An asset worth a million dollars on a screen does not necessarily support a million dollars of credit. The collateral taker needs protection against price changes and the cost of obtaining cash after default. In digital assets, that analysis also depends on whether the holding can be transferred, redeemed or sold within the assumed liquidation period.
The CPMI-IOSCO Principles for Financial Market Infrastructures call for appropriately conservative haircuts, concentration limits and stressed valuation practices for collateral accepted by an FMI. These principles have a defined infrastructure scope. They provide a useful risk-management reference without making every token or private lending arrangement eligible under a regulatory framework.
Separate eligibility from valuation
The first decision is whether to accept the asset at all. Determine what the token represents, what rights are available on default and whether the collateral taker can exercise them. A large haircut cannot repair an unenforceable claim or create authority to transfer an asset that the lender cannot control.
Next establish the holding arrangement. Identify the wallet, custodian, transfer permissions and any third-party approvals required for liquidation. A tokenised security can have a familiar underlying asset while its transfer process introduces additional steps. Our article on tokenised collateral market infrastructure explains why the representation and operating route belong in the analysis.
Define the liquidation horizon
A haircut model needs an assumption about how long it takes to realise value. Include default identification, legal authorisation, access to collateral, execution and receipt of usable cash. Instant token transfer does not establish that every other stage is instant. Test the route in conditions consistent with the proposed exposure.
For an illustrative calculation, a 30% haircut on a $1 million accepted valuation produces $700,000 of recognised collateral value before other limits or costs. This is arithmetic, not a recommended percentage. The useful question is whether the chosen haircut covers the documented scenario and whether the recognised amount remains within concentration and counterparty limits.
Model stressed depth and concentration
Volatility captures only part of liquidation risk. An institution should examine executable depth for its position size, dependence on specific venues and whether other holders are likely to sell at the same time. Liquidating a small observation trade is not evidence that a large concentrated position can exit at the displayed price.
The PFMI collateral principle addresses conservative valuation and concentrations that impair rapid liquidation. Apply that reasoning to a scenario where several borrowers pledge the same asset. A lender's exposure can become concentrated even if each borrower meets its individual collateral requirement. Aggregating the holdings is necessary to see the potential sale the lender would actually face.
Look for wrong-way risk
Collateral may lose value precisely when the borrower becomes less creditworthy. A borrower posting its own token is an obvious scenario to examine, but shared ecosystem dependencies can create less visible links. Analyse collateral, borrower cash flows and liquidation venues together rather than score each in isolation.
The Basel Committee's counterparty credit risk guidelines emphasise complementary exposure measures and a comprehensive mitigation strategy for banks. Margin and collateral belong inside that wider assessment. They should not become a reason to stop assessing the counterparty itself or the quality of information available about it.
Define repricing and exceptions
Specify who can change a haircut, what triggers review and how changes affect existing exposures. If a haircut rises sharply during stress, borrowers may need to provide additional collateral or reduce positions at the least convenient moment. Stress tests should include that cash demand rather than stop at the lender's own protection.
Maintain a dated record of assumptions, price sources, liquidation routes and overrides. An exception should name an owner, expiry and compensating controls. Temporary discretion without those details can become a permanent source of unmeasured credit exposure.
For a lending-protocol context, see Stani Kulechov's speaker profile. An institutional collateral policy should explain both the recognised value and the circumstances in which that value stops being available. The percentage is the final expression of the analysis, not a substitute for understanding what can be realised after default.