> For the complete documentation index, see [llms.txt](https://maxim-speransky.gitbook.io/doc/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://maxim-speransky.gitbook.io/doc/gitbook-risk-framework/gitbook-allocation-policy.md).

# Allocation Policy

Allocation Policy determines whether an assessed market fits a vault mandate and the maximum capital that may be supplied to it. Scores describe risk; this policy decides admission and size.

This policy guides allocation decisions for the Core and Enhanced Yield vaults. Assessments and policy parameters are reviewed as market conditions, evidence, and methodology evolve.

## Admission Before Sizing

Every proposed position passes through two stages:

| Stage                      | Question                                                 | Result                                     |
| -------------------------- | -------------------------------------------------------- | ------------------------------------------ |
| Candidate evaluation       | Does the position fit the vault mandate?                 | Candidate for sizing, or a recorded stop   |
| Final admission and sizing | What total position satisfies every required constraint? | Maximum total position, or a recorded stop |

Candidate evaluation consumes [Asset Scoring](/doc/gitbook-risk-framework/gitbook-asset-scoring.md), [Market Scoring](/doc/gitbook-risk-framework/gitbook-market-scoring.md). It checks the permitted collateral universe, Eligibility, quality requirements, Confidence, and Position Risk Band. `Excluded` or `Unassessable` assets or markets cannot become candidates. Critical missing Asset or Market evidence also stops evaluation.

Membership in a permitted collateral group does not establish asset quality. Passing candidate evaluation does not establish an allocation size. Market liquidity evidence is already required to support the Market assessment; later sizing determines the vault-specific Liquidity Cap.

Both vaults operate exclusively on Morpho. Platform Score and Platform band are not used in this policy's current scope.

## Position Risk Band

Allocation Policy maps assessment scores to ordinal bands, from strongest to weakest: `Pristine`, `Prime`, `Robust`, `Tactical`, `Speculative`, `High Risk`, and `Experimental`. `Excluded` and `Unassessable` results are `Ineligible`; they receive no numeric score or Position Risk Band. Bands are risk classifications, not probabilities of loss.

The Position Risk Band starts with the collateral Asset band. Subordination may improve the position's band under the policy's ordinal mapping, without changing the intrinsic Asset Score. `None` provides no improvement; `Limited` records headroom only. `Material` and `Strong` can support a bounded improvement when Confidence permits. Lower Confidence restricts or prevents that improvement; it never upgrades risk quality.

The final Position Risk Band is the weaker of the Subordination-adjusted Asset band and the Market band. Strong collateral or Subordination cannot compensate for a weak market. A clearance result may support Subordination through the stressed-loss waterfall, but cannot also create a separate automatic improvement.

Manual review may reject a position or hold it in a lower-quality band. It cannot override a failed condition or promote a result across a band boundary.

## Vault Mandates

| Requirement            | Core                                                                                                     | Enhanced Yield                                                                                        |
| ---------------------- | -------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |
| Collateral universe    | BTC, ETH, and approved wrapped representations; no PT, yield-bearing stables, or cross-chain derivatives | Wider eligible collateral universe; PT may be considered                                              |
| Risk quality           | Conservative minimum Asset, Market, and Position Risk Band standards                                     | Separate minimum standards for explicitly accepted additional risk                                    |
| Confidence             | Asset and Market Confidence must each be `Medium` or `High`                                              | `Low` requires manual review and prevents Subordination improvement                                   |
| Liquidity and loss     | Required atomic clearance, decision-grade dynamic coverage, and declared loss tests                      | Required atomic clearance, decision-grade dynamic coverage, and declared loss tests under its mandate |
| Additional constraints | All position and shared-dependency limits apply                                                          | All position and shared-dependency limits, plus aggregate PT and maturity constraints, apply          |

Enhanced Yield is not a fallback for positions that fail Core. Each mandate has its own admission requirements. Manual review cannot bypass the required final Position Risk Band. Expiring collateral requires renewed assessment of pair stress, depth, maturity, settlement, and exit at each allocation review. Looping and recursive strategies are outside this policy's current scope.

## Position Cap

Three constraints bind on the same reporting currency, `as_of`, and vault state:

```
Position Cap = MIN(Rating Cap, Liquidity Cap, Concentration Cap)
```

| Constraint        | What it limits                                                                          |
| ----------------- | --------------------------------------------------------------------------------------- |
| Rating Cap        | Exposure permitted by the mandate at the final Position Risk Band                       |
| Liquidity Cap     | The greatest total vault position satisfying required stressed clearance and loss tests |
| Concentration Cap | Total position permitted by every required shared failure-domain limit                  |

Each cap is a ceiling on the **total supplied position**, including accrued interest. It is not a target allocation. Even when the Rating constraint is non-binding, Liquidity and Concentration still apply. An incremental model result must be converted to a total-position ceiling before taking the minimum.

```
Permitted Additional Allocation = MAX(0, Position Cap - Existing Supplied Position)
```

Available cash and combined constraints across proposed allocations still bind. Zero additional headroom does not establish that the existing position complies; current breaches are recorded separately. Missing caps are neither zero nor unlimited: they stop final sizing.

### Liquidity Cap

[Liquidation Resilience Assessment](/doc/gitbook-risk-framework/gitbook-market-scoring/gitbook-slcr-methodology.md) supplies execution economics, atomic clearance, dynamic clearance, market loss, and vault-attribution outputs. Every materially required output must be `decision-grade`. A required `diagnostic-only` or `not-computable` result cannot establish a Liquidity Cap.

When the stressed path clears wholly inside `H_atomic`, Tier 2 may reduce to an atomic-only calculation. A path requiring the current diagnostic progressive implementation cannot satisfy the mandate's decision-grade coverage requirement.

Sizing tests the candidate total position against a declared post-allocation market state, supported borrowing assumptions, competing flow, shared liquidation routes, and the protocol loss waterfall. Adding supply does not itself create liquidation demand. A smaller vault position cannot repair a failed market-level clearance requirement.

Collateral-sale depth and supply-withdrawal liquidity answer different questions; neither alone defines a supply cap. Each run requires versioned scenarios, fixed horizons, clearance targets, and absolute-loss tests with explicit vault-loss tolerances. Missing required tests or tolerances stop sizing. A separate loss tolerance does not relax the zero-market-bad-debt definition of `dynamic_slcr`.

### Concentration Cap

Positions share a limit when one material dependency or point of control can impair them together. Different tokens, wrappers, markets, or addresses do not establish diversification when the failure path is common. Full supplied exposure is counted against each applicable domain; exposure is not divided among domain categories.

The current supporting concentration module covers Oracle, Collateral Underlying, and Collateral Issuer / Backing. Numerical ceilings and remaining required axes are unresolved. Partial domain headroom cannot supply a complete Concentration Cap or authorize final sizing.

## Mapping Policy to On-chain Caps

For a Morpho Vault V2 market allocation ID:

```
Configured Market Ceiling = MIN(Absolute Cap, Relative Cap * Vault TVL)
```

Absolute Cap must be no higher than the calculated Liquidity Cap, with further reductions where other constraints bind. Relative Cap must be no higher than the applicable Rating fraction, with stricter limits where required. Their combined ceiling must not exceed the complete Position Cap at the assessed state.

Market caps do not replace aggregate collateral-class or shared-dependency limits. Group caps require their own supported mapping. Caps constrain increases; they do not automatically deallocate an existing excess or refresh stale assessments.

## Review and Decision Records

Record the mandate, vault and market identity, assessment date, source versions, candidate result, final sizing result, binding constraints, unresolved gaps, and any mapped on-chain settings. Reassess after material changes to vault or market state, borrowing, routes, dependencies, maturity, or policy. Other lenders can change whole-market conditions independently of this vault's caps.

Discretion may reject, reduce, or require further assessment. It cannot admit a position through an unmet requirement. Provisional expert thresholds and mappings are not empirically calibrated capital requirements.