Asset Quality

Methodologies Sub-Methodologies
1

Introduction

The Credora Asset Quality Sub-Methodology assesses risks that may lead to a decline in the fair value of reserve assets, arising from credit defaults or losses from underlying investment strategies. Part of the Sub-Methodology Layer of the Credora Token Rating Framework, the output of this sub-methodology is the Asset Quality PD.

Key Sections

Below is an overview of the core sections covered in the methodology document:

  1. Evaluation Techniques: The following evaluation techniques are applied for different types of tokens:

    • Direct Rating: Applied to reserve assets that are themselves tokens (e.g. stablecoins).
    • Market Proxy: Uses credit ratings from external agencies for low volatility real-world assets (e.g. U.S. Treasury Bills).
    • Monte Carlo Simulations: Assesses reserve value volatility of alternative assets through market simulations.
    • Structural Credit Modelling: Uses variations of the Merton Model to evaluate reserves deployed in active investment strategies (e.g. hedged derivative positions).

  2. Real-World Assets (RWA): RWA tokens are backed by off-chain assets such as fiat, commodities, or fixed-income instruments. The sub-methodology focuses on evaluating credit risks employing a market proxy approach, using aggregations of public ratings for the underlying assets.

  3. Alternative Assets: These tokens hold reserves in multiple asset types, including cryptocurrencies and traditional assets. Risks for these tokens include:

    • Credit deterioration of reserve assets.
    • Decline in market value of reserve assets.
    • Illiquidity of the reserve assets.

    Monte Carlo simulations are used to assess the risk of these tokens, modelling potential future scenarios for collateral assets to calculate the probability that the value of reserve assets falls below the Redemption Value.

  4. Active Strategy: Tokens that maintain value using collateral or specific trading strategies (e.g. USDe) to manage reserve assets. Risks for these tokens include:

    • Decline in value of reserve assets.
    • Mismanagement of reserves.
    • Illiquidity of underlying assets.

    A version of the Merton Model, known as the Black-Cox Model, is used to calculate the probability that per unit reserve value falls below the Redemption price. Using historical data, multiple scenarios of the model are applied to capture a range of potential results that are then aggregated into a final output.

  5. Framework Integration: Outputs are used as an input to the Anchor PD of the Stablecoin methodology within the Calibration Layer evaluation.

Access the Full Documentation

You can view the complete Asset Quality Sub-Methodology on Gitbook.

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