8. Buffer Health and Recovery

Buffer Health measures the condition of the external payout capacity supporting a covered portfolio. It is the central operating metric for both the facility and the market instruments referencing it.

A healthy buffer means that most or all allocated external capacity remains available. A stressed buffer means that realized covered payout exposure has impaired part of the external capacity. The market can then price whether the facility is likely to recover through future capacity fees or deteriorate further through continued impairment.

Remaining Buffer and impairment

Remaining Buffer is calculated by subtracting realized buffer impairment from the allocated external capacity. Impairment occurs when covered payout exposure consumes part of the external capacity associated with the facility. It reflects facility utilization by real covered payout events, not synthetic market losses.

Impairment does not expand operator obligations beyond the approved facility parameters. The facility may experience deterioration, but the operator remains inside the predefined exposure framework. This is essential for keeping the operator layer bounded and understandable.

Recovery progression

After impairment, the facility may enter a recovery state. Recovery can occur through future capacity fee generation, reduced utilization, lower payout stress or predefined rebuild mechanics. The exact allocation of capacity fees between compensation, recovery and reserve rebuilding must be defined ex ante.

Recovery matters because it creates a tradable dynamic. A facility that has been impaired may trade at a discount if market participants believe recovery is uncertain. The same facility may appreciate if expected carry increases, utilization normalizes or the buffer begins to rebuild.

Protection controls

Facilities should include protection mechanisms linked to utilization, impairment and Remaining Buffer conditions. If stress thresholds are reached, multiplier support can be reduced, covered exposure can be throttled, or the portfolio can be temporarily restricted. These controls are not punitive; they preserve the sustainability of the facility and the credibility of its reference metrics.