Step 4 — Threshold Breach Evaluation
The threshold evaluation layer runs four independent checks in sequence. Each check can independently trigger a WARNING or BREACH outcome. The most severe outcome across all four checks determines the overall system response.
Check 1 — Gross Exposure Limit
Validates that total inventory exposure across all open batches does not exceed the Reserve Pool's configured maximum capacity.
| Level | Condition | Action |
|---|---|---|
| Normal | Total gross exposure < 70% of Reserve Pool max capacity ($5M) | No action |
| Warning | Total gross exposure 70–90% of capacity ($3.5M – $4.5M) | PROTECT signal to FX Engine; schedule early rebalance |
| Breach | Total gross exposure > 90% of capacity (>$4.5M) | RESTRICT signal to FX Engine; Emergency RFQ triggered |
Check 2 — VaR Limit
Validates that the portfolio VaR does not exceed a defined percentage of total Reserve Pool capital. This is the primary risk-based limit — unlike the gross exposure check, it accounts for current market volatility.
| Level | Condition | Action |
|---|---|---|
| Normal | Portfolio VaR < 5% of Reserve Capital | No action |
| Warning | Portfolio VaR between 5–10% of Reserve Capital | PROTECT signal; spread widened; early rebalance scheduled |
| Breach | Portfolio VaR > 10% of Reserve Capital | RESTRICT signal; Emergency RFQ triggered for highest-VaR corridor first |
Check 3 — Concentration Limit
Validates that no single corridor accounts for an excessive proportion of total Reserve Pool exposure. Concentration risk is independent of total size — even a small total position can be dangerous if it is entirely in one illiquid corridor.
| Level | Condition | Action |
|---|---|---|
| Normal | No single corridor > 50% of total Reserve exposure | No action |
| Warning | Single corridor at 50–60% of total Reserve exposure | PROTECT signal for that corridor only |
| Breach | Single corridor > 60% of total Reserve exposure | RESTRICT for that corridor; Emergency RFQ for that corridor only |
Check 4 — Drawdown Limit
Validates that cumulative unrealised losses have not exceeded a threshold relative to Reserve Pool capital. This is the most sensitive trigger — it fires when the market has already moved against the position and the protocol is sitting on real losses.
| Level | Condition | Action |
|---|---|---|
| Normal | Unrealised PnL loss < 2% of Reserve Capital | No action |
| Warning | Unrealised PnL loss between 2–5% of Reserve Capital | PROTECT signal; early rebalance scheduled immediately |
| Breach | Unrealised PnL loss > 5% of Reserve Capital | RESTRICT or HALT; Emergency RFQ with wide tolerance; ops team notified |
Combined Threshold Reference
| Check | Warning Level | Breach Level | FX Engine Signal |
|---|---|---|---|
| Gross Exposure | > 70% of $5M capacity | > 90% of $5M capacity | WARNING → PROTECT · BREACH → RESTRICT |
| VaR Limit | > 5% of Reserve Capital | > 10% of Reserve Capital | WARNING → PROTECT · BREACH → RESTRICT |
| Concentration | > 50% in one corridor | > 60% in one corridor | WARNING → PROTECT (corridor) · BREACH → RESTRICT (corridor) |
| Drawdown | > 2% of Reserve Capital | > 5% of Reserve Capital | WARNING → PROTECT · BREACH → RESTRICT / HALT |
Overall Risk Assessment
After all four checks complete, the system takes the worst breach level across all four checks to determine the response path. A single Breach in any check triggers the Emergency RFQ path, regardless of whether the other three checks are green.
| Worst Level | Response Path |
|---|---|
| All checks Normal | Step 5A — Green (Normal) path |
| One or more Warning, no Breach | Step 5B — Yellow (Warning) path |
| One or more Breach | Step 5C — Red (Emergency RFQ) path |