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

A tokenized bond platform embeds coupon payments in a smart contract that automatically transfers cash tokens to holders on each coupon date, and restricts transfers to whitelisted investors. A risk manager wants to describe the main efficiency benefit of this programmability. Which description is most accurate?

Programmability lets smart contracts execute coupon payments and transfer restrictions automatically, cutting manual reconciliation and operational processing. It does not change the issuer's creditworthiness, remove the need for legal documentation, or ensure prices equal fundamental value.

  1. AIt lets contract logic execute payments and compliance checks automatically, reducing manual reconciliation and operational processingCorrect
  2. BIt guarantees that the issuer cannot default on coupon obligations
  3. CIt removes the need for any legal documentation of the bond
  4. DIt ensures the bond price is always equal to its fundamental value

Explanation

Programmability embeds rules such as coupon payment and eligibility in code, automating servicing and reducing reconciliation and manual error. It does not alter issuer credit quality, replace legal documentation, or ensure efficient pricing. The default guarantee option confuses automation with credit support.

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