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

A regulator is assessing a tokenized money market fund whose shares are recorded on a public blockchain and can be transferred around the clock. Which feature of tokenization most directly supports the argument that it can reduce settlement-related counterparty risk in secondary trading?

Atomic settlement is the feature that reduces settlement counterparty risk. Because the asset and payment legs move together or not at all, neither party can be left exposed after delivering while the other fails to perform, which removes the gap that creates principal risk.

  1. AAtomic settlement, where asset and payment legs transfer simultaneously or not at allCorrect
  2. BPseudonymous wallet addresses that hide the identity of holders
  3. CHigher token issuance volumes that increase trading activity
  4. DThe ability to trade only during traditional market hours

Explanation

Atomic delivery-versus-payment settlement removes the window in which one party has delivered and the other has not, which lowers principal and replacement risk. Pseudonymity does not reduce counterparty risk and may raise compliance concerns. Trading volume and trading hours are unrelated to the settlement mechanism.

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