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

A securities firm settles a tokenized bond trade against tokenized cash on the same ledger, with the two transfers executing as a single indivisible operation through a smart contract. Which risk is most directly reduced by this design compared with a traditional T+2 process?

Atomic delivery-versus-payment on a shared ledger mainly reduces principal settlement risk, because the securities and cash legs either both complete or both fail. It does not alter interest rate risk, valuation model risk or issuer concentration.

  1. APrincipal settlement risk, because delivery and payment succeed or fail togetherCorrect
  2. BInterest rate risk on the bond, because the coupon is fixed by the contract
  3. CModel risk in the bond valuation, because the ledger validates prices
  4. DConcentration risk in issuers, because tokens are divisible

Explanation

Atomic settlement means delivery occurs only if payment occurs, eliminating the exposure where one leg is delivered and the other fails. It does not change interest rate exposure, valuation model risk or issuer concentration.

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