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

A trader holds collateral in a bond that must be moved to meet a margin call at a clearing house, but the transfer cannot complete outside the settlement system's operating hours. What type of friction does this illustrate, and what is its main consequence?

This shows the friction of limited operating hours in traditional infrastructure. Collateral cannot move outside set windows, so participants must hold extra liquidity buffers or prefund positions, raising costs and liquidity risk. Continuous 24/7 settlement on tokenized platforms is proposed to ease this constraint.

  1. ALimited operating hours of infrastructure, which delay collateral mobility and can raise liquidity needsCorrect
  2. BExcess transparency, which lowers funding costs
  3. CAtomic settlement, which removes counterparty risk
  4. DPerfect interoperability across ledgers, which speeds transfers

Explanation

Legacy systems operate on fixed schedules, so assets cannot move around the clock. Delayed collateral mobility forces participants to hold extra buffers or prefund, raising liquidity costs. The other options describe features that would reduce rather than create the friction.

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