Module: | MODULE B: RISK MANAGEMENT
Q452: Scenario: During a severe liquidity crunch, a bank's Treasury Head takes charge of both the front office trading desk and the back office settlement desk to speed up emergency funding operations. Furthermore, the mid-office risk manager is asked to report directly to the Treasury Head instead of the Risk Management Committee. Based on strict liquidity governance principles, consider the following statements:
1. The integration of front office trading and back office settlement strictly violates the fundamental risk management principle of segregation of duties.
2. The mid-office risk management function must remain independent and report directly to the Risk Management Committee, bypassing the Treasury Head.
3. During a severe systemic liquidity crunch, the Reserve Bank of India officially permits the temporary merger of front and back office functions to ensure rapid emergency funding.
Which of the statements given above is/are correct?
2. The mid-office risk management function must remain independent and report directly to the Risk Management Committee, bypassing the Treasury Head.
3. During a severe systemic liquidity crunch, the Reserve Bank of India officially permits the temporary merger of front and back office functions to ensure rapid emergency funding.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The foundational pillar of treasury internal controls is the strict "Segregation of Duties." The Front Office (which executes trades and borrows funds) must be completely physically and logically separated from the Back Office (which confirms, values, and settles the trades) to prevent unauthorized transactions and massive operational fraud.
Statement 2 is correct: The Mid-Office acts as the independent risk watchdog.
To ensure unbiased oversight, the Mid-Office must be structurally independent from the revenue-generating Front Office.
Therefore, it must report directly to the Risk Management Committee (RMC) of the Board, not to the Treasury Head.
Statement 3 is incorrect: Regulatory compliance is non-negotiable.
The Reserve Bank of India does not grant any emergency waivers to merge Front and Back office functions during a liquidity crisis.
Diluting core internal controls during a panic is strictly forbidden, as it exponentially increases the risk of catastrophic errors.
Statement 2 is correct: The Mid-Office acts as the independent risk watchdog.
To ensure unbiased oversight, the Mid-Office must be structurally independent from the revenue-generating Front Office.
Therefore, it must report directly to the Risk Management Committee (RMC) of the Board, not to the Treasury Head.
Statement 3 is incorrect: Regulatory compliance is non-negotiable.
The Reserve Bank of India does not grant any emergency waivers to merge Front and Back office functions during a liquidity crisis.
Diluting core internal controls during a panic is strictly forbidden, as it exponentially increases the risk of catastrophic errors.