Skip to content

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

A fund finances a position through repo and currently pledges collateral on a T+1 cycle, leaving the dealer's collateral uncovered for part of each day. A tokenized repo uses a smart contract that moves collateral and cash simultaneously and can automatically substitute or top up collateral when margin thresholds are breached. Which is the most likely benefit for the dealer's counterparty credit exposure?

Counterparty exposure is reduced because simultaneous, automated collateral movement and margin calls shorten the lag between exposure changes and collateral coverage. Exposure is not eliminated, since tokenized collateral can still fall in value, and settlement timing does affect credit risk.

  1. AExposure is reduced because collateral transfers and margin calls occur with less delay, shrinking the gap between exposure and collateralCorrect
  2. BExposure is eliminated because tokenized collateral cannot lose value
  3. CExposure rises because smart contracts cannot be used for margin calls
  4. DExposure is unchanged because settlement timing never affects credit risk

Explanation

Faster, automatic collateral movement shortens the effective margin period of risk, so uncollateralized exposure during the lag falls. Collateral value can still change, so exposure is not eliminated. Settlement timing does matter for credit exposure, which makes the unchanged option wrong.

Did you get it right without looking?

One question tells you little. A timed set on Tokenization and Financial Market Inefficiencies shows your real accuracy, how long you take and where you lose marks.

Practise Tokenization and Financial Market InefficienciesFree diagnostic mock

More Tokenization and Financial Market Inefficiencies questions