Michael Shapiro, director, and Andrew Scott, md at NetDelta answer SCI's questions

Andrew Scott

Q: How and when did you/your firm become involved in the credit derivative market?
MS: NetDelta was founded in 2008 to address the counterparty risk management challenges that have been present in the credit derivative market since its inception. We believe that there is a structural problem in the OTC CDS market, whereby individual transactions have been consistently layered on top of each other, creating a complex web of overlapping and unmanageable exposures. This resulted in large gross notionals - and therefore counterparty risk - which are many multiples of actual market risk.

NetDelta seeks to remove the excess counterparty exposure, while keeping participants' market exposure constant.                                     

Q: How has your service/offering developed since then?
AS: The CDS market has constantly evolved and so has NetDelta. Over the years much work has been done to increase transparency, processing and connectivity in the OTC markets.

NetDelta helps add to the work that has been done in the past, while resolving counterparty risk issues which have often been overlooked. NetDelta is a post-trade platform and makes use of industry protocols, straight-through processing and links to DTCC, so that all positions and transactions are stored in DTCC's Trade Information Warehouse.

Q: Which market constituent is your main client base? Do you focus on a broad range of asset classes or only one?
MS: NetDelta focuses primarily on sell-side institutions; however, there are definitely applications to the buy-side. In addition, the platform has been set up for OTC credit derivative contracts, but there is no reason why it cannot be extended to include other OTC instruments.

Q: How do you differentiate yourself from your competitors?
AS: NetDelta offers a superior solution in that it seeks to eliminate counterparty risk. Many of the existing solutions in the market, including central counterparties, either re-distribute or actually concentrate risk in a single entity rather than removing it.

Michael Shapiro

We believe that NetDelta's model, which has been built and tested over a period of over three years, will help participants and regulators understand the amount of risk in the system and who bares it. For example, if NetDelta had been in place during Lehman Brothers' failure, the losses in the market would have been significantly reduced. NetDelta allows the most experienced party to assess credit risk, rather than outsourcing the decision to a third party.

Q: Which challenges/opportunities does the current financial environment bring to your business and how do you intend to manage them?
MS: The challenges of the current financial environment have helped shine a light on risk management. Participants and regulators are focused on finding solutions that help reduce risk while allowing the markets to function in an orderly manner. There has been great interest in NetDelta due to the fact that the platform allows participants to maintain their bilateral relationships while mitigating the risks inherent in the market.

Q: What major developments do you need/expect from the market in the future?
AS: Given the failures of the past, we expect a greater regulatory presence going forward. We believe that central clearing for credit default swaps should not be mandated and that market participants will choose the methodology which works best for their business model.

If the recent financial crisis has taught us anything, it's to be aware of over concentrating risk in a single place or relying on a single model to calculate risk [see also separate News Analysis]. Certain products will undoubtedly gravitate towards central clearing and exchanges, while others are better suited to trade in the over-the-counter market. NetDelta will continue to exist as a solution in the OTC markets to help reduce counterparty risk.

About NetDelta
NetDelta is a post-trade platform that allows participants to minimise and diversify their counterparty exposure while continuing to trade bilaterally in the over-the-counter CDS market.

NetDelta addresses a primary concern of both regulators and market participants by reducing counterparty risk concentration through the use of pooled credit and standardised credit derivative contracts. The platform multi-laterally nets transactions and uses participants' credit lines to reallocate exposures so that participants' market exposure stays neutral but counterparty risk is minimised.