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

A fund manager notes that a corporate bond is held through a chain of custodians and sub-custodians before reaching the end investor. Which friction does this multi-layer chain most clearly add?

Layered custody chains add reconciliation burden and operational risk, because each intermediary maintains its own record of ownership and these records are not synchronised. This produces delays, errors, higher costs and opacity, which are frictions tokenization aims to reduce with a shared ledger.

  1. AHigher reconciliation burden and operational risk from multiple, non-synchronised records of ownershipCorrect
  2. BElimination of all settlement fails
  3. CReduced need for legal title checks
  4. DInstant atomic settlement of the trade

Explanation

Each intermediary keeps its own record, so records must be reconciled, raising operational errors, delays and costs. Chains do not remove fails, reduce legal diligence, or give atomic settlement.

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