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

A regulator is assessing a proposal to let tokenized money market fund shares be used as collateral in a 24/7 on-chain repo market. Which feature of tokenization most directly raises the risk that stress could spread faster than in a conventional T+1 settlement environment?

Atomic, round-the-clock settlement and redemption most directly speeds up stress transmission. Participants can exit or demand collateral instantly, leaving less time for liquidity management, which can accelerate run dynamics. Transparency, programmability and disintermediation are mainly efficiency features rather than the primary source of faster contagion.

  1. AAtomic, round-the-clock settlement that lets participants withdraw or redeem instantlyCorrect
  2. BFull transparency of ownership records on a shared ledger
  3. CProgrammable transfer restrictions embedded in the token
  4. DReduction in the number of intermediaries in the settlement chain

Explanation

Instant, continuous settlement and redemption compresses the time available for liquidity management and can accelerate runs, especially when assets are used as collateral across venues. Transparency, programmable restrictions and fewer intermediaries are generally cited as efficiency or risk-reducing features, not the main contagion speed amplifier.

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