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

A repo desk trades a large volume of overnight repos each day. Under the current process, collateral is delivered late in the day and the cash lender must fund a daily intraday credit line to cover the gap. The desk moves to a tokenized platform with atomic delivery-versus-payment and near-continuous settlement. What is the most likely effect on the desk's liquidity risk profile?

Intraday liquidity buffers can be lower. Intraday credit and buffers mainly cover the timing gap between delivering collateral and receiving cash. Atomic, near-continuous settlement shrinks or removes that gap, so less intraday funding is required, although participants must still have assets pre-positioned for each swap.

  1. ALower intraday liquidity buffers are needed because settlement timing gaps shrinkCorrect
  2. BHigher intraday liquidity buffers are needed because settlement becomes irreversible
  3. CNo change, because atomic settlement only affects the custody of collateral
  4. DHigher collateral haircuts are needed because counterparties are anonymous

Explanation

Intraday credit lines and buffers exist largely to bridge the time gap between delivering one leg and receiving the other. Atomic, near-continuous settlement narrows that gap, which reduces the intraday funding need. Irreversibility does not increase the buffer need for a fully pre-funded swap, and anonymity is not a feature that follows from atomic settlement.

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