3.2. Valuation Policy for Eligible Collateral

Eligible Collateral shall be recognized at their daily market value (according to the last closing price) published on www.treasurydirect.gov. It is understood that Validators and Minters might not observe the same market price in case they access the market data at different times. Minters shall consider this when requesting signatures for updateCollateral() calls from Validators. With Signature we refer to the cryptographically hashed meta information of a transaction with the private key of the Validator which allows the Minter to perform a certain Protocol transaction after the Validator has verified that the conditions for such a transaction are met.

In proposing valuation options for Eligible Collateral, the Adopted Guidance document has considered two alternative options: mark-to-market, and at-cost, opting ultimately for a mark-to-market approach. The two options somehow reflect similar accounting methodology for so-called held for trading or available for sale assets, and have a set of pros and cons that have been analyzed when proposing one over another:

• Fair value representation: the current executable market price of an asset remains the most accurate representation of its value at any given time. By opting for a mark-to-market approach Minters would see the immediate benefit of the appreciation of a fixed income asset as it approaches maturity, without having to realize it. Given the eligible instruments, we believe that a mark-to-market approach would allow Minters to operate based on the most accurate level of overcollateralization

• Non-arbitrage: reflecting collateral value fluctuations on-chain can prevent misalignments and unexpected behaviors due to arbitrage opportunities among parties. This is particularly important in scenarios of extreme price movements driven by significant interest rate changes. We are aware that recognizing the mark-to-market fluctuations of fixed income instruments on-chain, even without the obligation for a Minter to redeem those assets at will, could expose the structure to interest rate risk and, in extreme scenarios, bank-run phenomena. While we believe that those effects should be accounted for and mitigated by appropriate levels of overcollateralization, similar to what happens for a bank's core capital, we think that the nature of Eligible Collateral today, as well as the dominant macroeconomic conditions, make those risks manageable.

• Capital efficiency: the continuous increases in Minters' Owed M due to the accrual of Minter Rate introduces natural pressure on the Collateralization Ratio. Valuing collateral at market price can alleviate this pressure, due to the time value of the instruments currently considered eligible.

It is important to remember that the recommended Valuation Policy is strictly interdependent with the nature of the Eligible Collateral. Following an evolution of the eligibility criteria, e.g. expanding towards longer maturities of different asset classes, will require, among other things, a revision of the Valuation Policy. This will be valid also in case of significant shifts in the current economic landscape.

Collateral that is to be considered Eligible Collateral under the conditions set forth in Ancillary Criteria for the Eligibility of Assets shall be valued without a haircut.