Risk Management and Conduct
What this domain tests
This section tests whether you can identify the risks in a fixed-income business and apply conduct controls: client money, conflicts, complaints and escalation.
Risk categories
Market risk includes interest-rate and spread risk. Credit risk is the risk an issuer fails to pay. Liquidity risk is the risk of being unable to sell at a fair price, which is material in less-traded corporate bonds. Operational risk covers process, systems and people failures. Conduct risk arises from incentives, mis-selling and poor treatment of clients. Concentration risk applies at both client and firm level.
Conduct controls
Client money must be held in trust or a separate client account, not used for the firm's own purposes. Conflicts must be identified, disclosed and managed. Complaints need a clear process and timely response. Staff should escalate breaches rather than resolve them informally.
Worked example
A firm deposits client application money into its own operating account and uses it temporarily for working capital. Even if the money is later repaid, this is a serious conduct and custody breach: client money must be segregated. The correct control is a dedicated client account with reconciliation, dual authorisation and independent oversight.
Traps that cost marks
Treating market risk and credit risk as the same; ignoring liquidity in thin corporate bonds; assuming repayment cures a client-money breach; and failing to escalate a conflict because no loss occurred.