# 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. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. 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