Treasury, market risk and liquidity risk audit
What the exam tests
This domain tests controls over treasury dealing, market risk measurement and liquidity risk management. Expect questions on segregation of duties, limit monitoring, independent price verification, VaR backtesting and liquidity ratios.
Core rules and concepts
- Treasury must segregate front office (dealing), middle office (risk measurement and limit monitoring) and back office (settlement, confirmation and reconciliation).
- Deal controls include timely deal capture, independent confirmation, approved counterparties, accurate revaluation and exception reporting.
- Market risk limits cover position, sensitivity, stop-loss and VaR. Independent price verification tests trader marks against external sources.
- IRRBB and liquidity risk are reviewed separately from trading risk. LCR and NSFR must meet at least 100% under the Basel liquidity framework applied by BNM.
- Stress testing and a contingency funding plan must be plausible, board-approved and tested.
Worked example
A bank uses a 99% one-day VaR model backtested over 250 days. The auditor finds six exceptions. Under the Basel traffic-light approach, 5 to 9 exceptions fall in the yellow zone, not the green zone. The auditor does not simply accept the model. The auditor tests whether exceptions were investigated, whether the model was recalibrated, whether limits were breached, and whether the results were escalated to the risk committee. The conclusion links backtesting exceptions to model validation and limit governance.
Traps
- Checking limits only after trades are executed.
- Relying on trader marks without independent price verification.
- Auditing trading book VaR but ignoring banking book IRRBB.
- Treating LCR as a month-end reporting exercise rather than a daily risk measure.