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FRM Part II · FRM Exam Part II · Tokenization and Financial Market Inefficiencies

A broker-dealer currently settles a securities trade on T+2 through a central securities depository, with the cash and securities legs processed in separate systems. It is considering a tokenized platform where the security token and a cash token are exchanged in a single indivisible transaction on a shared ledger. Which risk is most directly eliminated by this atomic settlement design?

Atomic settlement removes principal risk, because the security and cash legs are exchanged in one indivisible transaction. Either both legs complete or neither does, so a party cannot deliver its asset and then fail to receive the counter-asset. Market, model and legal risks remain.

  1. APrincipal risk arising from one leg delivering while the other fails to deliverCorrect
  2. BMarket risk from price changes between trade date and any later date
  3. CModel risk from the valuation methodology used for the security
  4. DLegal risk from differing insolvency regimes across jurisdictions

Explanation

Atomic settlement means both legs execute together or neither does, so one party cannot deliver without receiving the counter-leg. This removes principal (Herstatt-type) settlement risk. Market risk may fall as the settlement period shortens, but atomicity itself does not remove it, and legal and model risks are unaffected.

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