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
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
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 Quant≡m™ smart contract securities that provide a non-derivative alternative to CDS contracts. Quant≡m Securities are transparently negotiated, originated, administered and traded within the open distributed ledger of the DelphX market. These two Quant≡m 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
Through the SEC-regulated DelphX market and digital Quant≡m 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 Quant≡m bonds in which pooled default risk is embedded
- Definitively manage or eliminate credit exposures through “pairing” of offsetting Quant≡m 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 Quant≡m securities and referenced issues eligible for trading in the primary and secondary markets of DelphX.
Learn more about Validated Benchmarks.