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

A trading firm executes 1,000 trades per day, each with notional USD 10 million. Under a T+2 settlement cycle, the firm's average unsettled exposure equals two days of trading, and it holds capital against settlement exposure at 0.5% of average unsettled notional. If it moves entirely to atomic settlement so that unsettled exposure is effectively zero, what capital would be released, assuming daily volumes are constant and unsettled notional is two full days of trades?

The firm would release USD 100 million of capital. Daily notional is USD 10 billion, two days unsettled is USD 20 billion, and 0.5% of that is USD 100 million. With atomic settlement unsettled exposure falls to zero, so the entire settlement capital charge is no longer needed.

  1. AUSD 100 millionCorrect
  2. BUSD 50 million
  3. CUSD 20 million
  4. DUSD 10 billion

Explanation

Daily notional is 1,000 x USD 10 million = USD 10 billion. Two days unsettled gives USD 20 billion. At 0.5%, capital is USD 100 million. Atomic settlement brings unsettled exposure to zero, releasing USD 100 million. USD 50 million wrongly uses one day of notional (10 billion x 0.5%); USD 20 million wrongly applies a 0.1% rate; USD 10 billion is a base error.

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