X factor to negate chip is fine, and this coming from a dorm player who curses whenever someone activates it. Chip damage in this game is insane, and for low health characters it's completely nuts sometimes. You're still running down their xfactor timer while they're in blockstun, no reason to punish them anymore for using it.
If they used X-Factor at full screen without already possessing an offensive use, they deserve all the punishment that can be given to them.
You know what's really crazy for low health characters? Getting comboed. Maybe X-Factor should negate combos, too. This logic just does not make sense. Characters are balanced by risk and reward. Most chip damage is not free - it's a calculated risk you make. All it takes is one missed Dark Hole or Purification, and Dormammu is gone against a competent player, even at full-screen against most. Have you ever noticed that most competitive Dormammu players don't use those moves all that much? They usually focus on his teleport mix-ups, because it's just too risky to throw out moves that take a half-second to start up, and a full second to complete against a competent opponent.
X-Factor arbitrarily removes the offensive potential of a large portion of the cast. I would even go so far as to claim Capcom only added it because they said "woah!" to level 3 X-Factor chip damage, were too lazy to balance it, added chip damage negation for "balance", and called it a day.
On one hand, yeah, X-factor negating chip damage does favour rushdown characters, but if it didn't, then it would encourage keepaway playstyles even more, and with the right character setup, the last character of anyone fighting a keepaway team might as well not exist as X-factor + chip damage would undoubtedly kill them without them being able to do anything.
I wish keepaway were so simple; I am honestly unbothered by someone activating X-Factor at the start of the match to negate chip to get in. That's not an issue at all. What irritates me is when I just have Dormammu left, my opponent and I both activate level 3 X-Factor, and the situation is horribly against me just because most of the benefits I get from level 3 X-Factor are entirely negates by my opponent's usage.
X-23 becomes a fearless warrior in my face, and the best I can do is block or hope she makes a mistake. It's fine to have differences and imbalances, but no one would think it were fine if there were a "disarm" system in this game: push a button at any time, and if your opponent happens to wield a weapon, they can't use it anymore. That would not fly, and it's not any different with X-Factor negating chip damage.
Now, along with the previous idea that X-Factor be a "groove" selection, I think it would be fine to, say break X-Factor into its various buffs, such as chip damage negation, damage boosting, speed boosting, health regeneration, etc. and when you choose X-Factor, you have to choose which of these buffs you get via your choice of button input. Then my opponent at least has to give something up for that fearless offense, instead of getting the whole package while I get a half-eaten sandwich. Maybe, right as you press X-Factor, you can continue to hold one of the inputs, and that determines which buff you get.