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

A regulator is assessing how tokenization of securities could affect market structure. Which of the following is the most commonly cited mechanism by which tokenization may reduce inefficiencies in post-trade processes?

Atomic settlement is the key mechanism. By linking the asset transfer and the payment on a shared ledger, tokenization can shorten settlement times and reduce counterparty exposure. It does not remove the need for legal frameworks, guarantee premium pricing or eliminate liquidity risk.

  1. AAtomic settlement on a shared ledger that links the transfer of the asset and the payment, reducing settlement lag and counterparty exposureCorrect
  2. BEliminating the need for any legal framework governing ownership of the underlying asset
  3. CGuaranteeing that all tokens trade at a price above the value of the underlying asset
  4. DRemoving all liquidity risk because tokens can be transferred twenty-four hours a day

Explanation

Tokenization on a shared programmable ledger can allow delivery-versus-payment to occur atomically, shortening settlement and reducing counterparty and settlement risk. Legal ownership frameworks are still required, tokens do not systematically trade at a premium, and round-the-clock transfer does not remove liquidity risk.

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