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

A risk analyst at an asset manager reviews why a cross-border bond purchase takes two business days to settle, with cash and securities moving through several custodians and intermediaries. In the context of tokenization, which friction in traditional markets is this MOST directly an example of?

The two-day settlement with several custodians is a settlement delay caused by fragmented, sequential post-trade processing. Tokenization targets this friction by enabling atomic settlement on a shared ledger, so securities and cash exchange together, instead of passing through multiple intermediaries each maintaining separate records.

  1. ASettlement delay arising from sequential, fragmented post-trade processing across intermediariesCorrect
  2. BPrice discovery failure caused by the absence of a central limit order book
  3. CInformation asymmetry about issuer creditworthiness
  4. DMandatory minimum tick sizes set by exchanges

Explanation

Delayed settlement with multiple custodians and intermediaries reflects fragmented, sequential post-trade processes. Tokenization aims to reduce this through atomic, near-simultaneous settlement on a shared ledger. The other options describe different issues unrelated to the post-trade chain.

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