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

A broker-dealer settles a bond trade today on a conventional T+2 cycle, leaving it exposed to its counterparty for two days between trade and settlement. It is considering a tokenized platform that offers atomic settlement. Which risk is most directly reduced by atomic settlement?

Atomic settlement mainly reduces principal (settlement) risk, because the asset and payment legs execute as one indivisible transaction. Either both transfer or neither does, so one party cannot deliver while the other defaults. Market, model and regulatory risks are not changed by this feature.

  1. APrincipal risk arising from one leg being delivered without the otherCorrect
  2. BInterest rate risk on the bond's coupon
  3. CModel risk in the bond's pricing methodology
  4. DRegulatory risk from changes in disclosure rules

Explanation

Atomic settlement makes the exchange of asset and payment a single indivisible operation, so either both legs occur or neither does. This removes the chance that one party delivers and the other fails to. Interest rate, model and regulatory risks are unaffected by how the transfer is executed.

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