🔬Risk Framework

Risk Assessment

For each approved yield source (see How SIERRA Generates Yield), SIERRA's Risk Framework analyzes 11 forms of risk:

• Duration Risk: Risk that an interest rate change causes the value of the reserve assets to change

• Credit Risk: Risk that the issuer or obligor of the bonds, debt or other forms of yield default on their interest payments or overall debt obligations

• Liquidity Risk: Risk that SIERRA's reserves will incur loss through withdrawing, redeeming or recalling reserve assets from a yield source

• Term Risk: Risk that reserve assets in a yield source are completely illiquid until the term or deposit period expires, which may cause SIERRA to not be able to meet all of its redemption obligations in a timely fashion

• Currency Risk: Risk that reserve assets are deployed in a yield source denominated in another currency than USD and that currency depreciates against USD. Additionally, there is a similar risk that a yield source relies on a different USD-denominated stablecoin than USDC and it depegs below $1

• Yield Volatility Risk: Risk that the floating-rate yield sources vary from the initial rate that reserve assets were deployed

• Smart Contract Risk: Risk that bugs or vulnerabilities in the underlying smart contracts for DeFi yield sources result in partial or full loss of reserve assets deployed

• Exploit Risk: Risk that a malicious actor uses a DeFi yield source in an unintended way that results in partial or full loss of reserve assets deployed

• Financial Crime Risk: Risk that a high-risk entity (i.e. sanctioned wallets or darknet marketplace users), based on wallet scoring by AML analytics platforms, comingle their assets in a DeFi yield source that Sierra has reserve assets deployed into

• Regulatory Risk: Risk that regulators sue, or take similar action, against one of the DeFi yield sources that Sierra has reserve assets deployed into

• Correlation Risk: Risk that problems with one yield source could trigger issues in another, making additional losses more likely to happen

Additionally, SIERRA's Advisory Council continually monitors yield sources for residual risks that are not captured in any of these categories. Furthermore, the Risk Framework is reviewed and updated as needed to ensure risk monitoring and assessments evolve in line with changing market conditions and new technological innovations.

Each yield source is assessed against these 10 risk types and scored based on the respective applicability. For example, an uncollateralized lending yield source will be scored more risky than overcollateralized lending or U.S. Treasury MMFs based on credit risk. After scoring each yield source across all risk types, a discounting methodology is applied to create risk-adjusted yields, which are now directly comparable across all yield sources.

Lastly, each yield source is assigned a Maximum Portfolio Allocation, which limits the amount of SIERRA's reserves that can be deployed into a given yield source. This extra layer of risk management ensures that SIERRA's portfolio does not become too overweight higher risk yield sources. Each yield source's Maximum Portfolio Allocation is reviewed and updated as needed as well.

Dynamic Rebalancing of SIERRA's Portfolio

Each day, the prevailing yield for each yield source is obtained and the respective discounting is applied to obtain the current set of risk-adjusted yields. Then SIERRA's portfolio rebalancing algorithm sorts the risk-adjusted yields and allocates up to that respective yield source's Maximum Portfolio Allocation. If there is remaining reserves that have not been allocated, the algorithm selects the next highest risk-adjusted yield and allocates up to the corresponding Maximium Portfolio Allocation. The process repeats until all reserves have been allocated or all risk-adjusted yields are below the risk-free yield source of U.S. Treasury MMFs, which has a Maximum Portfolio Allocation of 100%.

This dynamic rebalancing strategy helps to remove discretion and automatically SIERRA's portfolio of reserve assets in response to changing market conditions.

Adding New Yield Sources

SIERRA's Advisory Council is continually monitoring new yield opportunities across RWAs and DeFi and periodically assesses new yield sources using the Risk Framework. Once approved by the Advisory Council and Board of Directors, Sierra instructs OpenTrade to begin supporting this new yield source and it becomes included in the daily dynamic-rebalancing algorithm.