Last Updated: 2026-01-27
Asset Classification
Every asset has three relevant characteristics:
A. Fundamental Risk (Risk Weight)
What can go wrong even if you hold to maturity?
- Credit default
- Smart contract failure
- Counterparty failure
- Regulatory seizure
This is the irreducible risk that doesn't go away with time. Expressed as a risk weight percentage.
Note: In the capital formula, risk weight is the fundamental-loss floor. For unmatched exposures it is combined with forced-sale / forced-liquidation terms via max(...) (see capital-formula.md).
B. Mark-to-Market Risk (Drawdown)
How far could this asset fall from current price before recovering?
Measured as Expected Shortfall at a confidence level (e.g., 97.5%) over a relevant stress horizon. This is the FRTB-inspired concept — the loss you'd realize if forced to sell during a stress period.
See market-risk-frtb.md for the drawdown treatment module.
C. Stressed Pull-to-Par
For assets that mature or converge to a known value, we use Stressed Pull-to-Par — the time until an asset converges to its fundamental value under stress conditions.
Why Stressed Pull-to-Par?
Normal pull-to-par (or WAL for amortizing assets) assumes typical prepayment and amortization patterns. But the scenario where asset duration matters for capital is precisely the stress scenario:
- During crises, prepayments slow dramatically (borrowers can't refinance)
- Amortization continues but reinvestment into new loans slows
- Pull-to-par extends, sometimes significantly
Using unstressed duration would be like stress-testing a lifeboat in calm seas. Duration matching validity must hold during stress.
Stressed Pull-to-Par Calculation
Stressed Pull-to-Par = Normal Pull-to-Par × Stress Modifier
The stress modifier is derived from historical worst-case prepayment slowdowns for equivalent asset classes:
| Asset Class | Normal Pull-to-Par | Stress Modifier | Stressed Pull-to-Par | Historical Basis |
|---|---|---|---|---|
| CLO AAA (JAAA) | ~2.5 years | 1.4x | ~3.5 years | 2008-2009: prepayments dropped from 28% to 9-15% (historical range 1.3-1.4x; 1.4x used for capital purposes) |
| Agency MBS | Varies | 1.2-1.5x | Varies | Rate-dependent; extension risk in rising rate environments |
| Corporate bonds | To maturity | 1.0x | To maturity | Fixed maturity, no prepayment optionality |
| T-bills | To maturity | 1.0x | To maturity | Fixed maturity, no extension risk |
| Money market ETF | Near-zero | 1.0x | Near-zero | Daily liquidity, stable NAV |
Key insight: The stress modifier should reflect the same stress scenario that drives liability outflows. If a credit crisis causes both duration extension and depositor flight, the stressed pull-to-par ensures the asset-liability match remains valid under that scenario.
Assets without Pull-to-Par
- ETH: Infinite (no pull to par — perpetual volatility)
- Sparklend positions: None (perpetual, no maturity)
Assets with no pull-to-par cannot be duration-matched regardless of stress assumptions.