Bond Market 2.0

The single-name credit default swap (CDS) market is in decline, leaving investors with no direct means of hedging credit risk. DelphX® uses blockchain technology to globally diffuse that risk.

Result: More efficient risk management and speculation, increased liquidity and higher yields.

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The Alarming Concentration of Risk

The declining non-cleared CDS market—and failure of the cleared market to provide a cost-effective alternative—is concentrating risk and choking liquidity to dangerous levels. 

 

Non-Cleared CDS Market

Non-cleared CDS contracts have been the primary means of hedging credit risk. They have added a degree of certainty to the bond market that ensured liquidity. But that changed in 2007.

Non-Cleared CDS Market: No Risk Diffusion

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The conventional non-cleared CDS concentrates risk, with one risk-holder bearing the entire exposure.

From its 2007 high of USD 33 trillion, the market has declined to less than USD 5 trillion in outstanding notional value, and protection is now only available for less than 200 issuers.

 

Cleared CDS Market

Some have cited the Central Counterparty (CCP) market for CDS as a preferred alternative to non-cleared CDS, but its diffusion of risk is limited to only a small number of institutions. For example, the largest 20 clearing members account for roughly 75 percent of total financial resources provided by all clearing members.

Centrally-Cleared CDS Market: Moderate Risk Diffusion

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In the CCP model, risk is diffused among clearing members, but it effectively creates a new class of institutions that are Too Big To Fail.

In effect, the CCP model has created a new category of Too Big To Fail institutions. A recent academic report (PDF) on risks in CCP networks found that CCPs are most likely to fail when they are needed most.

 

A Blockchain-Powered Solution

DelphX is launching a regulated market solution employing Blockchain technology for global origination and trading of Quantm™ smart contract securities that provide a non-derivative alternative to CDS contracts. Quantm Securities are transparently negotiated, originated, administered and traded within the open distributed ledger of the DelphX market. These two Quantm Securities—Default Compensation Receipts™ (DCR) and Collateralized Reference Obligation™ (CRO) bonds—will facilitate global diffusion of risk through transparent and dynamic pooling of that risk among all participants.

  • Default Compensation Receipt (DCR) securities—For bondholders and speculators, these securities provide guaranteed market-based compensation when a qualifying credit-event occurs.
  • Collateralized Reference Obligation (CRO) bonds—For credit investors, these investment-grade fixed-income securities are embedded with pooled DCR-related risk that is broadly diffused and shared. It is anticipated that the CRO purchase discounts afforded by risk pooling will produce mean post-claim yields in excess of 12%.

Global Diffusion of Risk Through Blockchain-Powered Pooling

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Through the SEC-regulated DelphX market and digital Quantm Securities, all parties benefit from the global diffusion of risk.

Protection Buyers can:

  • Effectively convert any credit security to a guaranteed-principal investment—receiving guaranteed market-based compensation upon its default
  • Secure direct hedges for more than 1 million eligible issues referenced on DelphX
  • Eliminate the need for variation and other collateral margins for credit protection
  • Generate competitive risk-free returns though anonymous basis trading

Learn more about how protection buyers can benefit on the Guaranteed Protection page.

 

Credit Investors can:

  • Anonymously negotiate double-digit yields on transparent Quantm bonds in which pooled default risk is embedded
  • Definitively manage or eliminate credit exposures through “pairing” of offsetting Quantm Securities

Learn more about how credit investors can benefit on the Enhanced Yields page.

 

Speculative Investors can:

  • Competitively speculate on the future movement of protection pricing for all referenced securities in a fully transparent all-to-all trading environment

Learn more about how credit investors can benefit on the Dynamic Speculation page.

 

All Participants can:

  • Access transparent displays of continually updating and validating Benchmark Pricing for all Quantm securities and referenced issues eligible for trading in the primary and secondary markets of DelphX.

Learn more about Validated Benchmarks.

 

A Better Bond Market

DelphX_Whitepaper_thumb.jpg Default risk is too concentrated. The market is nontransparent. Too few issues can be protected. DelphX addresses these problems, providing guaranteed credit protection, deeper market liquidity and enhanced investor yields.

Read the White Paper

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