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

A trading desk compares a traditional securities settlement chain, with a trade followed by T+2 settlement through intermediaries, to a tokenized platform offering atomic settlement. Which is the primary risk reduction directly attributable to atomic settlement?

Atomic settlement reduces settlement or principal risk because the asset and payment legs execute together or not at all. This removes the exposure window of a delayed settlement chain. It does not remove market risk, smart contract risk, or guarantee secondary market liquidity.

AElimination of market risk on the security held
BLower principal (settlement) risk, because delivery and payment occur simultaneously or not at allCorrect
CRemoval of operational risk from smart contract coding errors
DGuaranteed liquidity in the secondary market

Explanation

Atomic settlement links the asset leg and the payment leg so that both occur or neither does, which reduces principal risk and counterparty exposure during the settlement window. Market risk remains, smart contract risk is added rather than removed, and liquidity is not guaranteed.

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