Option A is correct—excluding it underestimates operational risk exposure. Option B misclassifies it as market risk (the cause is operational). Option C is true but incomplete. Option D is wrong—Basel II includes near-misses and gains.
Exact Extract from Official Source:
BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June 2006, para. 673: "Operational risk data should include all relevant events, including those resulting in gains or near-misses, to provide a complete picture of risk exposure."
GARP FRR Study Notes, Operational Risk Section: "Events like trade errors, even if profitable, must be recorded in operational risk assessments to evaluate process reliability."
Chosen Answer:
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