8009 Exam IV: Case Studies: Standards: Governance, Best Practices and Ethics - 2015 Edition Questions and Answers

I, II and III only

I, III and IV only

I and III only

All of these are expected of the Financial Accounting and Reporting Infrastructure

Nick Leeson also ran the back office for his trading area

Nick Leeson dealt in complex derivatives lacking transparency of pricing

SIMEX made inquiries to Barings Bank about large margin calls on its positions

Nick Leeson claimed to be running an arbitrage book

Maintaining appropriate assurance measures to ensure that the Governance and Risk framework of the organization is effective, and, if any shortcomings are discovered, to escalate these to the Board so that remedial action can be taken in an appropriate and timely manner

ensuring that all employees understand the rules and regulations (both internal and external) with which they must comply and the implications, for them and for the organization, of non-compliance

Ensures that reporting of risk and governance-related matters are produced in a timely and accurate manner

Acts as sponsor for risk throughout the organization and ensures that a risk culture is implemented, and maintained

30%

40%

50%

60%

I, II and IV only

I and II only

I, III and IV only

All of these are PRMIA Governance Principles

made it straightforward for TFMI to determine whether risk had actually been transferred and they decided not to take out more catastrophe insurance cover

made it difficult for TFMI to determine whether risk had actually been transferred so they had to take out additional catastrophe insurance cover

made it straightforward for TFMI to determine when the risk had been transferred and to take out additional catastrophe insurance cover

made it difficult for TFMI to determine whether risk had actually been transferred and whether it had sufficient catastrophe insurance cover

Having the back office and front office operations under the same person

Difference in the contract sizes in the OSE and SIMEX

The different time zones that the office was trading in

Leeson was executing an arbitrage strategy even though he was not authorized to do so

knowledge, skills, expertise

experience, skills, previous successes

risk appetite, knowledge, expertise

track record, expertise, skills

Many of the banks in the rescue consortium were among LTCM ' s counterparties

Some of the banks in the rescue consortium were LTCM investors

Untimely unwinding of some LTCM positions would lead to large market fluctuations and possible turmoil

The consortium wanted to keep this out of the regulators ' eyes

Large customer withdrawals despite the UK regulator and the UK Treasury giving assurances that the bank was solvent

Doubts arising about the viability of the business model which necessitated Bank of England intervention

A general lack of confidence in mortgage backed securities associated in large part with developments in the US sub-prime mortgage market, and doubts emerging about the viability of the Northern Rock business model

A depositor run on the bank, following doubts about the viability of the Northern Rock business model

A covert money market support operation designed to cover up the difficulties Northern Rock was facing

The Bank of England ' s role as Lender-Of-Last-resort was activated at a penalty interest rate of 150 basis points above the Bank Rate

The UK government offered to guarantee all existing and new retail deposits, and to most other creditors

The Bank of England provided an additional unlimited facility secured on the collateral of all Northern Rock assets

Both relied on a star manger, supposedly in a low risk business.

Both losses grew over time, but were not discovered by management until too late.

Both traded in illiquid and obscure markets that were easy to manipulate.

Both losses were eventually exposed by massive margin calls.

Know and abide by applicable rules and regulations

Clearly inform all affected parties of any apparent or actual conflicts of interest

Report to the Regulator any departures from generally accepted methodology or practices

Provide advice that is clear and accurate

Greater volatility than expected over the life of an option

Sudden gaps in market prices

Both A and B

Neither A nor B

Failed corporate governance

Accounting abuses

Unfair pricing to customers

Over stating actual sales

A window of time between close of day for reporting purposes and back office checking that allowed traders to hide losses using fictitious trades

The Board received risk management information that was incorrect, incomplete or insufficiently detailed

Both A and B

Neither A nor B

Recapitalise Fannie Mae and Freddie Mac with US$2.4 billion of additional capital to ensure they weathered the risks associated with any future downturn in the housing markets

Provide grants of US$800 million to help home buyers with down-payment and closing costs

Allow risky, high-cost loans to be credited towards affordable housing goals

Provide tax credits of nearly US$2.4 billion over the next 5 years to investors and builders who developed affordable single-family housing in poor and distressed areas

I, II and III only

I, III and IV only

I, II and IV only

All of these are expectations of the Organization as a Whole

Separation of front and back offices

More senior level involvement at Barings regarding use of derivatives

Recognition that large profits can be an indicator of higher risk

All of the above

relied almost entirely on Fortress Re ' s management team for information on the risks in its portfolio

relied on the information it received from other members of the reinsurance pool to manage its risks

had a full understanding from Fortress Re of the risks in the pool

had a full understanding from other members of the pool of the pool ' s liabilities

The role of the UK government and the possible underwriting of risks by tax-payers, and the general question of Moral Hazard

The reform of the Deposit Protection Scheme because of its internal inconsistencies

It emphasised the importance of effective governance arrangements within financial firms

The original successful business model had not stress tested sufficiently for the incidence of Low Probability, High Impact incidents

Volume growth at the expense of margin

Excessive reliance on volatile and sophisticated derivatives

A failure to try to protect their clients ' interests

Over exposure to the property market

unhedged

hedged using exchange-traded futures with longer maturities than the retail contracts

hedged using exchange-traded futures with shorter maturities than the retail contracts

fully hedged using exchange-traded futures of the same maturities as the retail contracts

Define the organization ' s definition of risk management as articulated by the Board in clear and uncertain terms

Include financial risk management, compliance and external reporting and, to the extent that resources allow, should exclude legal or accounting

Be independently staffed and report to an employee who is on the Executive Committee (Operating Committee) but who is NOT a business unit leader

Review continually the application of the Principles of Good Governance to the Risk Management Infrastructure, financial accounting and reporting infrastructure and the organization as a whole

I, II, III, and IV

IV, III, II, and I

II, I, IV, and III

III, II, IV, and I

The Board of Directors, but only if the Blue Ribbon Panel affirms the change

The Board of Directors and a majority of the Members

The Board of Directors alone

34 of all Members

Basis Risk

Currency Settlement

Interest Rate

Inflation

LPHI Risk; Business Model; Solvency vs. Liquidity: and Deposit Protection

Corporate Governance; Moral Hazard; Role of Government; and Credit Risk

Deposit Protection; Moral Hazard; Business Model; and LPHI Risk

Business Model; Corporate Governance; Moral Hazard; and Deposit Protection

PRMIA Standards

the standards of the organization where the work is being performed

his / her established personal standards of work approved in previous work situations

local regulatory authority standards which may be less onerous than PRMIA standards

I, II, and III only

III only

I, II, and IV only

I, II, III and IV above