Risk Disclosure Statement for SWAP Transactions
YOU SHOULD CAREFULLY CONSIDER WHETHER SWAP TRANSACTIONS ARE SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION, EXPERIENCE, AND INVESTMENT OBJECTIVES. SWAP TRANSACTIONS INVOLVE SUBSTANTIAL RISK OF LOSS AND ARE NOT SUITABLE FOR ALL INVESTORS.
THIS RISK DISCLOSURE STATEMENT (THIS "STATEMENT") DESCRIBES SOME, BUT NOT ALL, OF THE RISKS ASSOCIATED WITH SWAP TRANSACTIONS, INCLUDING CASH-SETTLED COMPUTE FUTURES CONTRACTS REFERENCING THE ORNN COMPUTE PRICE INDEX (OCPI) OFFERED BY ORNNX LLC, A DE MINIMIS SWAP DEALER ("ORNN"). YOU SHOULD CAREFULLY REVIEW THIS STATEMENT BEFORE ENTERING INTO ANY SWAP TRANSACTION WITH ORNN.
1. General Risks of SWAP Transactions
Swaps are complex financial instruments that involve substantial risks. Before entering into a swap transaction, you should understand the following:
Substantial Risk of Loss:
You can lose more than the amount of margin or collateral deposited. Swap transactions are highly leveraged, and a small adverse movement in the price of the underlying index can result in a significant loss or gain.
Suitability:
Determine that the swap transaction is suitable for you in light of your investment objectives, financial circumstances, and risk tolerance.
Liquidity Risk:
Although Ornn intends to facilitate trading, there is no organized exchange for these swaps. You may not be able to offset or liquidate your position at a favorable price or even at all, especially during periods of market stress.
Counterparty Risk:
This is the risk that Ornn, as your counterparty, may default on its obligations under the swap agreement. While Ornn is a corporate entity, it is not a clearing house or an insured financial institution.
Legal Risk:
The legal and regulatory status of swap transactions, especially those involving novel underlying assets like compute capacity, is subject to ongoing change and interpretation, which could affect the enforceability or value of the swap.
Limited Regulatory Oversight:
As a de minimis swap dealer, Ornn is subject to less comprehensive regulation than a fully registered swap dealer. This may affect the legal protections afforded to you.
2. Specific to Cash-Settled Compute Futures Risks
Ornn's swap transactions are based on the Ornn Compute Price Index (OCPI), which tracks the volume-weighted average price of GPU compute capacity.
A. Index/Settlement Risk
Reliance on OCPI Methodology:
The value of your swap position is entirely dependent on the level of the OCPI. The OCPI is calculated based on Ornn's proprietary methodology, which relies on data sourced from various third-party compute providers.
Data Integrity Risk:
Although Ornn maintains verification processes (as described in the OCPI Methodology document), the underlying data used to calculate the OCPI could be inaccurate, incomplete, or subject to errors, which could directly impact the settlement value of your swap.
Methodology Changes:
Ornn reserves the right to refine or change the OCPI methodology, which may affect the index's value, calculation, and representation of the underlying compute market. While Ornn commits to transparency, such changes could be detrimental to your position.
Operational Risk in Settlement:
As these swaps are cash-settled, any failure or delay in the calculation and publication of the final settlement price of the OCPI could lead to delays or disputes in cash settlement.
B. Market Volatility Specific to Compute
Technological Obsolescence:
The underlying asset (GPU compute capacity) is subject to rapid technological change. The introduction of new, more efficient, or cheaper hardware can quickly and dramatically reduce the value of compute capacity referenced by the OCPI, leading to unexpected price fluctuations.
Concentration Risk:
Compute pricing may be concentrated among a few major providers. Events affecting one major provider (e.g., outages, policy changes) could disproportionately impact the OCPI's value.
Regulatory Risk in Technology:
New governmental regulations, trade policies, or export controls related to high-performance computing, semiconductors, or AI infrastructure could suddenly affect market supply and demand, leading to extreme index volatility.
3. Collateral and Margin Risks
Margin Calls:
Swap transactions typically require the deposit of collateral (margin). If the market moves against your position, Ornn may issue a "margin call" requiring you to deposit additional funds or collateral immediately. Failure to meet a margin call can result in the mandatory liquidation of your position at a loss.
Liquidation Risk:
Ornn may have the right to liquidate your position without prior notice if you fail to meet margin requirements, if your counterparty credit limit is breached, or upon the occurrence of other specified events of default. Such forced liquidation may occur at an unfavorable price.
Asset Segregation:
The collateral you provide to Ornn is subject to the terms of the Credit Support Annex (CSA) and may or may not be segregated from Ornn's own assets, depending on the terms agreed upon and applicable law. Understand clearly how your collateral is held.
4. Other Risks
Conflict of Interest:
Ornn may engage in trading for its own account, which could potentially result in conflicts of interest with your swap transactions.
No Fiduciary Duty / No Investment Advice:
Ornn is acting solely as a counterparty to your swap transactions. Ornn does not provide investment advice, act as a fiduciary, or make any recommendations regarding the suitability of any particular transaction. You must rely on your own judgment and the advice of your independent advisors.