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

A broker-dealer settles a bond trade through a conventional chain of custodians and clearing agents, which takes two days after the trade date. It is considering a tokenized platform in which the bond token and the cash token are exchanged in a single indivisible transaction. Which risk is most directly eliminated by this atomic settlement feature?

Atomic settlement removes principal (settlement) risk, because the securities token and cash token swap in one indivisible transaction. Either both legs complete or neither does, so one party cannot deliver without receiving payment. Issuer credit, interest rate and legal risks are unaffected.

  1. APrincipal risk arising from one leg of the trade being delivered without the otherCorrect
  2. BIssuer credit risk on the underlying bond
  3. CInterest rate risk on the bond between trade and settlement dates
  4. DLegal risk from differing insolvency regimes across jurisdictions

Explanation

Atomic settlement makes delivery and payment happen together or not at all, which removes the chance that one party delivers and the other fails to pay. It does not change the issuer's creditworthiness, the bond's price sensitivity to rates, or the legal framework governing the asset.

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