# Risk Factors msY Vault

Traditional stablecoins maintain par value through fully collateralized fiat reserves. In contrast, Main Streets msY strategy vault's economic backing is produced through synthetic lending via equity options, where yield is earned by locking in implied interest rates through matched call and put structures. As a result, msY's value reflects market-implied financing conditions rather than bank-held deposits.

### Key Risk Categories and Mitigations

#### 1. Rates Compression Risk 

Box spread yields could compress if excess liquidity floods the options market, eroding any minor premium over T-bills. This might occur in low-volatility regimes or if competitors scale rapidly, as seen with BOXX's growth to $9.3 billion AUM without significant erosion (average yield to expiration: 4.23% as of December 4, 2025).

* **Quantification:** Historical spreads averaged 35-67 bps from 1996-2019 but have narrowed recently due to reduced Treasury convenience yields—e.g., 18-month box spreads dropped from \~34 bps (2012-2019 average) to \~9 bps in 2025. In a worst-case flood (e.g., +50% market liquidity), yields might drop another 5-10 bps, reducing leveraged returns by 0.2-0.4% at 4x leverage.

<figure><img src="/files/IeW5Wu5N4ymST0udnbfx" alt=""><figcaption></figcaption></figure>

* **Mitigation:** Diversify strike widths (favoring wide boxes like BOXX's K1=10, K2=10,010 for stability) and monitor implied rates in real-time. Strategy remains consistent with cash-and-carry even at compressed levels.
* **Probability/Impact: Low/Medium** – Arbitrage keeps floors intact.

#### 2. Mark-to-Market (M2M) Losses:

Sudden rate hikes can cause temporary valuation dips, amplified by leverage. For short-duration boxes, impacts are limited but could delay yield realization if held to maturity. Put-call parity (PCP) violations—fleeting pricing mismatches—may exacerbate this, though they resolve via arbitrage.

* **Quantification:** Drawdown analysis on E-mini S\&P options (last 5 years, including 2025 dislocations):

<table data-header-hidden><thead><tr><th valign="top"></th><th valign="top"></th><th valign="top"></th></tr></thead><tbody><tr><td valign="top">date</td><td valign="top">strategy loss</td><td valign="top">s&#x26;p loss</td></tr><tr><td valign="top">4/3/2025</td><td valign="top">-0.44%</td><td valign="top">-4.93%</td></tr><tr><td valign="top">4/4/2025</td><td valign="top">-0.50%</td><td valign="top">-5.98%</td></tr><tr><td valign="top">4/7/2025</td><td valign="top">-0.44%</td><td valign="top">-0.24%</td></tr></tbody></table>

<figure><img src="/files/4OlpTbr9vORhYhsB7c5S" alt=""><figcaption></figcaption></figure>

* **Mitigation:** Use short durations (≤3 months) to minimize sensitivity; ladder expirations for smoothing. Active rebalancing during hikes to capture higher rates.
* **Probability/Impact:** Medium/Low – Historical Fed actions rarely exceed 0.5-1% hikes quarterly.

#### 3. Leverage and Margin Call Risk:

Leverage (up to 4x) amplifies M2M volatility, potentially triggering FCM margin calls if collateral dips below thresholds during extreme scenarios.

* **Quantification:** FCM caps ensure stability (e.g., 4x at scale); a 1% M2M loss at 4x = 5% collateral hit. Stress test: 2025 vol spikes caused <2% leveraged drawdowns.
* **Mitigation:** Conservative leverage tiers based on TVL; over-collateralize (compared to FCM requirement).
* **Probability/Impact:** Low/Medium – FCM constraints prevent over-leveraging.

4. #### 4. Counterparty and Clearing Risk

Positions are executed and held on Deribit, a leading offshore crypto options exchange without a central clearinghouse. Unlike CME, counterparty risk is directly tied to the exchange’s solvency, risk engine, and insurance fund rather than a regulated clearing entity.

Deribit employs a real-time risk management system, including portfolio margining, auto-liquidation mechanisms, and a dedicated insurance fund to absorb losses from bankrupt accounts. However, this structure does not provide the same systemic guarantees as a SIFMU-designated clearinghouse.

Quantification:

No major user loss events from platform insolvency to date, but crypto exchange failures (e.g., FTX) demonstrate non-zero tail risk Insurance fund size fluctuates (typically hundreds of millions USD equivalent) but is finite Collateral is primarily BTC, ETH, and USDC (USDC carries issuer risk via Circle and banking partners)

Mitigation:

Actively monitor exchange solvency signals (insurance fund levels, open interest concentration, withdrawal activity) Keep excess capital off-exchange; use Deribit only as a trading venue, not a custodian Diversify across venues where possible (e.g., partial allocation to CME or other regulated venues) Daily reconciliation of positions, collateral, and PnL Avoid concentrated exposure during periods of extreme volatility or liquidity stress

Probability / Impact:

Probability: Low–Moderate Impact: Moderate–High (due to absence of central clearing and legal protections)

→ Net Assessment: Higher counterparty risk than CME; materially lower than unsecured DeFi protocols, but still within the crypto exchange risk spectrum

#### 5. Operational and Execution Risk:

&#x20;Errors in monitoring, hedging, or execution could arise, though boxes require no delta/gamma hedging. Initial reliance on OTC with market-makers limits open-market liquidity for deep ITM options.

* **Quantification:** Operational failures in similar strategies (e.g., BOXX) are rare (<0.1% AUM impact historically).
* **Mitigation:** Transition to algorithmic trading for open-market execution; redundant systems with audits. Partner with vetted market-makers.
* **Probability/Impact:** Low/Low – Simpler ops than volatility trades.

#### 6. Liquidity and Redemption Risk:

&#x20;Large redemptions during drawdowns could strain liquidity, as unwinding boxes pre-expiration incurs fees/losses. Tokenized format may face on-chain/off-chain mismatches.

* **Quantification:** At $1B TVL, 20% redemption in stress could delay 5-10% of requests by 1-3 months (box duration). Historical BOXX redemptions: Handled without gates.
* **Mitigation:** Gate mechanisms (e.g., 10% daily cap); hold 20% in liquid buffers; staggered maturities.
* **Probability/Impact:** Medium/Medium – Mitigated by design, but key for DeFi integration.

#### 7. Regulatory and Compliance Risk:

&#x20;Evolving regs on tokenized derivatives (CFTC for CME, SEC for stablecoins) could impose restrictions, reporting, or reclassifications.

* **Quantification:** Recent 2025 CFTC guidance on hybrid products increases scrutiny; potential fines/compliance costs: 0.5-2% of AUM.
* **Mitigation:** Full KYC/AML via doxxed team; engage legal counsel for filings. CME compliance ensures baseline.
* **Probability/Impact:** Medium/Low – Proactive engagement reduces tail risks.

#### 8. Rollover/Reinvestment Risk:&#x20;

Gaps when rolling expiring boxes could expose to interim rate changes or execution delays.

* **Quantification:** Rollover slippage: 2-5 bps historically; in rate volatility, up to 10 bps loss.
* **Mitigation:** Overlapping positions; target liquid expirations; pursue automation and algorithmic execution.
* **Probability/Impact:** Low/Low – Short durations minimize gaps.

#### 9. Concentration Risk:

&#x20;Reliance on S\&P-linked boxes could correlate with equity crashes, though delta-neutral.

* **Quantification:** Correlation to S\&P: <0.1 historically; 2025 drawdowns tied to vol, not direction.
* **Mitigation:** Diversify underlyings (e.g., add Nasdaq, BTC).
* **Probability/Impact:** Low/Medium – Broad market exposure.

#### 10. Smart Contract/Oracle Risk (DeFi-specific):

&#x20;If vault tokenization involves on-chain elements, code bugs or oracle failures could affect pricing/redemptions.

* **Quantification:** Audit history in DeFi: 5-10% protocols exploited; potential loss: 100% in hack.
* **Mitigation:** Multi-audits; decentralized oracles for off-chain data; insurance via Nexus Mutual
* **Probability/Impact:** Low/High – Critical for curation; we prioritize battle-tested code.

#### 11. Team and Rug Risk:

&#x20;Doxxed team eliminates anonymous rugs; paper trails ensure accountability.

* **Quantification:** Insider risks: Negligible with oversight.
* **Mitigation:** Vesting schedules; multi-sig controls.
* **Probability/Impact:** Very Low/Low.

#### Conclusion and Overall Risk Profile:&#x20;

This strategy's risks are balanced and manageable, with mitigations drawing from TradFi best practices. We employ diversified short-duration boxes, conservative leverage, and robust monitoring to maintain a low-volatility profile akin to ultrashort bonds. In stress scenarios (e.g., 2025 dislocations), max drawdowns remain under 1% unlevered.

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