Pass the PRMIA PRM Certification 8020 Questions and answers with CertsForce

TheTask Force on Climate-related Financial Disclosures (TCFD)was established todevelop climate-related financial risk disclosure recommendationsto help investors, lenders, and regulators make informed decisions.

TheFinancial Stability Board (FSB), an international organization that monitors and makes recommendations about the global financial system, founded theTCFD in 2015.

The FSB recognizedclimate risk as a financial stability issueand launched the TCFD to standardize reporting.

Option A ("World Bank")→ Incorrect because theWorld Bank supports climate initiativesbut did not create the TCFD.

Option B ("United Nations")→ Incorrect because theUN has climate programs like the UNFCCC, but not the TCFD.

Option D ("European Commission")→ Incorrect becausethe EC develops its own sustainability regulations (e.g., SFDR, CSRD), separate from the TCFD.

Step 1: What is the TCFD?Step 2: Who Founded the TCFD?Step 3: Why the Other Options Are Incorrect

PRMIA Climate Risk Guidelines– Cites FSB's role in founding the TCFD.

FSB Official Reports (2015)– Confirms that the FSB established the TCFD.

PRMIA Risk References Used:

Final Conclusion:TheFSB founded the TCFD in 2015, makingOption C the correct answer.

TheFTX collapseinvolvedfraudulent fund mismanagement, where FTX executives created a "backdoor" to allowAlameda Research (FTX’s sister trading firm) to borrow client funds without their consent.

The backdoor wasa hidden code in FTX’s system, allegedly created bySam Bankman-Fried, which allowed Alameda to accesscustomer depositswithout triggering alerts to auditors or compliance teams.

Alameda used these fundsfor risky trading strategies and investments, leading to the eventual collapse of FTX when a liquidity crunch exposed the missing funds.

Option A ("allowed a stablecoin to be removed from the ledger and added to the balance sheet")

Incorrect because FTX’s fraud involvedmisuse of customer funds, not just a stablecoin misclassification.

Option C ("allowed currency traders to smooth profits and conceal losses for over two years")

Incorrect because this sounds more likeLIBOR-rigging scandals, whereas FTX misappropriated client funds.

Option D ("allowed a rapid pace of acquisitions but poor integration of acquired companies")

Incorrect because FTX's collapse was due tofinancial fraud, not poor acquisition strategy.

Step 1: The "Backdoor" in FTXStep 2: Why the Other Options Are Incorrect

PRMIA Financial Crime Risk Management– Discusses insider risk and fraudulent misappropriation of funds.

FTX Collapse Reports– SEC, CFTC, and DOJ filings confirm that Alameda had unauthorized access to client funds.

PRMIA Risk References Used:

Final Conclusion:FTX’s backdoorenabled Alameda to take $65 billion in client funds without permission, makingOption B the correct answer.

The Business Indicator (BI) is a financial-statement-based metricused inBasel III's Standardized Approach for Operational Risk.

It replacesprevious approachesby usingfinancial figures (e.g., revenue, fees, interest income)to estimate operational risk exposure.

The BI uses financial-statementdatato calculateoperational risk capital requirements.

It acts as aproxy for a bank’s operational risk exposureby linking operational risk to itsfinancial size and complexity.

Option A ("Proxy for near-miss events")→ Incorrect because BI is based onfinancial data, not near-miss risk events.

Option B ("Non-financial-statement-based proxy")→ Incorrect becauseBI is explicitly derived from financial statements.

Option C ("Scaling factor based on historical losses")→ Incorrect becauseBI does not use historical losses directly—it relies on financial-statement inputs.

Step 1: Definition of the Business Indicator (BI) in Basel IIIStep 2: Why Option D Is CorrectStep 3: Why the Other Options Are Incorrect

Basel III Operational Risk Framework– Defines the Business Indicator as a financial-statement-based metric.

PRMIA Operational Risk Guidelines– Explains the BI’s role in capital calculations.

PRMIA Risk References Used:

ESG (Environmental, Social, and Corporate Governance)refers to the three core factors used to evaluate a company's sustainability and ethical impact.

ESG is now akey part of risk management, influencinginvestment decisions, regulatory compliance, and corporate strategy.

Environmental (E): Climate change, carbon emissions, resource management.

Social (S): Diversity & inclusion, labor rights, community engagement.

Governance (G): Board structure, executive pay, corporate ethics.

Option A ("Environmental, Strategy, and Corporate Governance")

Incorrect becauseStrategy is not part of ESG.

Option C ("Enhanced Social Governance")

Incorrect because ESGcovers more than just social governance.

Option D ("Extra Social Governance")

Incorrect as it does not align with the recognized ESG definition.

Step 1: Definition of ESGStep 2: Breakdown of ESG ComponentsStep 3: Why the Other Options Are Incorrect

PRMIA ESG Risk Management Guidelines– Defines ESG factors as Environmental, Social, and Governance.

PRI (Principles for Responsible Investment)– Aligns ESG with financial risk management.

PRMIA Risk References Used:

Risk Appetiteis theamount of risk an organization is willing to take to achieve its objectives.

ARisk Appetite Statement(RAS) communicatesrisk tolerance levels and management expectations.

Risk Capacity(not Risk Appetite)defines the maximum risk the firm can withstand.

Risk Appetite is about willingness to take risk, not the absolute limit.

Option A ("Improves risk management standards")→Correct, as RAShelps define better risk management.

Option B ("Governing body articulates expectations")→Correct, as RAS isapproved by the board.

Option D ("Assists strategic discussions")→Correct, as RASguides decision-making.

Step 1: Understanding a Risk Appetite StatementStep 2: Why Option C is IncorrectStep 3: Why the Other Options Are Correct

PRMIA Risk Appetite Framework– Differentiates between Risk Appetite and Risk Capacity.

Basel III Governance Principles– Encourages organizations to establish clear risk appetite statements.

PRMIA Risk References Used:

Final Conclusion:Risk Appetite does not establish the maximum risk the firm can withstand—that isRisk Capacity, makingOption C the correct answer.

Material customer detrimentrefers to service disruptions thatcause financial loss, inability to access essential services, or significant hardship.

PRMIA andUK FCA Operational Resilience Standardsdefine"significant harm" as going beyond inconvenienceto includemonetary or operational distress.

Significant harm occurs when customers face tangible financial or service losses, not just reputational inconvenience.

Regulatory frameworks (e.g.,Basel, FCA, PRMIA) require banks toprotect customers from material disruptions.

Option A ("Low threshold, any complaint")→ Incorrect becausenot all complaints indicate material detriment.

Option B ("Inconvenience and reputational damage")→ Incorrect becausetrue material harm is more than just inconvenience.

Option C ("Financial system resilience")→ Incorrect because thisdescribes systemic financial stability, not customer impact.

Step 1: Definition of Material Customer DetrimentStep 2: Why Option D is CorrectStep 3: Why the Other Options Are Incorrect

PRMIA Operational Resilience Framework– Defines material customer detriment.

UK FCA Operational Resilience Guidelines– Requires firms to minimize severe harm to customers.

PRMIA Risk References Used:

Final Conclusion:Material customer detriment involves actual financial hardship, not just inconvenience, makingOption D the correct answer.

Stafford Beer’s Viable System Model (VSM)

VSM is acybernetic modeldesigned to analyze andimprove organizational structures.

It consists offive core subsystemsthat define governance and operations.

Why Answer B is Correct

The VSMdoes not explicitly include “Input” as a key component.

The key elements of VSM includeGovernance, Process, and Output, but it does not define“Input” as a standalone concept.

Why Other Answers Are Incorrect

Option

Explanation

A. Governance

Correct– Governance is part of VSM and deals with decision-making and oversight.

C. Process

Correct– Process represents the operational functions within VSM.

D. Output

Correct– Output refers to the results of the system’s operations.

PRMIA Governance and Cybernetic Systems Guidelines

Stafford Beer’s Viable System Model Framework

PRMIA References for Verification

WorldCom was one of the largest U.S. telecom companies before its collapse in 2002due tofraudulent accounting practices and poor risk management.

The companyexpanded aggressively through acquisitionsbutfailed to integrate them properly, leading tofinancial mismanagement and accounting fraud.

WorldComacquired over 60 companies in a short periodwithout proper integration.

Thismasked financial problemsand led to$11 billion in fraudulent accounting adjustments.

PRMIA and risk management frameworks stress thatpoor integration after rapid acquisitions increases operational and financial risks.

Option A ("Risk models and mortgage underwriting")→ Incorrect becausethis describes the 2008 financial crisis, not WorldCom.

Option B ("Lack of a CRO during IPO")→ Incorrect becauseWorldCom was well-established before its fraud—CRO absence was not the main issue.

Option D ("Unauthorized derivatives trading")→ Incorrect becauseWorldCom’s failure was due to fraudulent accounting, not derivatives.

Step 1: Understanding the WorldCom CaseStep 2: Why Option C is CorrectStep 3: Why the Other Options Are Incorrect

PRMIA Corporate Governance Guidelines– Discusses risks of poor post-merger integration.

SEC Investigation on WorldCom (2002)– Identified fraudulent accounting due to failed acquisitions.

PRMIA Risk References Used:

Background of the Barings Case Study

TheBarings Bank collapseoccurred due to unauthorized derivatives trading byNick LeesoninSingapore.

Leeson concealed losses, and his trading positions became unmanageable.

How the Kobe Earthquake Affected Barings

OnJanuary 17, 1995, theKobe earthquakecaused extreme market volatility.

Leeson's unauthorized trades were highly exposed to the Nikkei 225 index, and the earthquake triggeredheavy losses.

The eventaccelerated the exposure of Leeson’s fraudulent activities, leading toBarings' collapse.

Why Answer D is Correct

TheKobe earthquake created market turmoil, forcing Barings toconfront its financial position, ultimately revealing the hidden losses.

Why Other Answers Are Incorrect

Option

Explanation

A. The collapse of Lehman Brothers into bankruptcy in 2002.

Incorrect–Lehman Brothers collapsed in 2008, not 2002.

B. The Singapore earthquake of January 17th, 1995.

Incorrect– No significant earthquake occurred in Singapore on that date.

C. The collapse of Lehman Brothers into bankruptcy in 2008.

Incorrect–Barings collapsed in 1995, not related to Lehman Brothers' 2008 failure.

PRMIA Case Study on Barings Bank Collapse

Basel Committee Principles on Risk Oversight and Fraud Prevention

PRMIA References for Verification

TheNational Australia Bank (NAB) FX Options Case Studyis a well-known example ofoperational risk, fraud, and governance failure.

What Happened?

Traders engaged inunauthorized foreign exchange (FX) options trading, usingdeep-in-the-money optionsand other complex instruments.

They manipulated profits and losses tosmooth earningsand mislead risk managers and auditors.

Why Answer C is Correct

The traderssmoothed both profits and lossesto avoid detection and ensure continued trading bonuses.

This aligns with PRMIA’sOperational Risk Management Guidelines, which highlight thathidden trading losses and smoothing techniques increase financial crime risk.

Why Other Answers Are Incorrect

Option

Explanation

A. Complex structured transactions aided in the smoothing of losses.

Incorrect– Smoothing occurred with bothprofits and losses, not just losses.

B. Deep-in-the-money options and other complex structured transactions aided in the smoothing of losses.

Incorrect– Profits were also manipulated, making this answer incomplete.

D. Deep-in-the-money options aided in the smoothing of losses.

Incorrect– This focuses only on deep-in-the-money options and ignores other structured transactions involved in the fraud.

PRMIA Fraud and Risk Management Case Studies

Basel Principles on Market Risk and Internal Control Failures

PRMIA References for Verification