Frequently asked questions
What is the DelphX value proposition?
We improve financial outcomes for buyers of credit default protection and buyers of bonds that provide collateral for that protection. Using risk-diffusion, distributed ledger and other technologies, we enable credit investors to hedge their default risks and optionally assume incremental risks through participation in a global risk-sharing pool.
By pooling credit risks among hundreds and eventually thousands of informed holders, each of whom assume a very small share of increasingly-predictable risks, each holder can more profitably invest while lowering their default exposure.
Why has the market for single-name default credit protection been declining?
Increased post-Crisis capital requirements have decreased the ability of dealers to provide cost-effective protection through credit default swap (CDS) contracts. Since 2007, the outstanding notional value of single-name CDS has declined from US $33 trillion to less than US $4 trillion, and protection is now available for less than 200 issuer names, a small subset of the many thousands of credit security issuers.
The transparent CPO and CRN securities offered by dealers and available for trading within the DelphX platform, allow those dealers to provide investors a secured alternative form of credit protection that is less costly and more efficient than CDS.
What role does distributed-ledger technology play in the DelphX platform?
DelphX employs its proprietary distributed ledger technology to transparently record and display all CPO and CRN transactions and ongoing administration. Academic observers have noted that the DelphX platform represents an ideal application for distributed ledger (Blockchain) processing as that technology offers the following utilities:
- Transparency and trust
- Simplified processing
- Faster execution
- Lower costs
What makes DelphX unique?
The regulated DelphX platform offers the following unique features:
- Dealers can structure and offer new tailored default-hedging (CPO) and enhanced-yield (CRN) securities
- Dealers can also globally make markets and provide on-demand liquidity in CPO, CRN and underlying securities
- CPO holders can cost-effectively hedge risk through securities meeting their specific needs
- CRN holders can optionally reduce their risk and enhance their returns by transferring that exposure to DelphX’s transparent risk-diffusion pool
- Dynamic market-based diffusion of credit risks employing proven actuarial protocols (e.g. risk-based allocation of aggregate exposure, pooling of risks and application of the law of large numbers)
- Transparent midpoint benchmarking pricing of all CPOs, CRNs and underlying issues
- Administration of all risks, payments and collateral positions by a neutral non-bank, non-SIFI counterparty employing immutable, risk-diffusing/distributed-ledger technology
- Definitive offsetting and elimination of risk by CRN holders through purchases of pairing CPOs
- Continuous reporting of midpoint CPO pricing benchmarks that reflect the market’s current assessment of the probability of a default of the underlying security/issuer
How will DelphX restore liquidity in the credit protection market?
The DelphX platform is designed to restore and expand the liquidity of credit protection and cash bonds by facilitating competitive offerings by dealers of new risk-hedging CPO securities (enabling investors to execute basis trades and easily speculate on the future pricing of CPO protection for any underlying cash bond).
Risk-bearing CRN securities are designed to enable investors to receive yields that have been enhanced through the unique risk-diffusion characteristics of CRN securities, and to stimulate liquidity through opportunistic trading of those securities within the DelphX platform.
For optimal liquidity, we’ve also incorporated within the DelphX platform the following characteristics of the most liquid global markets:
- Traded assets are commoditized and possess standardized features
- Assets can be rapidly sold with minimal loss of value
- Dealers can make active markets, acting as both buyers or sellers
- All participants can actively speculate on future pricing levels
- All transactions are executed with a common counterparty
- All transaction terms are timely and transparently reported
- Midpoint benchmark pricing is displayed in real-time for every tradeable asset
Is there historical data evidencing the effectiveness of DelphX’s risk-diffusion technology?
Yes. DelphX accumulated actual single-name CDS experience data for the period 2004 to 2017, encompassing more than 7 million contracts. That real-world data was then employed to create an empirical pool containing those actual exposures, which was then regressively tested to:
- Determine the loss experience of each CDS contract over its tenor;
- Assess the aggregate experience of the pool containing all such CDS exposures;
- Calibrate the individual loss experience of each pool participant; and
- Calculate the net Total Return of each participant.
Those tests consistently verified the high degree of predictability the pooling of default risks produces, the material reduction in the impact of each and all historical credit events upon the pool participants and the significant returns available to pool participants.
How does the DelphX facility differ from other ATS platforms?
No other ATS:
- Facilitates dealer origination and sale of tailored new securities
- Facilitates trading of CPO and CRN securities
- Enables speculation on the future pricing of default protection for virtually any CUSIP/ID
- Facilitates basis trading of a default-protection security and its underlying cash bond
How does DelphX generate revenue?
Our business model produces a combination of asset-based and transaction-based revenue, recurring access and licensing fees, retained investment income and transaction-processing fees.
How do regulators view DelphX?
Throughout the development of the DelphX platform, and securities traded thereon, we have consulted with regulatory authorities and received valuable guidance from those agencies. We believe, along with our regulatory counsel, that the DelphX platform and its unique risk-diffusing CPO and CRN securities will provide favorable results to dealers, investors and other market participants, and the authorities that regulate credit markets.
As we globally expand the scope and utility of the DelphX ATS, we intend to file for recognition by the appropriate authorities in other jurisdictions in which DelphX services would provide value.
We anticipate that, given the benefits and protections provided by the neutral and transparent structure of the DelphX platform, and the risk-mitigating and liquidity-promoting features of its CPO and CRN securities, our application for such recognition will likely be viewed favorably by regulators in those regions.
How are the DelphX platform and CPO and CRN securities regulated?
The DelphX platform is a securities trading platform established in accordance with and pursuant to the SEC’s Regulation ATS.
Consistent with Regulation ATS, it is intended that DelphX Services Corporation (DSC), the broker-dealer subsidiary of DelphX, will operate the DelphX platform pursuant to an exemption from registration as an exchange under the Exchange Act. In addition, DSC will also continue to comply with all requirements necessary to continue as a member of FINRA and will seek FINRA’s approval of its continuing membership application with respect to its operation of the DelphX platform.
It is expected that CPO and CRN securities will be issued and offered pursuant to an exemption from registering these securities under the Securities Act and an exemption from registering as an investment company under the Investment Company Act.
What key milestones has DelphX achieved?
Over the past five years, significant investment has gone into developing the DelphX platform, which integrates numerous registered trademarks and pending patents.
Key developments include:
- Invention and development of CPO and CRN securities
- Development of the DelphX distributed ledger
- Development of the DelphX risk-diffusion system
- Development of the MAV≡n pricing engine for continuous midpoint benchmark pricing of all CPOs, CRNs and potentially millions of underlying securities
- Development of historical transaction pricing database containing more than 350 million transactions and concurrent MAV≡n pricing forecasts
- Development of an array of patent-pending technologies
- Development of nine systems and trademarks for which USPTO protection and registration has been secured or is currently pending
Does DelphX have expansion plans?
Following the launch of the DelphX platform in North America, we plan to deploy comparable utilities in other geographic markets, based on demand.
Over the long term, exciting possibilities exist for DelphX as the platform can be readily adapted to include many other verticals, including a regulated securities-based alternative to Initial Coin Offerings (ICOs), global risk-diffusion of reinsurance exposures, and other applications.