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 Blockchain-powered distributed ledger technology, 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 institutional holders, each of whom assume a very small share of highly predictable credit risk, each holder can more profitably invest in credit securities, while lowering their default exposure.
Why has the market for single-name default credit protection been declining?
Post-crisis regulation and increased capital requirements have increased the cost of traditional 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 $3 trillion, and protection is now available for fewer than 200 issuers, a small subset of the thousands of credit security issuers.
Quantem’s fully transparent CPO and CRN securities, available for origination and trading within the DelphX facility, offer institutional investors a secured alternative form of credit protection that is less costly and more efficient.
What role does Blockchain play in the DelphX facility?
Blockchain provides the technology required to operate the Quantem distributed ledger in which all CPO and CRN holder transactions are immutably and transparently recorded. Academic observers have noted that Quantem and the DelphX facility represent an ideal application of Blockchain-powered distributed ledger technology as that technology provides the following utilities:
- Transparency and trust
- Simplified processing
- Faster execution
- Lower costs
What makes DelphX unique?
The DelphX ATS offers the following unique features:
- A regulated global facility in which participants can seamlessly trade cash bonds and negotiate, purchase and trade risk-protecting (CPO) and collateral-funding (CRN) securities
- A Blockchain-based risk transfer and diffusion model employing empirical modeling and sound actuarial science
- Efficient transfer of credit-related risks from the banking system to an institutional risk-sharing pool
- Dynamic market-based diffusion of credit-related 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 primary and secondary market-wide price discovery and integrated independent benchmark pricing
- Optimal collateral efficiency through market-based distribution of aggregate collateral among CPO risk exposures (e.g. Gaussian distribution)
- Administration of all risks, benefits and collateral positions by a neutral non-bank, non-SIFI counterparty employing immutable Blockchain/distributed ledger technology
- Definitive offsetting of risk by CRN holders through purchases of pairing CPOs
- Continuous reporting of changes in CPO pricing which reflect the market’s current assessment of the probability of a default of the underlying security.
How will DelphX restore liquidity in the credit protection market?
The DelphX facility is designed to restore and expand the liquidity of credit protection and the cash bond market by facilitating the primary negotiation and purchase of new risk-transferring CPO securities, enabling credit market participants to execute new forms of basis trades and to stimulate liquidity through speculation as to the future pricing of CPO protection for any underlying cash bond.
Risk-bearing CRN securities are designed to enable institutional investors to receive fixed income yields that have been enhanced through the unique risk-diffusion characteristics of the CRN securities, and to stimulate liquidity through anonymous and transparent trading of those issues within the DelphX ATS.
For optimal liquidity, we’ve incorporated within the DelphX facility 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
- All participants can act as buyers or sellers
- All participants can act in both primary and secondary transactions
- 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
- Best available bid and offer terms are continuously displayed
- Independent benchmark pricing is displayed in real-time for every tradeable asset
Is there historical data evidencing the effectiveness of Quantem’s risk-diffusing system?
DelphX has accumulated single-name CDS experience data for the period from 2004 to 2017, encompassing more than 7 million contracts. We have created an empirical pool containing those contracts, regressively analyzed the experience of pool participants through the tenor of each contract and rigorously tested the results of Quantem’s pooling protocols on that real-world data. Those tests consistently quantified the high degree of predictability pooling of default risks produces and the material reduction in the impact of each and all historical credit events upon the pool participants.
How does the DelphX facility differ from other ATS platforms?
No other ATS:
- Facilitates negotiation and trading of CPO and CRN securities
- Facilitates primary market negotiation, origination and sale of new securities
- Enables participants to customize the characteristics and terms of new securities they seek to purchase
- Enables participants to speculate 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 recurring and transaction-based revenue, including recurring access and licensing fees, primary and secondary market transaction fees and volume-based premium/coupon processing fees.
While each transaction fee is modest and has little impact on participants’ returns, the potential volume of transactions negotiated on the DelphX ATS is considerable, and the resulting revenue may well and swiftly become material.
How do regulators view DelphX?
Throughout the development of the DelphX ATS and the Quantem securities negotiated thereon, we have consulted with regulatory authorities and received valuable guidance from those agencies. We believe, along with our regulatory counsel, that the transparent and equitable all-to-all structure of the DelphX facility, and the unique risk-dispersing structure of Quantem securities will provide favorable results to credit investors, markets and the authorities that regulate those 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 investor and market benefits and protections provided by the neutral and transparent structure of the DelphX facility, and the risk-mitigating and liquidity-promoting features of its Quantem securities our application for such recognition will likely be viewed favorably by regulators in those regions.
How are the DelphX ATS and CPO and CRN securities regulated?
The DelphX ATS 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 ATS 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 ATS.
Quantem is expected to issue and offer the CPOs and CRNs 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 to date include:
- Invention and development of smart CPO and CRN securities
- Development of the Blockchain-powered Quantem distributed ledger
- Development of the Blockchain-powered Quantem risk-diffusion system
- Development of the MAV≡n pricing engine for continuous 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 ATS and Quantem securities in North America, we plan to deploy consistent utilities for additional credit securities, and to expand geographically based on market 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 alternative to Initial Coin Offerings (ICOs).