Summary: Should an insured user sell his/her Deriveum on the market for a price lower than the purchase price the Hedger will pay the difference.

The Hedger Reserve Fund is a specific structure for the Deriveum Project where 50% of the proceeds from the sale of tokens will be attributed to. This fund will be used by the Deriveum Hedger(s) to offset any loss on Deriveum trade. In short the user will be able to acquire a price hedge (CFD or option) that will pay the difference between the purchase price and the liquidation price, should the latter be lower than the former. The Deriveum Hedger(s) will have access to the Reserve Fund to offset any losses it may have on that trade, reducing the cost of the hedge and making it much more affordable for users.

In our mainline simulation we would expect the cost of the hedge to be approx. 0.2%. Please note that the hedger will be only to the reserved amount, rather than the notional amount of the CDS. Hence if the agreed reserved amount is 30% of the CDS, the price of the hedge would be 0.06%. We expect the hedging of the Deriveum price to be negligible in most cases. However, the Hedger is an instrumental element in the extended regulatory toolbox. Should a certain market participant start to amass too much risk, in the view of its regulator, the latter may request the market participant to be priced-out from the market. In those circumstances the Deriveum hedger will increase the premium for this particular flagged market participant to level that will make the Deriveum trade financially unviable. Utilizing that tool the regulators will be able to curb individual risky behaviour without affecting the whole market of the underlining bonds.

The Hedger is designed in accordance with the ECJ’s ruling on joined Cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06, to avoid conflicts of interests and abuse of market position.


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