FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement
A bank participates in a deferred net settlement (DNS) payment system with a single end-of-day settlement. Compared with a real-time gross settlement (RTGS) system, which statement is correct?
Deferred net settlement saves liquidity because only net obligations are settled at the cycle end, but participants carry credit exposures to each other during the interval. RTGS has the opposite profile, needing more liquidity but giving immediate finality and little intraday credit exposure.
- ADNS economises on liquidity but creates credit exposures between participants during the dayCorrect
- BDNS requires more intraday liquidity because each payment is settled gross
- CDNS eliminates credit exposure because payments are netted
- DDNS settles each payment individually with immediate finality
Explanation
In DNS, payments are accumulated and only net positions settle later, so liquidity needs are lower. However, participants extend implicit credit to each other until settlement. RTGS settles gross in real time, needing more liquidity but limiting credit exposure.
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