Credit Risk

Definition

Credit risk refers to the potential for the fund to experience financial losses due to the default or deterioration in credit quality of the securities it holds.

Impact on Eclipse AI’s collateral

Some money market funds typically invest in short-term debt securities such as Treasury bills, commercial paper, certificates of deposit, and other highly liquid and low-risk instruments. Credit risk arises when the issuer of a security is unable to fulfill its financial obligations, such as making timely interest payments or returning the principal amount at maturity. If a money market fund holds securities issued by entities with poor creditworthiness or facing financial distress, the fund may experience a decline in the value of its investments and potentially even losses.

Risk Monitoring and Management

First Line of Mitigation:

• Credit Risk Tolerance: We have zero tolerance for credit risk, restricting our investments exclusively to US treasuries, quasi-government debt, or cash. Corporate debt holdings are strictly prohibited.

Second Line of Mitigation:

• Asset Manager Controls: We only invest in tokenized RWAs funds where corporate debt holding is prohibited, relying on stringent controls implemented by tokenizer’s asset managers as the first line of defense. These controls are designed to ensure compliance with our investment criteria and safeguard our assets.

Third Line of Defense:

• Active Monitoring by Eclipse: Eclipse actively monitors the holdings within various RWAs tokenizers, serving as the second line of defense. This monitoring includes regular checks and audits to detect any deviations from our risk policy. Any discrepancies found are promptly flagged with both the tokenizer and their asset managers for swift resolution.

Non Compliance Management:

• Decisive Action: In cases where deviation of our risk policy persists despite initial corrective actions, we take decisive steps by consulting with protocol governance to determine the best course of action. This may involve removing an RWA from our list of eligible collateral or reducing our exposure to effectively mitigate risks.