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

A risk officer at a custodian bank reviews why a cross-border securities trade takes two business days to settle under the traditional T+2 model. Which feature of traditional market infrastructure most directly creates counterparty and settlement exposure during this period?

Settlement exposure arises because securities and cash are recorded on separate ledgers run by different intermediaries, so delivery and payment are reconciled sequentially over days. During that gap each side faces counterparty and settlement risk, which atomic same-ledger settlement through tokenization aims to reduce.

  1. AThe delivery of the security and the payment occur on separate ledgers and are reconciled through intermediaries over timeCorrect
  2. BSecurities are always issued in fractional units that cannot be traded
  3. CTrades are executed only on a single global exchange
  4. DInvestors hold securities directly without any custodian

Explanation

In traditional markets, securities and cash sit on separate ledgers maintained by different intermediaries, so settlement requires sequential messaging and reconciliation. This gap leaves each party exposed to the other's failure until completion. The other options describe features that are not characteristic of traditional infrastructure.

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