Financial Risk Manager
Encyclopedia
The Financial Risk Manager (FRM) designation is an international professional certification
offered by the Global Association of Risk Professionals
. To be awarded the FRM designation, candidates must complete two rigorous examinations that cover the major topics in financial risk management
, demonstrate two years' professional work experience in financial risk management, and meet other requirements.
, market risk
, and liquidity risk
as well as non-market related financial risks. FRM holders perform a broad variety of functions related to risk management within investment banks, asset management firms, as well as in corporations and government agencies. Top employers of FRM holders include global financial services firms Deutsche Bank
, HSBC
, and UBS, as well as auditing firms KPMG
, Ernst & Young
(EY) and PricewaterhouseCoopers
(PwC).
Candidate enrollment in the FRM program has grown rapidly: between 2001 and 2010, registration increased at a compound annual rate of more than 25%.
Growth has occurred not just in the United States but also in Europe and Asia: today, more than 70% of FRM holders reside outside of the United States. Top territories of residence for FRM holders include the United Kingdom, Switzerland
, Singapore
, and Hong Kong
.
While the financial crisis of 2007–2010 resulted in a dramatic downturn in overall financial services employment, the effect has been opposite in the field of risk management: the bankruptcy of Lehman Brothers
and the collapse of other large financial institutions underscored the need to accurately price the risk inherent in 21st century financial products and markets. The financial crisis has given a greater role to financial risk professionals, and driven further demand for skilled financial risk managers and the FRM designation.
As of September 2010, GARP had more than 101,000 members in 90 countries around the world, including more than 26,000 certified FRM holders. The FRM is a globally recognized benchmark certification program for financial risk managers, and is considered by many to be the defacto global qualification in the practice of financial risk management.
The Financial Risk Manager Handbook, written by risk management expert Philippe Jorion, is the primary text for the FRM curriculum. The handbook covers the core body of knowledge for financial risk managers, covering such topics as:
The FRM syllabus is dynamic and changes every year to reflect recent events in the global financial market
s.
The FRM exams are administered on a single day twice a year, on the third Saturdays in May and November. In 2011, the FRM exams are scheduled for May 21 and November 19.
The November 2010 FRM exam was administered at exam sites in 48 different countries.
The FRM exams are administered on paper. All questions are multiple choice
; each question has 4 answer choices. There are no penalties for wrong answers.
The questions in the exams are structured in the context of situations that financial risk managers face every day. The information needed to answer each question is contained within the question or vignette.
Only certain models of Texas Instruments (BA II Plus) and Hewlett Packard (10B II, 20B, and HP-12C) calculators may be used.
In addition to the official curriculum materials from GARP, study materials for the FRM exams are available from a number of third party providers, including Schweser
and Christian H. Cooper
. GARP recommends 150–200 hours of study for each part of the exam.
Beginning with the May 2010 exam window, the FRM Exam transitioned from a one-part to a two-part exam. The FRM exams now consist of two exams, FRM Part I and FRM Part II.
Each exam consists of a single four-hour session. Candidates may choose to sit for both parts on the same day, however if a candidate fails Part I their Part II exam will not be graded.
The Part I exam covers core areas of risk management, such as quantitative analysis, financial markets and products, and essential risk modeling.
The exam consists of 100 multiple-choice questions, and tests a candidate’s knowledge base in four main topic areas, weighted as follows:
The Part II exam covers specific topics on the practical implementation and execution of measurement and management of market, credit and operational risk, as well as a section covering current issues in financial markets.
The exam consists of 80 multiple-choice questions, and tests a candidate’s knowledge base in five main topic areas:
Professional certification
Professional certification, trade certification, or professional designation, often called simply certification or qualification, is a designation earned by a person to assure qualification to perform a job or task...
offered by the Global Association of Risk Professionals
Global Association of Risk Professionals
The Global Association of Risk Professionals is an international not-for-profit organization founded in 1996 by Marc Lore and Lev Borodovsky...
. To be awarded the FRM designation, candidates must complete two rigorous examinations that cover the major topics in financial risk management
Financial risk management
Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc...
, demonstrate two years' professional work experience in financial risk management, and meet other requirements.
The FRM designation
The FRM is a qualification for risk management professionals, particularly those who are involved in analyzing, controlling, or assessing potential credit riskCredit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
, market risk
Market risk
Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices...
, and liquidity risk
Liquidity risk
In finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss .-Types of Liquidity Risk:...
as well as non-market related financial risks. FRM holders perform a broad variety of functions related to risk management within investment banks, asset management firms, as well as in corporations and government agencies. Top employers of FRM holders include global financial services firms Deutsche Bank
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
, HSBC
HSBC
HSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...
, and UBS, as well as auditing firms KPMG
KPMG
KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....
, Ernst & Young
Ernst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
(EY) and PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
(PwC).
History and growth
GARP first awarded the FRM designation in 1997.Candidate enrollment in the FRM program has grown rapidly: between 2001 and 2010, registration increased at a compound annual rate of more than 25%.
Growth has occurred not just in the United States but also in Europe and Asia: today, more than 70% of FRM holders reside outside of the United States. Top territories of residence for FRM holders include the United Kingdom, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, and Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
.
While the financial crisis of 2007–2010 resulted in a dramatic downturn in overall financial services employment, the effect has been opposite in the field of risk management: the bankruptcy of Lehman Brothers
Bankruptcy of Lehman Brothers
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S...
and the collapse of other large financial institutions underscored the need to accurately price the risk inherent in 21st century financial products and markets. The financial crisis has given a greater role to financial risk professionals, and driven further demand for skilled financial risk managers and the FRM designation.
As of September 2010, GARP had more than 101,000 members in 90 countries around the world, including more than 26,000 certified FRM holders. The FRM is a globally recognized benchmark certification program for financial risk managers, and is considered by many to be the defacto global qualification in the practice of financial risk management.
Requirements
The basic requirements for becoming certified as a Financial Risk Manager include passing scores on both the Part I and Part II exams, as well as a minimum of two years' full-time work experience in financial risk management related positions including portfolio management, risk consulting, and other fields.Curriculum
The FRM curriculum is based on a candidate body of knowledge as defined by the Global Association of Risk Professionals. The FRM Committee, a panel of leading risk practitioners, develops and oversees the FRM program. The FRM curriculum emphasizes the practical applications of risk management theory, and ensures that candidates have firm knowledge of the major areas of financial risk management.The Financial Risk Manager Handbook, written by risk management expert Philippe Jorion, is the primary text for the FRM curriculum. The handbook covers the core body of knowledge for financial risk managers, covering such topics as:
- Market, credit, operational, liquidity, and integrated risk management
- Quantitative methods
- Capital markets
- Investment management and hedge fundHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
risk - Relevant regulatory and legal issues essential to risk professionals
The FRM syllabus is dynamic and changes every year to reflect recent events in the global financial market
Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
s.
Exams
The FRM Exams are intended to thoroughly assess a financial risk manager’s ability to measure and manage risk in a real-world environment.The FRM exams are administered on a single day twice a year, on the third Saturdays in May and November. In 2011, the FRM exams are scheduled for May 21 and November 19.
The November 2010 FRM exam was administered at exam sites in 48 different countries.
The FRM exams are administered on paper. All questions are multiple choice
Multiple choice
Multiple choice is a form of assessment in which respondents are asked to select the best possible answer out of the choices from a list. The multiple choice format is most frequently used in educational testing, in market research, and in elections-- when a person chooses between multiple...
; each question has 4 answer choices. There are no penalties for wrong answers.
The questions in the exams are structured in the context of situations that financial risk managers face every day. The information needed to answer each question is contained within the question or vignette.
Only certain models of Texas Instruments (BA II Plus) and Hewlett Packard (10B II, 20B, and HP-12C) calculators may be used.
In addition to the official curriculum materials from GARP, study materials for the FRM exams are available from a number of third party providers, including Schweser
Schweser
Schweser is a division of Kaplan, Inc. best known for providing review materials for various certification programs in finance, including the Chartered Financial Analyst , Financial Risk Manager and Chartered Alternative Investment Analyst examinations...
and Christian H. Cooper
Christian H. Cooper
Christian Cooper is an author, trader and independent film producer living in New York City. He is the Head of USD Derivatives Trading at Jefferies & Co. in New York City and is a frequent commentator in the Wall Street Journal, Reuters, Financial Times, and Bloomberg News. He is the author of...
. GARP recommends 150–200 hours of study for each part of the exam.
Transition to a 2-part exam
In November 2009, the FRM exam was offered for the last time in a one level ("full") examination format.Beginning with the May 2010 exam window, the FRM Exam transitioned from a one-part to a two-part exam. The FRM exams now consist of two exams, FRM Part I and FRM Part II.
Each exam consists of a single four-hour session. Candidates may choose to sit for both parts on the same day, however if a candidate fails Part I their Part II exam will not be graded.
FRM Part I Exam
The Part I exam is administered on FRM exam days in a single four-hour session from 8:00am to 12:00pm.The Part I exam covers core areas of risk management, such as quantitative analysis, financial markets and products, and essential risk modeling.
The exam consists of 100 multiple-choice questions, and tests a candidate’s knowledge base in four main topic areas, weighted as follows:
| Weight | Topic |
|---|---|
| 20% | Foundations of Risk Management Risk management Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities... |
| 20% | Quantitative Analysis |
| 30% | Financial market Financial market In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and... s and Products |
| 30% | Valuation and Risk models |
FRM Part II Exam
The Part II exam is administered on FRM exam days in a single four-hour session from 2:00pm to 6:00pm.The Part II exam covers specific topics on the practical implementation and execution of measurement and management of market, credit and operational risk, as well as a section covering current issues in financial markets.
The exam consists of 80 multiple-choice questions, and tests a candidate’s knowledge base in five main topic areas:
| Weight | Topic |
|---|---|
| 25% | Market Risk Market risk Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices... Measurement and Management |
| 25% | Credit Risk Credit risk Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk.... Measurement and Management |
| 25% | Operational and Integrated Risk Management |
| 15% | Risk Management and Investment Management Investment management Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors... |
| 10% | Current Issues in Financial market Financial market In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and... s |
Historical pass rates
The FRM exams are considered to be among the most challenging in finance: fewer than 25% of candidates are able to clear both Part I and Part II exams on first attempts.| 2-Part Exam | 1-Part Exam | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year | May 2011 | Nov 2010 | May 2010 | Nov 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 |
| Part I | 53% | 39% | 53% | 55% | 44% | 42% | 44% | 45% | 44% | 53% | 54% | 59% | 63% | 53% | 54% | 43% | 37% |
| Part II | 62% | 55% | 54% | -- | |||||||||||||
See also
- Chartered Financial AnalystChartered Financial AnalystThe Chartered Financial Analyst Program is a graduate level self-study program offered by the CFA Institute to investment and financial professionals...
(CFA) - Certified Public AccountantCertified Public AccountantCertified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
(CPA) - Certified Financial PlannerCertified Financial PlannerThe Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
(CFP) - Chartered Alternative Investment AnalystChartered Alternative Investment AnalystChartered Alternative Investment Analyst is a professional designation offered by the CAIA Association to investment professionals who complete a course of study and pass two examinations. The "alternative investments" industry is characterized as dealing with asset classes and investments other...
(CAIA)