Core Methodology Concepts

Methodologies Token Rating Framework
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Introduction

The Core Methodology Concepts underpin all Credora methodologies, providing a consistent foundation for assessing risk across diverse token types and financial instruments. At the core of all methodologies is the Credora Probability of Default Curve, a uniform underlying PD curve. The curve fundamentally enables comparison of risk across various Credora methodologies as well as benchmarking Credora risk outputs to those assigned by the traditional credit rating agencies.

Key Sections

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

  1. PD Curve: The Credora PD Curve provides a uniform basis for comparing risk across various methodologies, including Derivative Tokens, Stablecoins, and general corporate issuers.

    • Derived from historical default rates spanning 1990 to 2023 across major rating agencies (S&P, Moody’s, and Fitch).
    • Uses exponential interpolation to create a probability of default curve.
    • Creates a mapping of PD outputs to implied credit ratings and associated risk scores.

  2. Anchor PD and Modifiers: All Credora methodologies share a consistent set of core components, including the determination of an Anchor Probability of Default (PD) and the application of Modifiers. The Anchor PD establishes the foundational risk level, while Modifiers adjust this baseline through notch adjustments along the Credora PD Curve, accounting for additional risk factors not captured by the Anchor PD.

    • Anchor PD: Establishes the foundational probability of default based on primary risk characteristics.
    • Modifiers: Adjust the Anchor Probability of Default (PD) to incorporate additional risk factors that are not captured in the initial baseline assessment.

  3. Anchor PD Determination: Anchor PD evaluations are tailored to the unique characteristics of the asset, issuer, or structure under evaluation, ensuring the baseline risk reflects the specific factors relevant to each token category.

    • Stablecoins: Based on Asset Quality and Custody.
    • Derivative Tokens: Based on an assessment of the Centralized or Smart Contract Custody utilized.

  4. Modifier Determination: Modifiers refine risk assessment by evaluating additional variables which are not captured by the Anchor PD. The magnitude of a notch adjustment is calculated utilizing Scoring Curves or Scoring Tables.

    • Scoring Curves: Used to capture the impact a marginal change in a variable has on risk. The input is compared with a benchmark curve derived from a relevant peer group.
    • Scoring Tables: Assign categorical values to variables, linking predefined ranges or characteristics to specific notch adjustments.

Access the Full Documentation

You can view the complete Core Methodology Concepts on GitBook.

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  1. Provide General Feedback: Share your comments, suggestions, or questions in the replies below.
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  3. Ask Questions: Feel free to ask about any section of the methodology or its applications.

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