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

A risk manager reviews a tokenized collateral platform where margin calls are triggered and settled automatically by smart contracts whenever exposure crosses a preset threshold. Which concern is most specific to this programmable design during a sharp market sell-off?

The main concern is that automated, simultaneous margin calls can amplify procyclical liquidity demands in a sell-off and leave little room for discretionary intervention. Programmability speeds up collateral movements, so stress can propagate faster, whereas the other options describe problems that tokenization does not create.

  1. AAutomated, simultaneous margin calls could amplify procyclical liquidity demands and leave little time for discretionary interventionCorrect
  2. BMargin calls could never be met because tokens cannot be transferred
  3. CCollateral would be double-pledged because tokens are not unique
  4. DMargin would be calculated using stale prices since settlement is slow

Explanation

Automation speeds up and synchronizes collateral movements, so in stress many participants may face calls at once, intensifying procyclical liquidity strain with little room for judgment. Tokens can be transferred, a single token is not pledged twice on a well-functioning ledger, and fast settlement reduces rather than increases staleness.

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