Financial Risk Manager (FRM)

What is FRM?

FRM stands for Financial Risk Manager. Offered by Global Association of Risk Professionals (GARP), FRM certification sets you apart in the global marketplace and gives you a strong understanding of the underlying risk management concepts in today’s ever-changing financial markets. It also lets employers know that you take risk management seriously and that your knowledge has been validated by international professional standards.

To earn your FRM certification, you need to:

  • Take and pass the FRM exams. There are no degree or work requirements for taking the exams.
  • Work full-time in a financial risk role for 2 years.
  • Demonstrate your experience to GARP by describing your professional role in financial risk management and submitting it to GARP within 5 years of passing Part II.

The topics of the FRM exams are:

TheFoundations of Risk Management (Weightage: 20%)

This section introduces you to Financial Risk Management – risk terminology, risk categories and types. Spanning a set of around 14 readings, this section also exposes candidates to value creation through risk management and financial disasters that have their roots in the lack of or misguided applications of risk management principles. Readings also focus on basics of finance theory (analysis and evaluation of securities in portfolio context, performance evaluation and arbitrage pricing theory) for benefit of candidates who do not have prior exposure to these topics. Barring these readings, this section is relatively light on formulas and more focused on providing you with a big picture view of the risk management function.

TheQuantitative Analysis (Weightage: 20%)

This section introduces various quantitative techniques. Spanning around 15 readings, topics include random variables, distributions, statistical inference and hypothesis testing, econometrics, time series analysis and numerical methods (e.g. simulation methods, volatility estimation). Although relatively underweighted at 20%, it is a very important section as it underpins other sections of Part I and Part II curriculum. Preparation strategy should involve reading up these topics from the right source (not summarized notes) and lots of practice.

TheFinancial Markets and Products (Weightage: 30%)

The most voluminous section of the four, this section is worthy of a bigger allocation of your preparation time. It spans around 20 readings that cover topics in mechanics of OTC and exchange markets, introduction to various instruments (features, payoffs, pricing) and their applications (hedging and trading strategies). These readings truly form the foundation of Part II – only if these financial products are mastered fully will the candidate be able to understand and appreciate the risks (market risk, credit risk, model risk) stemming from their use. Again, preparation strategy should involve picking the right source for mastering the concepts, backed strongly with practice.

TheValuation and Risk Models (Weightage: 30%)

This section builds on the three sections above and it’s 17 readings can be effectively split into two sub-categories- a) Valuation b) Risk Management. The valuation subsection takes you through valuation methods for options (binomial trees, closed form models like Black Scholes along with calculation of sensitivities or ‘greeks’) and for fixed income securities (including estimating single factor and multi factor risk sensitivities). The risk management sub-section includes readings that introduce you to types of risk (credit risk, operational risk) and to risk measures used for quantifying risk (VaR, Estimated Shortfall, Stress Testing). This sub-section should give the candidate a true flavor of what lies ahead in Part II. Since this section is highly conceptual and relatively overweighted at 30%, preparation strategy should include adequate time spent on achieving a thorough understanding of all topics.

Market Risk Management (25%)

This section tests a candidate’s knowledge of market risk measurement and management techniques. These include:
  • Fixed-income interest rate sensitivities
  • Volatility exposures
  • Value-at-Risk (VaR) and back testing VaR
  • Expected shortfall (ES)
  • Correlations and copulas
  • Parametric and non-parametric estimation methods
  • Extreme value theory (EVT)
  • Exotic options and mortgage-backed securities

Operational and Integrated Risk Management (25%)

This section of FRM Part 2 November syllabus addresses a candidate’s knowledge of two areas of increasing importance for many firms—operational risk management and integrated risk management. This includes:
  • Coverage of the tools and techniques necessary to measure, manage, and mitigate operational risk
  • Economic capital allocation
  • Enterprise risk management (ERM)
  • Knowledge of critical issues related to liquidity risk management, model risk, loss data modelling and IT infrastructure, stress testing, and risk appetite
  • Importantly, this section also tests a candidate’s knowledge of key regulations and the major international regulatory frameworks relevant to risk managers today, such as Basel

Credit Risk Management (25%)

This area focuses on a candidate’s understanding of credit risk management with some focus given to structured finance and credit products such as collateral debt obligations and credit derivatives. Knowledge of counter party risk is also tested, as well as default risk and methodologies used to measure it, such as Credit VaR. Risk Management and Investment Risk Management (15%) This area focuses on a candidate’s knowledge of risk management techniques applied to the investment management process. Topics such as portfolio construction and performance analysis are covered, as well as risk budgeting and portfolio and component VaR. Issues related to hedge funds and private equity investments are also covered.

Current Issues in Financial Markets (10%)

The candidate is expected to familiarize him/herself with the readings from this section,approaching each paper critically as a risk manager equipped with the knowledge from the other sections. This area of the Exam will test a candidate’s knowledge of the material covered by each paper. Recent topics have included:
  • Sovereign Risk and Financial Crisis
  • Flash Crash
  • Financial Innovation and Its Issues
Both Part I and Part II of the exam are offered in May and November. The format of both parts is multiple-choice. The cost ranges from $750 to $1050 for each part, based on when you register. Part of the registration is a $400 enrolment fee. Of those who took Part I and Part II between 2010–2017, the average pass rate for Part I was 46% and 57% for Part II.