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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A risk manager compares real-time gross settlement (RTGS) with a deferred net settlement (DNS) payment system. Which statement is correct?

Deferred net settlement uses less liquidity because only net positions settle at set times, but participants bear credit exposure to one another until settlement, and a failure can unwind the netting. RTGS settles each payment gross and final, reducing credit exposure but needing more intraday liquidity.

  1. ADNS economises on liquidity but creates credit exposure between participants until net settlement occursCorrect
  2. BRTGS creates credit exposure between participants during the day because payments are held until the end of day
  3. CDNS removes all credit exposure because positions are netted
  4. DRTGS requires less intraday liquidity than DNS because payments are netted

Explanation

DNS settles net positions at set times, so liquidity needs are lower but participants are exposed to each other until then, and a failure may unwind the netting. RTGS settles each payment individually with finality and uses more liquidity. The other options reverse these properties.

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