【FRM Part I】 Introduction to FRM

What is Financial Risk Manager (FRM)?

• A professional designation issued by the Global Association of Risk Professionals (GARP). 
• Globally recognized along with other designations such as Chartered Financial Analyst (CFA).
• Specializes in assessing risk.

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Requirements

In order to obtain FRM designation, all of the three requirements below must be met.

• Pass FRM Exam Part I
• Pass FRM Exam Part II within 4 years of passing Part I
• Demonstrate 2 years of professional full-time financial risk management work experience

※ Unlike CFA, FRM does not require work experience or undergraduate degree

※ Both parts can be taken on a single day, but Part I must be passed to pass Part II.

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Trend

"Risk" became a hot potato following the Subprime Crisis in 2007. Combined with the recent developments in big data, AI, and accessible data analytics software, risk functions that were once cost-ineffective and even unthinkable are increasing in demand. 

In accordance to the drastically changing landscape in risk and investment profession, the number of FRM test takers have been increasing at 15~20% every year. Notably, number of Chinese national test takers have increased by 40~50% with approximately 20,000-30,000 taking FRM each year.

Pass Rate & Preparation Time

According to Bionic Turtle, one of FRM education services, the average pass rates for Part I is 45.9% and Part II is 56.4%. Please take note that Part II takers are not necessarily the passers of Part I, as both Parts can be taken on the same test date. However, these statistics are overall summary of all test takers (1) prepared by the interest parties that benefit from increase number of test takers (study material providers or administrating institution) and (2) without consideration of their background or nationality. Another source identifies that final pass rate is likely to be less than 20%; for non-English speaking nationals, 5~8%. 

Source: https://www.bionicturtle.com/forum/forums/about-frm.2/

Difficulty (Relative to Other Professional Designations)

This is a diagram shared by 300Hours.com on difficulty levels of financial qualifications. 

Based on my personal experience preparing all of FRM and CFA examinations, this diagram closely depicts the level of difficulty for each exam. If I were to break down FRM into two parts, I would position Part I in between Level 6 and Level 7, FRM Part 2 between Level 7 and Level 8, as shown in another diagram below.

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Curriculum

FRM covers a vast range of topics related to financial products and risk. At a high-level, Part I introduces the risk management principles and techniques to measure the risks posed by financial products or vehicles. More or less, Part I is focused on the risks fundamental to individual financial product and position. The coverage is particularly relevant to risk analysts' work. Part II expands the coverage to the risks posed as a portfolio or even as an enterprise, such as credit risk, liquidity risk, and operational risk. However, it would be helpful to know that Part II includes all information from Part I.

FRM Part I

1. Foundation of Risk Management
• Risk Types, Measurement, and Management Tools
• Risk Governance and Corporate Governance
• Credit Risk Transfer Mechanisms
• Capital Asset Pricing Model (CAPM)
• Modern Portfolio Theory (MPT)
• Arbitrage Pricing Theory (APT)
• Multifactor Models of Risk and Return
• Data Aggregation and Risk Reporting
• Enterprise Risk Management
• Financial Disasters and Risk Management Failures, case study
2. Quantitative Analysis
• Discrete and Continuous Probability Distributions
• Estimating parameters of distributions
• Population and sample Statistics
• Bayesian Analysis
• Statistical Inferences and Hypothesis Testing
• Measures of Correlation
• Linear Regression with Single and Multiple Regressors
• Stationary and Non-Stationary Time Series
• Simulation and Bootstrapping
3.  Financial Markets and Products
• Structure and Functions of Financial Institutions (Banks, Insurance, Pensions)
• Structure and Mechanics of over-the-counter (OTC) and exchange markets
• Structure, mechanics and valuation of forwards, futures, swaps and options
• Hedging with derivatives
• Interest Rates and Measures of Interest Rate Sensitivity
• Foreign Exchange Risk
• Corporate Bonds
• Mortgage-backed Securities
4. Valuation and Risk Management
• Value-at-Risk (VaR)
• Expected Shortfall (ES)
• Volatility and Correlation Estimation
• Economic and Regulatory Capital
• Stress Testing and Scenario Analysis
• Option Valuation
• Binomial Trees
• Black-Scholes-Merton (BSM) Model
• Option Sensitivity Measures "Greeks"
• Fixed Income Valuation
• Hedging
• Country and Sovereign Risk Models and Management
• External and Internal Credit Ratings
• Expected and Unexpected Losses
• Operational Risk

FRM Part II

1. Market Risk Measurement and Management
• VaR and other Risk Measures
• Parametric and non-parametric methods of estimation
• VaR Mapping
• Backtesting VaR
• Correlation Modeling (Bottom-Up)
• Expected Shortfall (ES) and other coherent risk measures
• Extreme Value Theory (EVT)
• Modeling dependence: correlations and copulas
• Term Structure Models of Interest Rates
• Drift and Vasicek Model
• Volatility: Smiles and Term Structures
• Fundamental Review of the Trading Book
2. Credit Risk Measurement and Management
• Credit Decision and Analysis (CAMEL system)
• Capital Structure in Banks
• Rating Assignment Methodologies
• Linear Discriminant Analysis
• Heuristic, Numeric, Artificial Neural Networks Approaches
• Credit Risk and Derivatives
• Spread Risk and Default Intensity Model
• Portfolio Credit Risk
• Structured Credit Risk
• Counterparty Risk and Intermediation
• Netting, Close-out and Related Aspects
• Collateral
• Credit Exposure and Funding
• Credit and Debt Value Adjustments
• Wrong-way Risk
• Stress Testing Counterparty Exposures (CCR)
• Credit Scoring and Retail Credit Risk Management
• Credit Transfer Markets
• Securitization
• Delinquency Ratio, Default Ratio, MPR, DSCR, WAC, WAM, WAL
3. Operational Risk and Resiliency
• Principles of Operational Risk Management
• Risk Appetite Frameworks and Enterprise Risk Management (ERM)
• Risk Culture and Conduct
• Analyzing and Reporting Operational Loss Data
• Model Risk and Model Validation
• Risk-Adjusted Return on Capital (RAROC)
• Economic Capital Frameworks and Capital Planning
• Stress Testing Banks
• Third-party Outsourcing Risk
• Risks related to Money Laundering and Financing of Terrorism
• Regulation and the Basel Accords
• Cyber Risk and Cyber Resilience
• Operational Resilience     
4.  Liquidity and Treasury Risk Measurement and Management
• Liquidity Risk Principles and Metrics
• Liquidity-Adjusted VaR (LVaR), Early Warning Indicators (EWI)
• Liquidity Portfolio Management
• Cash-flow Modeling, Liquidity Stress Testing and Reporting
• Contingency Funding Plan
• Funding Models
• Funds Transfer Pricing
• Cross-Currency Funding
• Balance Sheet Management
• Asset Liquidity
5. Risk Management and Investment Management
• Factor Theory
• Portfolio Construction
• Portfolio Risk Measures
• Risk Budgeting
• Risk Monitoring and Performance Measurement
• Portfolio-based Performance Analysis
• Hedge Funds
6. Current Issues in Financial Markets
• Blockchain
• Fintech Revolution
• Artificial Intelligence (AI), Machine Learning and "Big Data"
• Climate Change and Financial Risk
• Reference Rates

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