# FX Risk

## Definition

**FX risk** (foreign exchange risk, or currency risk) is the potential financial loss caused by fluctuations in exchange rates between currencies.

For a USD-pegged stablecoin like **USD0**, any **unhedged exposure to non-USD currencies** can reduce the USD value of the collateral backing user deposits.

> **Note (KB alignment):** The parameters and controls below should be periodically checked against the internal Knowledge Base (KB) to ensure they reflect the most current risk settings and operational procedures.

## Impact on Usual’s Collateral

USD0 is designed to maintain a strict **1:1 peg** with the US Dollar. If the protocol’s collateral portfolio were to include **non-USD-denominated** investments, exchange-rate movements could materially change the USD value of USD0’s backing.

FX fluctuations can be driven by factors such as:

* Macroeconomic indicators
* Geopolitical events
* Interest-rate differentials
* Shifts in investor sentiment

Because USD0 holders expect each token to be redeemable for **exactly $1** of collateral at all times, even small FX-related losses could threaten the peg and undermine confidence. For this reason, Usual enforces an **absolute prohibition on unhedged currency exposure** across its collateral portfolio.

## Risk Policy: Zero Tolerance

Usual maintains a **zero tolerance** policy for FX risk. The protocol only accepts Real World Assets (RWAs) that:

* **Exclusively invest in USD-denominated assets**, or
* **Are 100% FX hedged** to eliminate currency exposure

This policy applies to **all collateral types** accepted by the protocol, including **Hashnote USYC**, **M by M0**, **USTBL**, and any future collateral providers onboarded through governance.

By restricting collateral to **US Treasuries**, **US government securities**, **overnight repos with USD-denominated counterparties**, and **cash equivalents**, the protocol eliminates direct FX risk from the reserve portfolio by design.

## Risk Monitoring and Management

Usual uses a multi-layered defense framework to maintain continuous compliance with its zero-FX-risk policy.

### First Line of Mitigation: Strict Collateral Eligibility

* FX risk is addressed at onboarding: only RWAs that invest solely in USD assets or maintain **100% FX hedges** are eligible.
* All collateral must pass rigorous due diligence prior to onboarding, including verification that underlying investments are **denominated solely in USD**.
* This requirement is defined in the protocol’s collateral policy and enforced through the **tokenizer evaluation process**.

### Second Line of Mitigation: Asset Selection and Management Oversight

* Usual selects tokenized RWA products with **strict limitations on holding non-USD-denominated assets**. Accepted tokenizers’ investment policies must explicitly restrict or prohibit non-USD holdings.
* The **tokenizer’s asset management team** is responsible for day-to-day compliance with Usual’s FX constraints within fund operations.
* During due diligence, Usual evaluates each tokenizer’s:
  * Investment policy
  * Custody setup
  * Asset management practices\
    to confirm that FX exposure does not exist and cannot be introduced.

### Third Line of Mitigation: Enhanced Dual-Layer Monitoring

* Beyond the tokenizer’s internal monitoring, **Usual performs regular independent reviews** of holdings within accepted RWAs.
* This **dual-layer monitoring** (tokenizer oversight + Usual verification) is designed to detect and prevent deviations from the zero-FX-risk policy.
* **On-chain verifiability** of collateral composition adds transparency, enabling Usual and the community to audit reserve holdings in near real time.

## Non-Compliance Management

Usual maintains a defined escalation path if any deviation from the FX policy is detected.

### Initial Response to Deviations

* Usual will promptly engage the tokenizer’s asset management team to:
  * Identify the root cause
  * Resolve discrepancies
* Corrective actions may include immediate rebalancing of the affected portfolio back to **USD-only** assets.

### Escalation of Persistent Deviations

If a deviation persists after initial corrective efforts, Usual escalates the issue through protocol governance (**the Usual DAO**) to determine the appropriate response. Potential actions include:

* **Reducing exposure** to the non-compliant collateral provider by adjusting portfolio weights via the **Multi Collateral Controller**
* **Removing the RWA** from the eligible collateral list
* **Pausing minting** against the affected collateral until compliance is restored
* **Increasing insurance fund allocations** to offset potential losses from temporary exposure

## Relationship to the Broader Risk Framework

FX risk is one component of Usual’s broader financial risk policy:

| Risk Type              | Policy         | Duration / Threshold                                                 |
| ---------------------- | -------------- | -------------------------------------------------------------------- |
| **FX Risk**            | Zero tolerance | USD-only or 100% hedged                                              |
| **Credit Risk**        | Zero tolerance | US Treasuries, quasi-government debt, or cash only                   |
| **Interest Rate Risk** | Controlled     | Portfolio average duration ≤ 0.33 years; individual RWAs < 0.5 years |
| **Liquidity Risk**     | Controlled     | Redemption within 5 days with minimal slippage                       |

Together, these constraints aim to keep USD0 collateral concentrated in the safest, most liquid, **USD-denominated**, short-duration instruments available—such as **US Treasury Bills** and **overnight reverse repos**—thereby eliminating FX risk by design.