[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                    CHANGING MARKET ROLES: THE FTX 
                       PROPOSAL AND TRENDS IN NEW
                          CLEARINGHOUSE MODELS

=======================================================================

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION
                               __________

                              MAY 12, 2022
                               __________

                           Serial No. 117-33
                           
                           
                 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                           
                           


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov
                                                  
                              ___________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
48-754 PDF                WASHINGTON : 2022                         



                        COMMITTEE ON AGRICULTURE

                     DAVID SCOTT, Georgia, Chairman

JIM COSTA, California                GLENN THOMPSON, Pennsylvania, 
JAMES P. McGOVERN, Massachusetts     Ranking Minority Member
ALMA S. ADAMS, North Carolina, Vice  AUSTIN SCOTT, Georgia
Chair                                ERIC A. ``RICK'' CRAWFORD, 
ABIGAIL DAVIS SPANBERGER, Virginia   Arkansas
JAHANA HAYES, Connecticut            SCOTT DesJARLAIS, Tennessee
ANTONIO DELGADO, New York            VICKY HARTZLER, Missouri
SHONTEL M. BROWN, Ohio               DOUG LaMALFA, California
BOBBY L. RUSH, Illinois              RODNEY DAVIS, Illinois
CHELLIE PINGREE, Maine               RICK W. ALLEN, Georgia
GREGORIO KILILI CAMACHO SABLAN,      DAVID ROUZER, North Carolina
Northern Mariana Islands             TRENT KELLY, Mississippi
ANN M. KUSTER, New Hampshire         DON BACON, Nebraska
CHERI BUSTOS, Illinois               DUSTY JOHNSON, South Dakota
SEAN PATRICK MALONEY, New York       JAMES R. BAIRD, Indiana
STACEY E. PLASKETT, Virgin Islands   CHRIS JACOBS, New York
TOM O'HALLERAN, Arizona              TROY BALDERSON, Ohio
SALUD O. CARBAJAL, California        MICHAEL CLOUD, Texas
RO KHANNA, California                TRACEY MANN, Kansas
AL LAWSON, Jr., Florida              RANDY FEENSTRA, Iowa
J. LUIS CORREA, California           MARY E. MILLER, Illinois
ANGIE CRAIG, Minnesota               BARRY MOORE, Alabama
JOSH HARDER, California              KAT CAMMACK, Florida
CYNTHIA AXNE, Iowa                   MICHELLE FISCHBACH, Minnesota
KIM SCHRIER, Washington              JULIA LETLOW, Louisiana
JIMMY PANETTA, California            ------
SANFORD D. BISHOP, Jr., Georgia
MARCY KAPTUR, Ohio

                                 ______

                      Anne Simmons, Staff Director

                 Parish Braden, Minority Staff Director

                                  (ii)



                             C O N T E N T S

                              ----------                              
                                                                   Page
Kuster, Hon. Ann M., a Representative in Congress from New 
  Hampshire, submitted article...................................   199
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     1
    Prepared statement...........................................     3
    Submitted material...........................................    85
    Submitted comment letter on behalf of, and authored by, 
      Michael J. Seyfert, President and Chief Executive Officer, 
      National Grain and Feed Association........................   198
Thompson, Hon. Glenn, a Representative in Congress from 
  Pennsylvania, opening statement................................     3

                              Witnesseses

Duffy, Hon. Terrence A., Chairman and Chief Executive Officer, 
  CME Group, Chicago, IL.........................................     5
    Prepared statement...........................................     7
    Submitted question...........................................   218
Bankman-Fried, Samuel ``Sam'', Co-Founder and Chief Executive 
  Officer, LedgerX LLC d/b/a FTX US Derivatives, Chicago, IL.....    12
    Prepared statement...........................................    13
Lukken, J.D., Hon. Walter L., President and Chief Executive 
  Officer, Futures Industry Association, Washington, D.C.........    27
    Prepared statement...........................................    29
    Supplementary material.......................................   202
Edmonds, Christopher S., Chief Development Officer, 
  Intercontinental Exchange, Inc., Atlanta, GA...................    30
    Prepared statement...........................................    31
    Supplementary material.......................................   217
Perkins, Capt. Christopher R., (Ret.), U.S. Marines; Managing 
  Partner and President, CoinFund Management LLC, New York, NY...    34
    Prepared statement...........................................    36

 
                    CHANGING MARKET ROLES: THE FTX 
                       PROPOSAL AND TRENDS IN NEW
                          CLEARINGHOUSE MODELS

                              ----------                              


                         THURSDAY, MAY 12, 2022

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
1300 of the Longworth House Office Building, Hon. David Scott 
of Georgia [Chairman of the Committee] presiding.
    Members present: Representatives David Scott of Georgia, 
Costa, McGovern, Adams, Spanberger, Hayes, Brown, Kuster, 
Maloney, Plaskett, O'Halleran, Carbajal, Khanna, Lawson, 
Correa, Craig, Harder, Schrier, Thompson, Austin Scott of 
Georgia, Crawford, DesJarlais, LaMalfa, Davis, Allen, Rouzer, 
Kelly, Bacon, Johnson, Baird, Cloud, Mann, Miller, Cammack, and 
Fischbach.
    Staff present: Lyron Blum-Evitts, Carlton Bridgeforth, 
Emily German, Ashley Smith, Paul Balzano, Caleb Crosswhite, 
Jennifer Tiller, John Konya, and Dana Sandman.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    The Chairman. Welcome, everyone. The Committee will now 
come to order. And I want to thank all of you for coming to 
this important hearing. It is very timely. We see right now 
what is happening in the markets with cryptocurrency, which 
brings us to the significance and importance of this timely 
hearing. So thank you all for coming.
    Our hearing is entitled, Changing Market Roles: The FTX 
Proposal and Trends in New Clearinghouse Models. After a brief 
opening statement, Members will receive testimony from our 
witnesses today, and then the hearing will open for questions. 
And I will begin with my opening statement.
    Ladies and gentlemen, this is important. I feel personally 
that this could be a serious threat, particularly to our 
derivatives market and our cross-border dealings that we have 
been involved with. As we know, we are dealing with an $822 
trillion piece of the world's economy. That is what is on the 
table here today. And primarily it is to keep our economy, our 
financial system as the greatest in the world. That is what is 
at stake at this hearing.
    So, I look forward and I am sure we will have a robust and 
well-informed debate today on the merits and the suitability of 
the clearing model that is proposed now by FTX. This is why we 
are here. And I have said many times before, and I think my 
reputation speaks for it in my 20 years, and that is this: I 
have a tremendous respect, love, and admiration for our great 
financial system. As Chairman of our House Agriculture 
Committee, as well as senior Member of the House Financial 
Services Committee, I am particularly well-suited to really 
deal with this emerging and worrisome threat. Maybe after today 
you can convince me that it is not a threat, but until then, it 
seems to be a threat to me, to our clearinghouses and the 
derivatives market.
    Just as the CFTC has recognized the novelty of FTX's 
proposal to trade margin products under a non-intermediated 
clearing model and the need for closer public examination, I 
have heard a number of concerns about the risk, about the 
threats of their proposed model, and I believe that we must 
take great caution to preserve and protect our great financial 
system, the protections and the international standing it 
affords our market participants.
    And that is why I have asked you and I have brought some 
very distinguished individuals today representing a variety of 
interests and perspectives here to ensure that we are giving 
this conversation the appropriate amount of attention and that 
all the voices on this issue will be heard this day.
    Earlier this year, I invited and asked Chairman Behnam of 
the CFTC to come and testify before our Committee on the state 
of the CFTC, and I was heartened to hear that the Commission 
would offer an opportunity for robust public input on this FTX 
proposal. Any new and untested proposal that has widespread 
implications for the orderly clearing of derivatives trades 
must be given due and proper consideration.
    Make no mistake, ladies and gentlemen, while the proposed 
clearing model by FTX is limited in a select few cryptocurrency 
contracts, we must consider the potential of this model to 
expand into other derivatives market and be adopted in some 
form by other clearinghouses.
    Further, I am greatly concerned about the potential of this 
proposal to upset international agreements that the CFTC and 
this Committee have worked so hard to preserve, which have 
deemed our current clearing structure and regulations 
equivalent to EU and UK rules, affording U.S. derivatives 
clearing organizations the ability to provide clearing services 
in their markets.
    I want to remind you all that awhile back as I was serving 
as Chairman of the Commodity Exchanges, Energy, and Credit 
Subcommittee, that I, along with then-Chairman Collin Peterson 
and Mike Conaway, who was also Chairman, and my friend Austin 
Scott, we led a fight then to preserve the sanctity of our 
clearinghouses. There was a threat that the EU wanted to 
regulate them. We had to step in and stop that. So this is why 
this is very critical as we look at this. Both sides of the 
aisle, Democrats and Republicans, we are very concerned about 
that.
    We have the greatest financial system in the world, as I 
said, and we must ensure that the CFTC's regulatory safeguards 
governing derivatives markets help us maintain that position in 
the future. That is why this hearing is important.
    And as Chairman of our House Agriculture Committee, I 
believe it is very important for this Committee to ensure that 
this remains the case. And I look forward to our hearing today, 
and I am really looking forward to hearing our expert panelists 
help us as we navigate this challenging issue.
    [The prepared statement of Mr. David Scott follows:]

 Prepared Statement of Hon. David Scott, a Representative in Congress 
                              from Georgia
    Good morning to our witnesses and thank you for joining us today. 
The purpose of today's hearing is to examine the FTX proposal currently 
before the CFTC for public comment and the potential of such changes to 
the traditional clearinghouse model and roles of various market 
participants.
    I look forward to what I'm sure will be a robust and well-informed 
debate today on the merits and suitability of the clearing model 
proposed by FTX.
    As I have said many times before, I have a tremendous love and 
admiration for our great financial system.
    And as Chairman of our House Agriculture Committee, as well as a 
senior Member of the House Financial Services Committee, I am 
particularly interested in new and novel developments involving the 
CFTC and our financial system.
    Just as the CFTC has recognized the novelty of FTX's proposal to 
trade margined products under a non-intermediated clearing model and 
the need for closer public examination, I have heard a number of 
concerns about the risks of their proposed model and I believe that we 
must take great caution to preserve and protect our financial system, 
the protections, and the international standing it affords our market 
participants. That is why I have brought people representing a variety 
of interests and perspectives here together today to ensure that we are 
giving this conversation the appropriate amount of attention and that 
all of the voices are being heard.
    Earlier this year, Chairman Behnam was invited to testify before 
this Committee on the state of the CFTC and I was heartened to hear 
that the Commission would offer the opportunity for robust public input 
on the FTX proposal. Any new and untested proposal that has widespread 
implications for the orderly clearing of derivatives trades must be 
given due and proper consideration.
    Make no mistake--while the proposed clearing model by FTX is 
limited to a select few cryptocurrency contracts, we must consider the 
potential of this model to expand into other derivatives markets and 
adopted in some form by other clearinghouses.
    Furthermore, I am gravely concerned about the potential of this 
proposal to upset international agreements that the CFTC and this 
Committee have worked so hard to preserve which have deemed our current 
clearing structure and regulations equivalent to EU and UK rules, 
affording U.S. derivatives clearing organizations the ability to 
provide clearing services in their markets.
    By holding today's hearing, we are giving yet another public 
platform to shine a light on these novel market structures and help to 
ensure that the potential implications--good or bad--of such proposals 
are thoroughly considered before any changes are made.
    We have the greatest financial system in the world, and we must 
ensure that the CFTC's regulatory safeguards governing derivatives 
markets help us maintain that position into the future.
    As Chairman of our House Agriculture Committee, I believe it is the 
role of this Committee to ensure this remains the case and I look 
forward to hearing everyone's perspectives here today.
    I will now turn it over to the distinguished Ranking Member, the 
gentleman from Pennsylvania, Mr. Thompson, for any opening remarks he 
would like to give.

    The Chairman. With that, now I will turn to our 
distinguished Ranking Member, my friend from Pennsylvania, 
Ranking Member Thompson, for his opening statement.

 OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    Mr. Thompson. Well, thank you, Mr. Chairman. I want to 
acknowledge your efforts to work collaboratively with me on 
this hearing. I especially appreciate that today's table is a 
bipartisan witness table, and it will be a better hearing 
because of our work together, so thank you very much.
    In 1974 when the CFTC was first established, electronic 
trading was so novel that Congress directed the Commodity 
Futures Trading Commission in statute to determine the 
feasibility of trading by computer. Today, of course, the idea 
of computers would not have taken over markets seems almost 
laughable. Our markets exist almost entirely on computers. 
There are virtually no open outcry pits left anywhere in the 
world, but this transition didn't happen overnight. Certainly, 
many people are responsible for the transition to electronic 
markets. However, we have to give credit to both CME and ICE 
for their pioneering work in the 1990s and the 2000s to bring 
the futures market into the digital age.
    The benefits of this technology have been enormous. Today, 
computers and capital work together to deepen liquidity, narrow 
spreads, reduce transaction times, and create new hedging 
opportunities. Electronic trading provides greater access and 
availability to all market participants. But in the eyes of 
some, it also has some drawbacks. Certainly, the men and women 
put out of work might have mixed feelings. And to this day a 
few market participants continue to believe that electronic 
markets are more volatile and less reliable than human-
intermediated markets.
    Now, since moving markets to the screen, technology 
underpinning our markets has not stood still. Just last year, 
CME Group announced it is undertaking the next step in 
electronic markets by migrating to the cloud. And like the move 
to electronic trading, their proposal could be both beneficial 
and disruptive to the markets. Cloud-based infrastructure could 
be another revolution in leveling the playing field for market 
access, reducing cost for participants while also upending how 
existing participants interact with exchanges.
    Now, today, we are going to hear about another proposed 
market innovation, a recent proposal from FTX to expand their 
current non-intermediated clearinghouse to offer margin 
products. This proposal has generated excitement, concern, 
hope, and confusion. It sounds like Washington actually. You 
get all four of those emotions going at once, that is the kind 
of world we work and live in sometimes. But we acknowledge 
that. And this proposal has generated all of those emotions 
across the derivatives and the crypto industries. And as I have 
said in the past, I believe this proposal is worthy of balanced 
consideration.
    Now, I know the Commission is working diligently to 
consider it. A few weeks ago Chairman Behnam sat before us in 
this very room--thank you for that hearing, that opportunity--
and explained his process. Specifically, he committed to us 
that the Commission will consider, as they do every proposal, 
the proposal publicly according to the core principles for a 
derivatives clearing organization. Chairman Behnam also 
committed to a comment period, which closed yesterday, and to 
hold a public roundtable, which will take place at the end of 
the month.
    Now, I don't believe this Committee should duplicate that 
work. We have empowered the CFTC, the Commission and the 
Commissioners, to ensure stakeholders and the public will have 
a seat at the table, and now we must trust the process. Where 
the Commission fails to consider the proposal appropriately, 
deviates from the law, or unnecessarily limits debate, we 
should not hesitate to weigh in. But that has not happened.
    For me, the most interesting part of today's testimony will 
be a broader conversation about changing market structure and 
the ever-evolving impact of technology on markets, sometimes at 
a crawl and sometimes in leaps and bounds. Technological 
innovation is revolutionizing the world around us.
    Now, I hope we can discuss how technology can continue to 
empower market participants by reducing costs, improving 
access, and protecting our financial markets by increasing 
transparency and reducing systemic risk. Now, we have the 
largest, most liquid, most dynamic derivatives markets in the 
world because the potential for innovation is baked into our 
regulatory structure. In the end, it is the market participants 
and ultimately the American people who will benefit from the 
quality of these markets. Protecting and promoting the health 
of our markets is what should drive each of our regulatory 
decisions.
    And I want to say a warm welcome to all of our witnesses 
and I thank all of them for their diligence in preparing for 
today. And I look forward to your testimony. And with that, Mr. 
Chairman, I yield back.
    The Chairman. Thank you, Ranking Member.
    The chair would request that our other Members submit their 
opening statements for the record so our witnesses may begin 
their testimony and to ensure that we have ample time for 
everyone to ask questions and our witnesses time to give good 
thorough answers.
    Now it is my pleasure to introduce our distinguished panel. 
Our first witness today is Mr. Terry Duffy. Mr. Duffy is the 
Chairman and Chief Executive Officer of the CME Group. Our next 
witness today is Mr. Sam Bankman-Fried, who is the Chief 
Executive Officer and Founder of the FTX U.S. Derivatives. And 
our third witness today is Mr. Walt Lukken, the President and 
Chief Executive Officer of the Futures Industry Association. 
And our fourth witness today is Mr. Christopher Edmonds, the 
Chief Development Officer of the Intercontinental Exchange. And 
our fifth and final witness today is Mr. Christopher Perkins, 
the President of CoinFund Management, LLC. Welcome to all of 
you. Thank you for coming.
    Now we will get right to the testimonies. Mr. Duffy, you 
will be first. Please begin when you are ready.

    STATEMENT OF HON. TERRENCE A. DUFFY, CHAIRMAN AND CHIEF 
           EXECUTIVE OFFICER, CME GROUP, CHICAGO, IL

    Mr. Duffy. Well, thank you, Mr. Chairman and Ranking Member 
Thompson, for holding this hearing today. It is a great 
pleasure to be back in this body. I haven't been here in 
several years, and it is wonderful to be in person with 
everyone again. And I hope you and your families are all 
healthy and doing well.
    As the Chairman said, my name is Terry Duffy. I am the 
Chairman and Chief Executive Officer of CME Group, the world's 
leading derivatives marketplace, offering futures and options, 
contracts across every investable asset class. Risk management 
and innovation are hallmarks of CME Group and have always been 
fundamental to centrally cleared derivatives markets in the 
United States.
    Under false claims of innovation that are little more than 
cost-cutting measures, FTX is proposing a risk-management light 
clearing regime that would inject significant systemic risk 
into the U.S. financial system. The FTX model would come at the 
expense of proven risk mitigation practices, market integrity, 
and ultimately financial stability. In fact, the FTX proposal 
would significantly increase market risk by potentially 
removing up to $170 billion of loss-absorbing capital from the 
cleared derivatives market, eliminating standard credit, due 
diligence practices, and perhaps most importantly destroying 
risk management incentives by eliminating stakeholder capital 
requirements and mutualized risk.
    The FTX proposal to instantaneously auto-liquidate any 
customer who is under margin at any given moment in time would 
jeopardize both market integrity and financial stability. Auto-
liquidation can exacerbate volatility and create dramatic price 
moves during times of turbulence. In an already stressed 
market, these automated liquidations could lead to a repeated 
pattern of price declines followed by additional liquidations. 
This has the potential to build losses on top of losses and 
destabilize markets for all participants.
    Furthermore, FTX's market maker and backstop liquidity 
provider plans imported from its offshore practices in low 
regulatory jurisdictions raises serious questions about the 
potential conflicts of interest embedded in the FTX model.
    Finally, the FTX proposal eliminates critical customer 
protections. Under their model, market participants will lose 
important customer segregation protections and could be exposed 
to increased collateral investment losses. In non-defaulting 
customer positions--let me repeat that--non-defaulting customer 
positions could be terminated or collateral liquidated at the 
discretion of first line of defense against losses for any 
reason under any market condition. By contrast, U.S. 
clearinghouses like CME Clearing have billions of dollars of 
resources available in the default waterfall that must be used 
to cover losses prior to any possibility of a position tear-up.
    The FTX proposal is not innovation. It is an evasion of 
best practices and prudent risk management. And while the 
Commodity Exchange Act may promote innovation, it does not 
promote innovation for the sake of innovation alone. In order 
to approve the FTX proposal, the CFTC must determine that it 
complies with the core principles and is in the public's best 
interest. We do not see how the Commission could credibly make 
this finding or legally limit its approval even on a test basis 
to crypto only. If the Commission makes its finding for crypto 
markets, they will not be able to keep FTX or others from 
expanding into other asset classes. To suggest otherwise would 
put all market participants at an extreme disadvantage. Market 
structure changes would affect the entire industry, not just 
FTX. And all platforms must be able to participate under the 
same rules at the same time. Accordingly, the CFTC should 
either reject the FTX proposal or commence a formal rulemaking 
to allow a broader public discussion of appropriate risk 
management standards.
    In conclusion, let me make one final point. As you know 
better than anyone, Chairman Scott, you and this Committee have 
spent enormous time--you mentioned it in your opening remarks--
and energy defending the CFTC's standards and regulatory 
oversight as equal to or better than any other jurisdiction in 
the world. If in fact the CFTC decides to approve a rushed and 
ill-conceived proposal, we believe the hard-won cross-border 
equivalence agreement that you referred to will come under 
question.
    Just a few weeks ago, sir, a senior European Central Bank 
official warned, and I quote, ``The crypto market is now larger 
than the subprime mortgage market was when it triggered the 
global financial crisis.'' To put this into context, the 
subprime mortgage market was at $1.8 trillion in 2008. Today, 
the cryptocurrency value is north of $1.8 trillion and growing. 
The stakes are extremely high.
    Exempting FTX from well-established U.S. clearing rules 
could undermine confidence in our regulatory regime. Therefore, 
I applaud you, Mr. Chairman and this Committee, for holding 
this hearing today. Your oversight of the derivatives 
marketplace structure is critical to ensuring sound public 
policy. Mr. Chairman, Ranking Member, and Members of the 
Committee, I thank you. I look forward to answering your 
questions.
    [The prepared statement of Mr. Duffy follows:]

   Prepared Statement of Hon. Terrence A. Duffy, Chairman and Chief 
               Executive Officer, CME Group, Chicago, IL
    Chairman Scott, Ranking Member Thompson, and Members of the 
Committee, I am Terry Duffy, Chairman and CEO of CME Group Inc. 
(``CME''), the world's leading and most diverse derivatives 
marketplace. We offer the widest range of global benchmark products 
across all major asset classes and provide clearing services for our 
customers around the globe through our clearinghouse, CME Clearing.
    Thank you for the opportunity to testify today regarding proposed 
revisions to the derivatives clearing organization (DCO) registration 
order of LedgerX, LLC d.b.a. FTX US Derivatives (``FTX'') to offer 
central clearing of margined products directly to retail customers (the 
``FTX Request'' or ``FTX Proposal''). This proposal, if approved by the 
Commodity Futures Trading Commission (``CFTC''), would represent a 
dramatic change to the market structure of the derivatives industry and 
would set a precedent with wide-ranging negative implications for the 
safety and soundness of U.S. financial markets.
    FTX's Proposal is glaringly deficient and poses significant risk to 
market stability and market participants. We believe the implications 
of this application far exceed the parameters of the typical matters 
that lay before the CFTC, and we appreciate your interest in 
considering the numerous pitfalls inherent in the FTX Request. It is 
imperative that the committee of jurisdiction provides oversight and 
consideration of this matter. It is of fundamental importance to the 
effectiveness of the global commodity markets, and I hope that you will 
give the FTX Request the fullest measure of scrutiny because, as 
proposed, it promises to usher in a derivatives clearing model rife 
with risk management deficiencies, market integrity issues, cross 
border implications, and customer protection issues.
I. Risk Management Deficiencies in the FTX Request
    FTX's proposal does not instill the necessary risk management 
incentives for its participants--it is risk management ``light.'' Under 
this regime, FTX will not impose any capital requirements on its 
participants and does not intend to maintain mutualizable participant 
resources (i.e., loss-sharing among non-defaulting participants) to 
address participant defaults.
    More broadly, FTX's proposal is insufficient, as its direct model 
eliminates potentially billions of dollars of loss-absorbing resources 
that are currently a feature of the derivative markets.
A. Elimination of Capital Requirements
    FTX's proposed risk management regime has no capital requirements 
for participants. Today, DCOs maintain strict minimum financial 
requirements and are backstopped by the FCMs' own capital. FCMs, in the 
aggregate, maintain over $173 billion in adjusted net capital and other 
resources.\1\ There is no indication that FTX would hold capital or 
residual interest comparable to FCM levels today.
---------------------------------------------------------------------------
    \1\ CFTC, Financial Data for FCMs (Feb. 2022) (noting, figure 
includes adjusted net capital and residual interest for the customer 
segregated account), available at https://www.cftc.gov/sites/default/
files/2022-04/01-%20FCM%20Webpage%20Update%20-%20February%202022.pdf.
---------------------------------------------------------------------------
B. Lack of Counterparty Due Diligence
    Counterparty due diligence is a linchpin of the modern financial 
system and a key part of current DCOs' risk management practices, used 
to confirm that clearing members are well-placed to meet the 
obligations that arise from their risk-taking. FTX would not be the 
first party, novice or otherwise, to suggest that financial modeling 
and algorithm design could eliminate the need for best practices in 
risk management; however, the eventual fate of Long-term Capital 
Management \2\ and bespoke financially engineered products, such as 
mortgage-backed securities and collateralized debt obligations, suggest 
that it would be folly to unwind core risk management practices based 
on the assurance that ``this time it's different.''
---------------------------------------------------------------------------
    \2\ The near-failure of Long-Term Capital Management (``LTCM'') and 
the hedge fund it operated (``LTCM Fund'') in the summer and early fall 
of 1998 vividly highlighted the need for using sound risk management 
practices in the financial markets. LTCM engaged in highly leveraged 
trading for the LTCM Fund based on the general strategy that liquidity, 
credit and volatility spreads would narrow, in a range of financial 
instruments including derivatives. LTCM relied on risk management 
models that underestimated the risk that the spreads would widen as 
they did. By the end of August 1998, the capital held by the LTCM Fund 
had declined over 50% from the start of the year. The President's 
Working Group on Financial Markets issued a report in April 1999 
identifying the risk management and other failures at LTCM and its 
counterparties and provided a number of recommendations in the report 
to enhance risk management practices, including counterparty due 
diligence. See ``Hedge Funds, Leverage, and the Lessons of Long-Term 
Capital Management Report of The President's Working Group on Financial 
Markets'' (April 1999).
---------------------------------------------------------------------------
C. Insufficient Financial Resources for Managing Participant Defaults
    Unsurprisingly given the proposed lack of capital requirements for 
participants, under FTX's proposal, FTX will have insufficient 
financial resources to address default events (i.e., tail risk). 
Additionally, by proposing to self-fund its guaranty fund, FTX 
eliminates a core incentive for participants to effectively manage 
their risks. In contrast, current DCOs require clearing members to fund 
a mutualized pool of resources with knowledge of the risks they assume 
(in addition to a DCO's own contribution known as, ``skin-in-the-
game''), so that as risk-taking increases, resources increase. This 
provides incentives to clearing members to manage their own and their 
customers' risk in business-as-usual and stressed markets, while also 
incentivizing them to actively participate in the default management 
process. Removing the potential for loss mutualization, as FTX 
proposes, eliminates these risk management incentives.
D. Failure to Use Appropriate Stress Scenarios for Sizing Financial 
        Resources
    FTX also does not appear to fully understand the concept of 
``extreme but plausible market conditions'' (emphasis added) \3\ for 
the purposes of guaranty fund sizing. Surprisingly, FTX appears to 
suggest that increasing the assumed number of participants defaulting 
meets this requirement,\4\ and no other information is provided in the 
FTX Request on its stress testing methodology. DCOs today size their 
financial resources using both historical data and hypothetical 
scenarios that are designed to capture tail risk.\5\ Failing to do this 
ignores tail risk and leads to inadequate resources to cover default 
losses, particularly during stressed markets.
---------------------------------------------------------------------------
    \3\ CFTC Regulation 39.11(a)(1).
    \4\ FTX Request, Letter from Julie L. Schoening, Ph.D., Chief Risk 
Officer, FTX US Derivatives, to Clark Hutchinson, Dir., Div. of 
Clearing & Risk, at pg. 3 (Feb. 8, 2022) (Financial Resource 
Requirements under Core Principle B and CFTC Regulation 39.11(a)(1) in 
the Absence of Clearing Futures Commission Merchants (``FCMs'')) 
(noting, ``[i]ncreasing the number of the largest participants that are 
assumed to default at the same time makes a scenario more extreme but 
naturally decreases the plausibility of such a scenario.''), available 
at https://www.cftc.gov/media/7006/
ledgerx_dba_ftx_ltr_fin_resource_req2-8-22/download.
    \5\ CFTC Regulation 39.11(c)(1) (noting, CFTC Regulation 39.36(a) 
establishes additional requirements with respect to a systemically 
important and electing subpart C DCO's stress testing methodology 
(e.g., scenarios considered)).
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II. Market Integrity Jeopardized
    The FTX Request, as designed, would have a significant negative 
impact on market integrity. FTX assumes that auto-liquidation is a 
panacea that eliminates the need for other risk management practices. 
FTX is arguing in favor of eliminating best practices in risk 
management represented by risk-based capital and other participation 
requirements, counterparty credit due diligence, and participant funded 
mutualizable resources for managing defaults, among others. This 
collectively eliminates core incentives for participants to effectively 
manage their risk-taking.
    Contrary to FTX's assertions, auto-liquidation is not a new concept 
and has not been broadly implemented due to the panoply of problems it 
creates, particularly in stressed markets. Auto-liquidation may, at 
first glance, appear to be novel but it has been evaluated and 
generally dismissed as a market-wide risk management tool for three 
primary reasons: (1) it risks creating a vicious pro-cyclical cycle of 
cascading liquidations; (2) it incentivizes market abuse and bad 
behavior, including but not limited to, market participants triggering 
and trading against liquidation orders and market participants 
anticipating and front-running the liquidation orders, exacerbating 
market volatility and increasing liquidation cost; and (3) at least in 
the case of the FTX implementation, it closes out participant positions 
without the ability to cure the collateral shortfall.
    Moreover, FTX appears to realize that its proposed auto-liquidation 
tool and use of backstop liquidity providers may not always be 
successful. However, rather than proposing additional resources or risk 
management incentives to address an unsuccessful liquidation, FTX's 
proposed solution is to tear up positions in a manner similar to what 
was recently observed in the nickel derivatives market in the UK.
A. Cascading Liquidations
    FTX's proposed use of an auto-liquidation algorithm across its 
entire customer-base could cause widespread market disfunction and 
price distortions. Often referred to as a ``contagion effect'' in mass 
liquidations, the market impact associated with the liquidation of one 
account can cause the liquidation of other accounts, thus leading to a 
dysfunctional cycle of cascading account liquidations. Auto-liquidation 
has historically shown a propensity to exacerbate price moves during 
volatile markets, leading to cascading liquidations and further market 
destabilization.\6\
---------------------------------------------------------------------------
    \6\ See CME Group, Notice of Disciplinary Action, COMEX-15-0303-BC 
(Sept. 2020) (sanctioning firm that utilized functionality designed to 
automatically liquidate under-margined customer accounts that caused 
extreme price movements, liquidity and trade volume aberrations and 
velocity logic events on multiple occasions), available at https://
www.cmegroup.com/notices/disciplinary/2020/09/COMEX-15-0303-BC-
INTERACTIVE-BROKERS-LLC.html. See also CME Group, Notice of 
Disciplinary Action CBOT-15-0158-BC (Mar. 2017) (sanctioning firm that 
utilized an auto-liquidation algorithm to liquidate under-margined 
client accounts causing significant market disruptions on several 
dates), available at https://www.cmegroup.com/notices/disciplinary/
2017/03/CBOT-15-0158-BC-SAXO-BANK-AS.html.
---------------------------------------------------------------------------
B. Market Abuse
    FTX's proposed use of an auto-liquidation algorithm across its 
entire customer-base also sets the table for significant abusive 
practices. FTX's seemingly predictable auto-liquidation algorithm 
(i.e., X-percent of account liquidated in Y-second intervals) paves the 
way for predatory order anticipation strategies to front-run or trade 
ahead of the liquidation, which would have the effect of removing 
market liquidity and thus impairing the ability of the auto-liquidation 
algorithm to offset positions without significant price concession. It 
is also conceivable that sophisticated market participants could earn 
significant profits triggering and trading against liquidations, 
particularly during times of low liquidity.
C. Broken Hedges
    FTX has expressed its ambition to apply its model to other asset 
classes. Auto-liquidations could also have knock-on effects on the real 
economy, including exacerbation of price increases already being 
observed due to inflationary pressures, if it were utilized in core 
commodity markets such as agricultural, energy, and metals, as well as 
other markets. Commodity producers and purchasers often use derivatives 
markets to hedge their business risks over short-term and long-term 
time horizons. This has been reflected by the hedge accounting rules 
which, under certain conditions, allow these participants to benefit 
from preferential accounting treatment due to the reduced business risk 
associated with their well-hedged exposures.
    FTX propagates a model where participants can be liquidated without 
notice,\7\ in the middle of the night, and on weekends and holidays, 
during illiquid market conditions and at discounted prices.
---------------------------------------------------------------------------
    \7\ See proposed FTX Rules 7.1.C.5 and 7.2.D.2.
---------------------------------------------------------------------------
    Auto-liquidation would inject uncertainty in the application of 
hedge accounting programs at firms because the risk of sudden broken 
hedges. Such a break could occur during a market event, or in the case 
of FTX even without significant market moves, leading to realized and 
unrealized gains impacting firms' accounting statements at a time when 
balance sheet stability is more important than ever.
D. Partial Tear-Ups as a Front-Line Risk Management Tool
    Under FTX's proposal, innocent, non-defaulting participants may be 
subject to liquidation if FTX employs the partial tear-up of positions 
as a front-line risk management tool to manage a default. FTX has the 
discretion to implement partial tear-up prior to any attempt at 
liquidation (auto-liquidation or otherwise) or the use of FTX's 
guaranty fund.\8\ Thus, even a participant who deposited significant 
amounts of collateral in excess of their margin requirement to avoid 
auto-liquidation may still be subject to having their positions torn-up 
through no fault of their own.
---------------------------------------------------------------------------
    \8\ See FTX Rulebook at proposed FTX Rule 14.3.
---------------------------------------------------------------------------
    In other words, FTX has the power to implement a tear-up-similar to 
recent events in the nickel derivatives markets--in business-as-usual 
market conditions prior to the implementation of any risk management 
tools or utilization of any loss-absorbing resources, including those 
of FTX. This also inherently creates a conflict of interest for FTX, as 
it could elect to use partial tear-ups in order to avoid losses to its 
entirely self-funded guaranty fund.
E. Conflicts of Interest Need to be Disclosed and Explained
    FTX heralds its use of backstop liquidity providers as a prudent 
liquidity risk management tool that can be utilized where auto-
liquidation fails. FTX does not identify these potential backstop 
liquidity providers. We can only speculate on who they are and their 
relationship to FTX. It is worth noting that Alameda Research, which 
has common ownership with FTX and was originally founded to exploit 
cross-border crypto arbitrage opportunities, plays a significant role 
in managing liquidations and providing liquidity in offshore and cash 
crypto markets. It is important for market stakeholders and the CFTC to 
investigate these unknowns further in light of the clear conflicts of 
interest of such a structure.
III. Cross-Border Implications of the FTX Request
    Permitting the FTX Request to move forward in its current form 
could undermine the CFTC's position as a leader in derivatives 
regulation. The CFTC has long-been at the forefront of promoting best 
practices in risk management, including through its role in global 
standard-setting organizations \9\ and the adoption of risk management 
innovations that have been exported across the globe. The CFTC's 
potential abdication of this leadership role in the supervision and 
regulation of U.S. DCOs will have real world consequences for U.S. and 
global derivatives markets. The CFTC's leadership has helped to ensure 
that U.S. DCOs can effectively offer their risk management services to 
participants on a global basis.
---------------------------------------------------------------------------
    \9\ The CFTC is a member of IOSCO.
---------------------------------------------------------------------------
IV. Customer Protection Issues in the FTX Request
    FTX's proposal eliminates customer protections for all of FTX's 
participants in margined and fully collateralized products. FTX's 
proposal discards these carefully crafted customer protections 
developed by the CFTC over decades without consideration of the 
rationale underpinning their design.\10\ Most notably, the FTX proposal 
would eliminate regulatory standards designed to protect customer 
funds. An FCM is subject to stringent customer funds segregation 
requirements under the CEA and CFTC regulations with respect to holding 
funds it receives from public customers to guarantee, secure or margin 
their cleared futures and other derivatives transactions. The 
predominantly retail market participants that FTX plans to solicit to 
engage in leveraged futures trading as direct clearing members are the 
very type of market participants the segregation requirements are 
intended to protect, and they have a very different profile from 
institutional market participants that decide for business and other 
reasons to self-clear their leveraged trades as direct clearing 
members. However, because retail participants would self-clear their 
leveraged transactions directly on FTX, the CEA's customer funds 
segregation regime would not apply. If the segregation requirements do 
not apply, FTX's retail clearing members will lose the following 
protections, among others:
---------------------------------------------------------------------------
    \10\ Under FTX's proposal, fully collateralized participants (who 
lose these customer protections) would be inordinately penalized due to 
the legislative mandate requiring them to share losses on a pro rata 
basis with margined participants.

   FTX would not be prohibited from using a futures clearing 
        member's funds for any purpose other than to guarantee, margin 
---------------------------------------------------------------------------
        or secure such person's transactions.

   FTX would not have to hold funds of futures clearing members 
        as customer funds subject to the statutory trust created by CEA 
        Section 4d(b). The custodians that FTX uses likewise would not 
        hold those funds subject to statutory trust.

   FTX would not have to open accounts with custodians to hold 
        futures clearing members' funds under account names identifying 
        the accounts as holding property belonging to its customers, 
        nor would FTX have to obtain acknowledgement letters from such 
        custodians as would be required under CFTC Regulation 1.20.

   FTX would not have to use depositories that meet the 
        requirements of CFTC Regulation 1.49 to hold clearing members' 
        funds.

   FTX would not be required to bear sole responsibility for 
        any loss in its investment of clearing members' funds, as it 
        would under CFTC Regulation 1.29 if they were protected 
        segregated funds of an FCM's customers.

    Under FTX's proposal, the failure of FTX to provide these 
protections would not be disclosed to the customers; in fact, new 
entrants to the futures markets would have no knowledge that these 
protections exist and that these protections would normally be provided 
when trading on a futures exchange through the intermediation of FCMs.
V. The FTX Request is Contrary to and Inconsistent with the Commodity 
        Exchange Act
    The FTX Request blurs the existing distinctions between an FCM, a 
DCO, and a DCM and the clear set of rules and principles applicable to 
each registrant. If approved by the Commission, FTX will be allowed to 
engage in otherwise-regulated FCM activities without the same oversight 
and supervision that applies to FCMs. Not only is this counter to the 
foundational elements of the CEA, but FTX's proposal, if approved, will 
create a regulatory gap which will, in fact, lower regulatory standards 
and protections provided to retail participants.
A. The FTX Proposal Does Not Represent Responsible Innovation Serving 
        the Public Interest
    CEA Section 3(b) does not promote innovation in financial markets 
for the sake of innovation alone; it promotes responsible innovation 
that serves the public interests described in Section 3(a), namely, 
innovation that would foster fair, liquid and financially secure 
markets that businesses rely upon for risk management and price 
discovery. FTX's Proposal, if allowed and implemented, will harm market 
integrity, erode customer protections, and inject risk and financial 
instability into the markets.
    Moreover, FTX's purported innovations are neither innovative nor 
responsible. What, precisely, is innovative or responsible about 
shifting FCM activities into its DCM and DCO entity to circumvent FCM 
registration and regulation? This seems more evasive than innovative.
B. The FTX Proposal Would Degrade Existing Regulatory Standards
    The CEA's core principles governing a DCO under the CEA--and those 
of a DCM as well--are no substitute for the myriad of requirements that 
apply to FCMs under the CEA framework. While DCOs and DCMs are held to 
rigorous, comprehensive standards, these standards are designed to work 
in conjunction with the panoply of requirements applicable to FCMs. The 
CEA framework does not contemplate that a DCO or DCM would combine 
solicitation of customers and their funds to open accounts for 
leveraged trading with the market operations or clearing functions that 
they perform.\11\
---------------------------------------------------------------------------
    \11\ Putting aside the fully-collateralized disintermediated DCMs 
that the Commission has allowed, DCMs--those that provide for market 
access through the intermediation of FCMs--promote the contracts they 
list for trading generally to prospective market participants. They do 
not engage one-on-one with prospective customers to solicit them to 
open trading accounts, assist them with the customer on-boarding 
process, conduct ``know-your-customers'' reviews, or otherwise have 
ongoing day-to-day engagement with customers. Those functions are 
performed by the FCMs and are material components of the important 
checks and balances that FCMs provide.
---------------------------------------------------------------------------
    In addition, FTX's proposal would result in limiting the recourse 
available to retail customers if FTX were to engage in fraudulent or 
abusive business conduct practices with its customers or mishandle 
customers' funds. The National Futures Association's (``NFA'') 
arbitration and mediation would be unavailable for resolving customer 
disputes because FTX would not be an FCM member of NFA, nor could 
customers file a complaint against FTX using NFA's customer complaint 
process, for the same reason.
Conclusion
    Although the CEA does feature innovation as a statutory goal, the 
Act does not promote innovation for the sake of innovation alone. This 
means any purported ``innovation'' which is found to increase risk 
unacceptably or fails to protect customers, would be in contravention 
of the purpose of the law.
    The FTX Request does not meet this test. FTX proposes to implement 
a ``risk management light'' clearing regime. In fact, the purported 
``innovations'' of FTX's proposal are best understood as simple cost-
cutting measures. And these cost cutting measures would come at the 
expense of risk management best practices, market integrity, customer 
safety, and ultimately, financial stability. It should not be allowed 
to go forward as proposed. The CFTC should either reject the FTX 
proposal or commence a formal rulemaking to allow a broader public 
discussion of appropriate risk management standards.
    Thank you. I look forward to answering your questions.

    The Chairman. Thank you. Mr. Bankman-Fried, please begin 
when you are ready.

         STATEMENT OF SAMUEL ``SAM'' BANKMAN-FRIED, CO-
       FOUNDER AND CHIEF EXECUTIVE OFFICER, LedgerX LLC 
             d/b/a FTX US DERIVATIVES, CHICAGO, IL

    Mr. Bankman-Fried. Chairman Scott, Ranking Member Thompson, 
Members of the Committee, thank you so much for having me here 
today. A bit about myself, I went to MIT, majored in physics. I 
worked on Wall Street at Jane Street Capital with the goal of 
donating what I made. And I got involved in the digital asset 
ecosystem in 2017. In 2019, I founded FTX, a global 
cryptocurrency derivatives exchange. In 2020, we launched our 
U.S. arm, FTX US. And in 2021, we acquired LedgerX, now FTX US 
Derivatives, a CFTC-licensed clearinghouse and marketplace.
    Last year, we submitted an amendment to our clearing order, 
which would allow us to operate as almost every other 
clearinghouse does, with margin. We have spent tens of 
thousands of hours talking with the Commission about this 
proposal and thousands of pages of documents. We really, really 
deeply respect the thorough process that the CFTC has 
undergone, the amount of time that they have spent digging into 
the details of our proposal, challenging it where appropriate 
and the seriousness with which they are treating this proposal. 
We respect the CFTC and their process and whatever conclusions 
they ultimately come to.
    I will note that while our proposal does combine things 
together in a way that I think might bring powerful innovation 
to this space, each of the elements already exists in CFTC-
licensed derivatives exchanges, including ICE NGX, LedgerX, and 
others.
    I believe that the amendment that we put forward would help 
promote healthy markets. I think it that would promote fair and 
equitable access to platforms. In particular traditional 
exchanges charge for market data such that only the largest 
traders are able to get full knowledge of the markets that they 
are supposed to be trading on. With FTX, all of our market data 
is 100 percent free, transparent, and public. All users, 
regulators, and other observers have full access to our market 
data.
    Traditional exchanges have separate models for the largest 
traders and for other users such that only the largest traders 
have direct access with lower latency fees and more options. We 
would have equitable access to our platform where all users can 
choose the method of access that they most prefer and have 
access to the most powerful tools.
    We also have strong customer protections under our model. 
It is a safe and conservative risk model which would have 
helped to alleviate some of the instances that we have seen 
with recent futures exchanges like the LME nickel fiasco 
earlier this year by having the collateral pre-funded at the 
clearinghouse rather than relying on credit, and having a real-
time risk engine.
    We also have enhanced customer protections. We have all of 
the customer protections that exist on traditional features 
exchanges and on FCMs because we understand deeply that we have 
a responsibility to ensure that if there is direct access to 
the platform, that users are still afforded the same level of 
protection. On top of that, we have further customer 
protections, suitability, and transparency than what you find 
on most other platforms.
    Finally, we believe that this would bring competition and 
innovation. It would bring liquidity to the U.S. marketplace 
and options to U.S. consumers. It would bring competition in 
the futures markets where almost all of the volume is traded by 
just two exchanges. And it would bring competitiveness to the 
United States with respect to the rest of the world. Today, 95 
percent of digital asset volume trades overseas.
    And that brings me to some of the broader context here. 
Digital asset marketplaces need Federal oversight. They need 
that oversight to protect consumers, to protect against 
systemic risk, to bring liquidity back onshore, to ensure U.S. 
competitiveness globally. This is good for the U.S. economy, 
for Americans, for wealth creation, and good for our consumers. 
The CFTC is an appropriate regulator to provide this for 
digital asset futures contracts. They have been doing so on CME 
and other platforms for a number of years, a very thorough 
regulator who understands the space very deeply.
    Thank you to the Committee for having me today, and thank 
you for all of the work that you have put in to providing 
oversight and guidance on the this ecosystem. And I look 
forward to your questions.
    [The prepared statement of Mr. Bankman-Fried follows:]

  Prepared Statement of Samuel ``Sam'' Bankman-Fried, Co-Founder and 
Chief Executive Officer, LedgerX LLC d/b/a FTX US Derivatives, Chicago, 
                                   IL
Introduction
    Chairman Scott, Ranking Member Thompson, Members of the Committee, 
and distinguished guests, thank you for inviting me to testify before 
this Committee today. It is an honor and a privilege to be before you 
to share information and insights into our license application before 
the U.S. Commodity Futures Trading Commission (CFTC), as well as some 
of the key topics stemming from that effort. Along with my colleagues 
and teammates at FTX, I am pleased to provide you with as much 
information as you need in order to ensure a fully informed and robust 
conversation around whether and how this Committee could address some 
of these key topics.
Background on FTX and FTX US Derivatives
    The FTX group of companies (FTX Group or FTX) was established by 
three Americans, Samuel Bankman-Fried, Gary Wang and Nishad Singh, with 
international operations commencing in May 2019 and the U.S. exchange 
starting in 2020. The business was established in order to build a 
digital-asset trading platform and exchange with a better user 
experience, customer protection, equitable access, and innovative 
products, and to provide a trading platform robust enough for 
professional trading firms and intuitive enough for first-time users. 
In the U.S., the company operates a federally regulated spot exchange 
that is registered with the Department of Treasury (via FinCEN, as a 
money services business) and also holds a series of state money 
transmission licenses. Our U.S. derivatives business is licensed by the 
CFTC as an exchange and clearinghouse, the subject of our application 
discussed today. FTX US also holds a FINRA broker-dealer license. FTX's 
international exchange, which is not available to U.S. users, holds a 
series of marketplace licenses and registrations in many non-U.S. 
jurisdictions including Japan and the European Union.
    The core founding team had unique experience to develop an exchange 
given their experiences in scaling large engineering systems at premier 
technology companies, combined with trading experience on Wall Street. 
This brought to the effort an understanding of how to build the best 
platform from scratch, as well as what that platform should look like, 
unencumbered by legacy technology or market structure. FTX has aimed to 
combine the best practices of the traditional financial system with the 
best from the digital-asset ecosystem.
    Early International Success. The international FTX.com exchange has 
been successful since its launch. This year around $15 billion of 
assets are traded daily on the platform, which now represents 
approximately 10% of global volume for crypto trading. The FTX team has 
grown to over 200 globally, the majority of whom are responsible for 
compliance and customer support. The FTX Group's primary international 
headquarters and base of operations is in the Bahamas, where the 
company is registered as a digital-asset business under The Bahamas' 
Digital Assets and Registered Exchanges Act, 2020 (DARE).
FTX % global volume, 15d

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In addition to offering competitive products, the FTX platforms 
have built a reputation as being highly performant and reliable 
exchanges. Even during bouts of high volatility in the overall digital-
asset markets, the FTX.com exchange has experienced negligible downtime 
and technological performance issues when compared to its main 
competitors. We believe the dual-track focus on customers and 
reliability, plus compliance and regulation, are key reasons why FTX 
has also experienced the fastest relative volume growth of all 
exchanges since January 2020.
    The core product consists of the FTX.com website that provides 
access to a market place for digital assets and tokens, and derivatives 
on those assets. Platform users also can access the market through a 
mobile device with an FTX app. The core product also consists of a 
vertically integrated, singular technology stack that supports a 
matching engine for orders, an application programming interface or 
API, a custody service and wallet for users, and a settlement, clearing 
and risk-engine system. In a typical transaction, the only players 
involved are the buyers, sellers, and the exchange/clearinghouse.
    The FTX Group has operations in and licenses from dozens of 
jurisdictions around the world, including here in the U.S., Europe, and 
Japan. At the time of this writing the FTX platforms have millions of 
registered users, and the FTX US platform has around one million users. 
For FTX.com, roughly 45 percent of users and customers come from Asia, 
25 percent from the European Union (EU), with the remainder coming from 
other regions (but not the U.S. or sanctioned countries, which are 
blocked). In comparison to the international exchange, nearly all users 
of FTX.us are from the U.S.
    Commitment to a Diverse Workforce. We are proud of our workforce at 
FTX and believe that one of our key strengths is a culture of mutual 
respect and cooperation. This type of culture is borne from the 
diversity of our team, which necessitates a spirit of empathy, 
understanding and humility. These traits in our workforce are good for 
business and are much of the reason we have been successful at 
understanding our customers and their needs, and executing on products 
that meet their needs. FTX has employees from all over the world with 
diverse ethnic backgrounds, and 60 percent of women in our workforce 
are in senior management positions. The majority of our global 
leadership comes from diverse backgrounds.
    Commitment to Giving Back. FTX is committed to improving the lives 
not just of our customers through superior products, but also the lives 
of those in the broader global community. Toward this end, FTX created 
the FTX Foundation, founded with the goal of donating to the world's 
most effective charities. At minimum, one percent of net fees from FTX 
transactions are donated to the foundation; additionally, FTX's 
founders have pledged to donate the majority of what they make. Mr. 
Bankman-[F]ried has personally committed to donating 99% of his wealth. 
In 2022 alone, FTX, its affiliates, and its employees so far have 
donated over $100 million to alleviate global poverty, provide 
ventilators to countries ravaged by [COVID], provide financial services 
to the un- and under-banked, and combat climate change by ensuring FTX 
is carbon-neutral, and help the world achieve a brighter future.
    FTX has launched additional philanthropic initiatives including the 
FTX Future Fund which invests in ambitious projects aiming to improve 
humanity's long-term prospects. FTX Community's philanthropic efforts 
are focused on global poverty, animal welfare, and community outreach. 
In 2021, FTX Community organized the FTX Charity Hackathon * and 
awarded $1 million to a local student group with the best idea to 
improve mental and physical health.
---------------------------------------------------------------------------
    * https://ftxcharityhackathon.com/.
---------------------------------------------------------------------------
    Commitment to Carbon Neutrality. FTX Climate is a comprehensive 
initiative to make FTX carbon-neutral, support important environmental 
projects, and fund transformational research on the most impactful 
solutions to climate change. FTX plans to spend at least $1 million 
annually through FTX Climate. FTX has endeavored to take ownership of 
our portion of the environmental costs of mining associated with public 
blockchains and has purchased carbon offsets to neutralize those costs, 
in addition to funding research. Those interested in learning more 
about these initiatives can find more information at https://www.ftx-
climate.com.
    Banking the Un- and Under-Banked. FTX is dedicated to harnessing 
the power of crypto to tangibly improve lives. We are working with 
nonprofit organizations, cities and counties to make the financial 
system more inclusive. According to Federal Reserve estimates, 70 
million Americans are either unbanked or underbanked. They lack a safe 
place to store money and pay exorbitant fees to cash checks. Millions 
more are banked but face high fees when their balance falls below a 
minimum. Members of these communities often do not have insured 
checking accounts, for a variety of reasons, including credit 
histories. The legacy bank settlement system makes it hard to see 
realtime balances, and leads to overdrafts, which leads to higher fees. 
Our bank the unbanked program offers those cut out of the financial 
system a free bank account and debit card linked to a crypto wallet. 
There are no fees, and no minimum balances. Transferring funds is 
virtually free and instantaneous and can be accessed on a phone. They 
can use it to receive money, make payments and build savings. There are 
no fees and no minimum balance. Transferring funds through the crypto 
wallet is virtually free and instantaneous. We began our program in 
South Florida in partnership with OIC of South Florida and Broward 
County Government, and have recently announced a new million dollar 
program with the City of Chicago, and look forward to expanding to many 
other cities and communities across the country.
    Humanitarian Aid in Ukraine. Ukraine is deploying digital assets to 
defend against Russia's invasion and support the population. In 
collaboration with the Government of Ukraine, FTX is converting 
millions of dollars in wartime crypto donations to fiat for the 
National Bank of Ukraine. This marks the first-ever instance of a 
cryptocurrency exchange directly cooperating with a public financial 
entity to provide a conduit for crypto donations. Facilitated by FTX, 
the Ukrainian Government has purchased crucial defense and humanitarian 
equipment including medicine, ballistic plates for bulletproof vests, 
walkie-talkies, lunches for soldiers, thermal imagers and helmets. 
Ukraine's Deputy Minister of Digital Transformation has noted, ``each 
and every helmet and vest bought via crypto donations is currently 
saving Ukrainian soldiers' lives.'' Additionally, when the war broke 
out in Ukraine, FTX gave $25 to every Ukrainian user of our platform.
    U.S. Operations and FTX US Derivatives. FTX services U.S. customers 
through the FTX US businesses, which includes the spot exchange, FTX US 
Derivatives (https://derivs.ftx.us/), the NFT marketplace, and a soon-
to-go-live FINRA broker dealer (FTX Capital Markets). FTX US is housed 
under a separate corporate entity from FTX international and is 
headquartered in Chicago, IL. It has a similar governance and capital 
structure to the overall corporate family, and also has its own web 
site, FTX.us, and mobile app. As with FTX.com, the core product is an 
exchange for both a spot market for digital assets as well as a market 
for derivatives on digital assets. Like other crypto-platforms in the 
U.S., the spot market is primarily regulated through state money-
transmitter laws. FTX.us and FTX US Derivatives (FUSD) are being 
integrated into one user-experience platform and web site, but for now 
these two categories are separated in the United States, with spot 
market trading on FTX.us and derivatives trading offered through FUSD.
    FUSD was formed through the acquisition and re-branding of LedgerX 
and is being integrated with the overall FTX US platform. The product 
offers futures and options contracts on digital assets (or commodities) 
to both U.S. and non-U.S. persons. FUSD operates with three primary 
licenses from the CFTC: a Designated Contract Market (DCM) license, a 
Swap Execution Facility (SEF) license, and a Derivatives Clearing 
Organization (DCO) license. Prior to its acquisition, this business was 
the first crypto-native platform issued a DCO license by the CFTC in 
2017, which was a milestone for the agency and the digital-asset 
industry. That license was later amended in 2019 to permit the clearing 
of futures contracts on all commodity classes.
    FTX US Derivatives ``Equitable'' Market Structure. On the FUSD 
platform, users can trade a Bitcoin Mini Option or Ethereum Deci 
Option, a Next-Day Bitcoin Mini Swap or Next-Day Ethereum Deci Swap, 
and a Bitcoin Mini Future. For now, all of these contracts are fully 
collateralized. FUSD operates its trading platform with the option of 
direct access to the market and clearinghouse for users, which allows 
those who access the platform in this manner to become direct members 
of the FUSD clearing house. In practice, this allows any individual or 
institutional investor to onboard the FUSD platform by visiting the 
FUSD web site and completing the on-boarding process, or by connecting 
to the platform through the FUSD API. Importantly, FUSD is also willing 
for intermediaries to connect and provide their own customers access to 
FUSD products for trading, which is contemplated both by FUSD's 
existing clearing order, by FUSD's active rulebook, and confirmed 
publicly by the company's leadership at FIA's conference in Boca Raton, 
FL this year. By providing both options to investors for accessing FTX 
products--direct access or intermediated access--FTX maximizes choice 
for the investor and likes to think of this market structure as a more 
equitable market structure. For direct-access users, FTX also provides 
all of the applicable suitability controls and KYC processes that are 
often done by intermediaries, ensuring that the standard safeguards are 
in place whichever way customers access the platform.
    While this market structure is not unusual among global derivatives 
exchanges (it is the norm for digital-asset exchanges that list 
derivatives products), it is not the common market structure for the 
U.S. derivatives market. Nonetheless, the FUSD market structure is 
familiar to the CFTC and permitted under the CFTC's regulations, as 
evidenced by the fact that FUSD has been operating and supervised by 
the CFTC since 2017; in addition, ICE NGX operates a CFTC-licensed, 
direct-member model that offers margined products (see https://
www.theice.com/ngx); ErisX (https://www.erisx.com/); Nadex (https://
www.nadex.com/).\1\
---------------------------------------------------------------------------
    \1\ https://www.cftc.gov/PressRoom/PressReleases/6833-14.
---------------------------------------------------------------------------
    The FTX Application Before the CFTC. When the FUSD DCO was 
originally approved by the CFTC, the order granting the license limited 
the products that the DCO could clear to fully collateralized 
derivatives. In December 2022, FUSD submitted an application to amend 
its DCO license (FTX Application) to allow FUSD to clear margined 
futures contracts.\2\ The submission was made after many months of 
informal discussions with the CFTC staff, and after voluminous 
materials were created in support of the application and made part of 
the submission. Those discussions led to various adjustments and edits 
to the materials during the process.
---------------------------------------------------------------------------
    \2\ FUSD currently only offers futures, options, and swaps on 
digital asset commodities.
---------------------------------------------------------------------------
    On March 10, 2022, the CFTC released a request for comment on the 
FTX Application and posed a number of questions to the public for 
consideration. The period for comment originally was 30 days but the 
CFTC extended it for another 30 days, which ended May 11, 2022.\3\ The 
CFTC May 11, 2022 also has noticed a staff roundtable for May 25, 2022, 
where the agency will oversee a discussion on issues related to 
intermediation in the U.S. derivatives market place.\4\ To be sure, the 
CFTC has responded to and addressed the FTX Application in a very 
deliberate and transparent manner, allowing considerable opportunity 
for the public and the industry to comment on this narrow licensing 
matter. Under the CFTC's regulations, the process for applying for a 
DCO license is not required to be the subject of public comment and 
normally is not subjected to the same level of public scrutiny. This is 
in addition to a large amount of time that the staff has spent 
evaluating the FTX Application.
---------------------------------------------------------------------------
    \3\ https://www.cftc.gov/PressRoom/PressReleases/8499-22.
    \4\ https://www.cftc.gov/PressRoom/PressReleases/8499-22.
---------------------------------------------------------------------------
Discussion
    In this discussion I will address the following key points related 
to the FTX Application: (1) the sound and conservative approach to 
risk-management taken by the FUSD platform; (2) how FTX promotes 
equitable access while ensuring adequate customer protections to users 
of the FUSD platform; (3) how the innovations of the FTX Application 
address many pain points experienced by the U.S. derivatives market 
place; and (4) the importance of promoting responsible innovation and 
competition in the U.S. derivatives market place. While discussing 
these points this testimony references relevant CFTC regulations as 
needed, as well as international considerations related to equivalency 
determinations made by other jurisdictions.
1. The FTX Risk-Management System is Tested, Safe and Conservative
    The FTX Application before the CFTC proposes a risk-management 
system that is safer and more conservative than what is normally seen 
in the U.S. derivatives markets for a number of reasons. The proposed 
risk-management system, moreover, is consistent with CFTC regulations, 
including those related to DCO risk management. The Commodity Exchange 
Act (CEA), which authorized the CFTC and its regulatory authorities, is 
purposefully principles-based and flexible in allowing each DCO to 
implement a particular risk-management program for the market that it 
clears, so long as the core requirements of the CEA are met.\5\ 
Pursuant to Congressional intent, the CFTC's regulations give 
discretion to the DCO in the exact design of the risk-management 
system, and give the CFTC the authority to determine whether that 
design is consistent with the CEA.\6\ With this legal basis in mind, 
FTX has designed a system that has several key features that reflect a 
more conservative approach to risk management.
---------------------------------------------------------------------------
    \5\ Derivatives Clearing Organization General Provisions and Core 
Principles (``DCO Final Rule''), 76 Fed. Reg. 69334, 69335 (Nov. 8, 
2011).
    \6\ Id. at 69365-76.
---------------------------------------------------------------------------
    Real-Time Risk Assessment. First, the FTX risk-management system 
assesses risk on a nearly real-time basis, assessing customers' trading 
positions and account balances every few seconds to determine whether a 
customer has adequate resources or collateral in their account. This 
risk-exposure time period is substantially shorter than what is 
typically seen on other derivatives exchanges in traditional finance, 
ensuring on a more frequent basis that adequate collateral is on hand, 
rather than waiting longer for risk in the portfolio to potentially 
increase. This contrasts with most traditional markets, where risk 
typically is monitored on a less frequent basis.
    Prefunded Collateral Deposits Instead of Credit Extensions. Second, 
the system also requires that customers transfer the required 
collateral to support their trading to the FTX platform before they can 
begin trading. The amount of collateral required is based on a proven 
risk methodology that would cover at least 99 percent of the one-day 
portfolio returns using appropriate weightings for base VaR and stress 
VaR. To account for stress scenarios for a particular asset, the model 
looks at both historical as well as hypothetical scenarios to 
appropriately calibrate necessary resources. Notwithstanding the 
shorter risk-exposure time period the FTX system relies on, for its 
CFTC risk model FTX relies on a time period of 24 hours to calculate 
collateral requirements based on regulatory requirements, building in 
an additional buffer to the original 99% margin calculation. On 
traditional derivatives exchanges collateral is instead generally based 
on credit, exposing all market participants if that credit decision 
turns out to be unwarranted.
    Market-Responsive Liquidations Rather Than Risk Buildup. Third, the 
risk system has a real-time liquidation feature to prevent a build up 
of risk in a customer portfolio. If a customer begins to suffer trading 
losses and their collateral balance declines toward minimum margin 
requirements, an automatic liquidation process uses rate-limited, 
marketable limit orders to reduce risk as the customer account value 
falls below the maintenance margin level. As a result, customers are 
incentivized to manage their account collateral and proactively add 
collateral or reduce risk positions prior to partial auto-liquidation. 
Users of the platform receive ample and repeated notice that a 
liquidation of a position could ensue_the FUSD platform provides a 
series of warnings that a customer account is reaching levels that 
could trigger the risk system's liquidation feature.
    Notably, unlike traditional platforms, the FTX risk system does not 
extend calls for additional margin or extend credit to the customer 
hoping that such a call can be met--the system is based on a 
presumption that FTX will not have recourse against any customer for 
credit losses. On traditional exchanges it can take days to begin 
attempting to liquidate a large position, by which time it can be 
substantially more underwater than it was initially. This also means 
that FTX's risk system is non-recourse, and so customers cannot lose 
more than they proactively deposited to the clearinghouse prior to 
trading, unlike traditional platforms that may attempt to seize a 
customer's other assets.
    Auto liquidations on the platform are not expected to be the norm 
or common as some have feared, particularly because of the conservative 
initial-margin methodology FUSD has used. With initial margin required 
by FUSD based on a 24 hour period of risk, but with the period of risk 
assessed measured in seconds, the amount of initial margin collected by 
FUSD will be substantially higher than the risk model actually 
requires. This means that the risk of auto liquidations of positions 
goes down, minimizing the number of instances this feature is deployed. 
Indeed, on the FTX international platform, the notional value of 
liquidated positions is well less than one percent of all notional 
activity on the platform historically. Intermediated users also will 
have opportunities to avoid auto liquidation through their FCM's 
extension of credit, if such a product is offered.
    Observers have asked whether the auto-liquidation feature could 
promote ``pro-cyclicality'' in a market, exacerbating or accelerating 
declines in asset prices. The risk of pro-cyclicality comes from the 
interplay between margin calls and market moves. In particular, if 
markets start moving down[up], that could cause selling[buying] margin 
calls, which could move markets further down[up], creating a cycle. The 
core parameters that control this are:

  1.  Market liquidity

  2.  Margin call concentration

  3.  Original market move

    If (1) is much greater than (2), the risk of strongly pro-
cyclicality is low. If (2) is comparable to (1), there is larger risk. 
In order for there to be a large risk of a pro-cyclic event, you also 
have to have a large enough initial market move to trigger the cascade.
    Over the past few years, the risk of pro-cyclic behavior has 
dropped substantially on the FTX international platform. Market 
liquidity has increased substantially, from roughly $10 billion of 
daily digital asset volume in 2019, to $150 billion today. Here is 
some information from the two largest moves in cryptocurrency markets:

----------------------------------------------------------------------------------------------------------------
                                                                                                      Insurance
     Day         BTC move      ETH move        FTX volume            FTX OI          Liquidations        fund
----------------------------------------------------------------------------------------------------------------
  2020-03-12           ^39%          ^44%       4,441,696,624        228,317,363         44,946,399     ^410,638
  2021-05-19           ^14%          ^26%      53,068,090,693      3,718,475,962      1,679,839,594   ^4,686,029
----------------------------------------------------------------------------------------------------------------

    Both March 12, 2020, and May 19, 2021, represented elevated risk 
days for pro-cyclical behavior, with market moves of roughly 40% and 
20%, respectively. The scale of the marketplace grew substantially over 
that year, with volume and open interest climbing by more than 10x, and 
liquidation volume growing by more than 30x. Notwithstanding the higher 
number of liquidations, the growth in the liquidity of cryptocurrency 
markets helped to buffer the moves, creating less total price movement 
on the day.
    In any case, FTX has addressed risks related to pro-cyclicality in 
a comprehensive manner. First, the FUSD risk model follows various CFTC 
regulatory requirements related to the margin model that are designed 
to address pro-cyclicality. Second, the FTX trading platform sets 
slowly moving price bands for certain contracts, where the exchange 
will not accept trades or orders that are set outside the minimum and 
the maximum of the price range for that particular contract. These 
price bands have the effect of mitigating the impact of erroneous 
orders, momentary illiquidity, or large concentrated buying or selling 
of contracts that could momentarily exhaust the orderbook. They also 
act as a temporary circuit breaker, preventing markets from being able 
to quickly decline or increase more than a certain amount while 
creating time for algorithms to be inspected and liquidity to refresh.
    Additionally, FUSD limits the rate at which it closes customer 
positions to be within a small fraction of global volume. While this 
will not entirely eliminate the price impact of liquidations, it will 
ensure that the liquidations are much slower than the rate at which 
liquidity can be transported to the orderbook by sophisticated market 
participants, mitigating the risk of inefficient short-term price 
impact. Together these market and risk controls work to stem pro-
cyclical trends in the FTX order book, including trends influenced by 
the auto-liquidation feature of the FTX risk engine. With appropriate 
calibration of each of these controls, the FTX risk-management system 
promotes risk-reducing platform operations that also limit systemic 
risks throughout the market ecosystem.
    It is important to note that the absence of the auto-liquidation 
feature would have a pro-cyclical impact on markets but that would 
manifest in a different manner. Without auto-liquidation, there would 
be a call for additional collateral from a customer whose position 
suffered enough losses to require it. During a period of market stress 
and declining asset prices, market participants operating under this 
model would be under pressure to find liquid resources to make a margin 
call at a time when liquidity becomes more scarce. There are trade-offs 
to any risk-management system and in times of market stress, pro-
cyclicality always will be a risk to address and manage; FTX believes 
its risk system does so most effectively and appropriately.
    One way to view the decisions made by the risk engine is through 
the lense of a particular account. If a particular user's collateral is 
decreasing and nearing empty, the combination of real-time assessment 
and collateral prefunded directly at the clearinghouse allows FTX's 
risk model to ascertain exactly what the account's risk level is. This 
means that the risk engine can delay liquidating until the account is 
nearly out of collateral, while still successfully closing down the 
account's position in time to avoid a default. In a traditional, slower 
model, the risk engine would have had to choose between margin calling 
the account much sooner--building in days of delivery time--or risking 
the account defaulting and risk spreading to the system, as happened 
recently on another commodity exchange.
    Backstop Liquidity Providers to Address Defaulting Positions. 
Fourth, the FTX risk-management system relies on backstop liquidity 
providers (BLPs) to take on the portfolio of a participant in default. 
To wit, if a customer's account value continues to decline further to a 
determined margin threshold, then the system declares a default and the 
risk position is moved automatically to the contractually bound BLPs. 
Firms volunteer to be BLPs--no one is forced to--but when a firm does 
become a BLP, they are automatically passed liquidating positions in 
real time and are unable to reject it, legally bound to provide 
liquidity when it is most important.
    Over-Capitalized and Conservative Guaranty Fund to Absorb Default 
Losses. Finally, after BLPs assume and manage the risk positions of 
participants in default, and if there remain accounts with negative 
value, the FTX guaranty fund will absorb those remaining negative 
values. The sizing of the guaranty fund has been undertaken very 
conservatively, based on a multiple of a conservative and reasonable 
estimate of ten percent of total outstanding initial margin posted on 
the FUSD platform, which resulted in a calculation of $250 million cash 
now deposited unencumbered in a bank account held at Bank of America. 
Historically, on FTX.com less than one percent of this amount has been 
drawn from the FTX.com guaranty fund.
    Nonetheless, FTX is committed to growing the guaranty fund's 
minimum size as activity on the platform grows: Instead of fixing the 
fund's size to sustain the failure of the largest clearing FCMs 
(``Cover-1'' or ``Cover-2''), we have instead voluntarily committed to 
cover 10% of total outstanding initial margin, up to a ``Cover-3'' 
standard if required. This is substantially more conservative than is 
required by regulation. (I have included as an exhibit to this 
testimony a fuller explanation of how FTX sized the guaranty fund for 
the FTX Application.\7\)
---------------------------------------------------------------------------
    \7\ See also https://www.ftxpolicy.com/ftx-guaranty-fund.
---------------------------------------------------------------------------
    Some observers have assumed that if the FUSD risk model relies only 
on its own capital (and not guaranty-fund contributions by member 
FCMs), and the guaranty fund is sized based on the CFTC's ``Cover-1'' 
standard with only non-institutional participants, then the guaranty 
fund must be too small to sufficiently absorb losses. Instead, FTX has 
gone above and beyond the regulatory requirements, and well above what 
has been necessary or required based on our experience over the past 
years of operation internationally.
    All other things remaining equal, this type of system is a more 
conservative approach to managing risk. So long as the collateral 
required by the system's risk model is adequate, and so long as the 
platform deploying the risk system is otherwise operated in a resilient 
manner, this type of system will better prevent massive losses by a 
customer that could have implications for the broader market by 
requiring collateral to be posted to the clearinghouse, and by acting 
promptly in the case of large market moves. And perhaps most 
importantly, the FUSD risk-management system also aligns with the 
CFTC's regulations.
2. FTX US Derivatives Promotes Equitable Access While Ensuring Customer 
        Protections
    FTX is focused on compliance, transparency, education, and 
assessing users' knowledge and understanding of our products to create 
responsible equitable access. FTX believes that all users (provided 
they pass our KYC/AML program and are not otherwise barred by law or 
past improper conduct) should have full access to FTX, so long as they 
are sufficiently informed and can demonstrate that they understand what 
they are trading; we also believe that it is our duty to ensure that 
those safeguards are in place. This approach is fully aligned with the 
Congressional mandate to provide for fair and open access to CFTC 
markets in a manner that is consistent with prudent risk management.\8\
---------------------------------------------------------------------------
    \8\ See CEA section 5b(c)(2)(C), 7 U.S.C.  7a-1(c)(2)(C); see also 
CEA section 5(d)(2), 7 U.S.C.  7(d)(2).
---------------------------------------------------------------------------
    Hallmarks of Equitable Access. FTX's real-time monitoring of 
participant positions enables it to determine, at all times, whether a 
participant's account has sufficient cash and collateral to meet its 
margin obligations to the DCO. Because FTX monitors participant 
accounts 24/7 and addresses risk in real time, there is no need to 
establish minimum capital requirements for each participant, as is the 
common approach to U.S. investors for credit and risk purposes (FTX 
does collect financial information from all users during the on-
boarding process). Instead, FTX's risk-management framework enables it 
to ensure at all times that each participant has sufficient financial 
resources to meet its current obligations arising from participation in 
the DCO. Any ``means'' testing that constrains access to FUSD therefore 
stems from available resources that the user has posted as collateral 
on the platform, not otherwise on personal wealth.
    Notwithstanding the above, the vast majority of FTX users on all of 
its platforms are highly sophisticated traders. On the FTX 
international platform, for example, more than 90 percent of the 
trading volume comes from users trading more than $100,000 in volume 
per day. FTX anticipates that the user base for FUSD would be similar 
if the FTX Application is approved.
    Another hallmark of equitable access is free and open access to all 
market data on FTX platforms including FUSD. Users, regulators, and 
other market participants can access all public market data via the FTX 
website, mobile app, or API in real time. Additionally, there are no 
platform-access or connection fees--all users large and small have the 
same options for connecting to the matching engine and clearing house. 
Users have access to their entire account, balance, funding, and 
trading history displayed via website, mobile app, and API. All fees 
charged are displayed transparently in a user's market data.
    Customer Protections--Protection of Customer Funds. In the case of 
a FUSD user who also is a customer of an FCM, the full panoply of FCM 
requirements would apply, including those that relate to the 
safekeeping of customer assets. Similarly, a direct-access user of FUSD 
also enjoys comparable protections under the relevant rules applicable 
to all DCOs. These rules include those related to commingling of DCO 
and clearing member customer positions, as well as rules on money, 
securities, or property received to margin, guarantee, or secure such 
positions.\9\ Pursuant to its current CFTC clearing order and rulebook, 
FUSD separately accounts for and segregates from FTX proprietary funds 
all participant funds used to purchase, margin, guarantee, secure, or 
settle positions. Finally, restrictions on investing customer 
collateral apply equally to the FUSD DCO.\10\
---------------------------------------------------------------------------
    \9\ CFTC Regulation 39.15.
    \10\ CFTC Regulation 1.25.
---------------------------------------------------------------------------
    Customer Protections--Robust Systems Safeguards. The FUSD platform, 
like all DCMs and DCOs, is subject to the CFTC's system-safeguards 
regulations,\11\ which require a program designed to identify and 
minimize operational risk and protections from cyber-related threats. 
FTX has implemented best-in-class controls relating to information 
security, including controls related to: (1) access to systems and 
data; (2) user and device identification and authentication; (3) 
vulnerability management; penetration testing; (4) business continuity 
and disaster recovery processes; and (5) security incident response and 
management, among others.
---------------------------------------------------------------------------
    \11\ CFTC Regulation 38.1050-51 and Regulation 39.18.
---------------------------------------------------------------------------
    Customer Protections--Related to Trading. In its capacity as a DCM, 
the FUSD platform provides the same types of customer protections and 
transparency related to trading on the platform when a user accesses 
the platform directly as the user would experience through an FCM. In 
the absence of an intermediary standing between the FUSD platform and 
the user, FTX would provide the following types of protections or 
reports normally provided by an FCM:

   Disclosures related to the risks of trading; \12\
---------------------------------------------------------------------------
    \12\ FUSD is subject to exchange trading related public disclosure 
requirements as set forth in DCM Core Principle 7, and CFTC regulations 
38.1400 and 38.1401, which are comparable to the duties of an FCM.

   Order and transaction recordkeeping obligations; \13\
---------------------------------------------------------------------------
    \13\ FUSD is subject to exchange trading related recordkeeping 
requirements as set forth in DCM Core Principle 18, and CFTC 
regulations 38.950 and 38.951.

   Minimum trading standards; \14\
---------------------------------------------------------------------------
    \14\ FUSD is subject to exchange trading related requirements to 
protect its markets and market participants as set forth in DCM Core 
Principle 12, and CFTC regulations 38.650 and 38.651.

   Trading authorization requirements; \15\
---------------------------------------------------------------------------
    \15\ CFTC Regulation 166.2.

   Requirements to produce monthly statements and 
        confirmations; \16\
---------------------------------------------------------------------------
    \16\ FTX provides IRS Form 1099s to customers, trade history is 
available to each customer.

   Conflict of interest and trading standards.\17\
---------------------------------------------------------------------------
    \17\ FUS is subject to exchange-trading, conflicts-of-interest 
requirements as set forth in DCM Core Principle 16, and CFTC 
regulations 38.850 and 38.851.

Again, FUSD has been operating under CFTC supervision for years and 
providing these protections as required, and would continue to do so if 
the FTX Application is approved. Over years of operation, FUSD has 
demonstrated how its market structure and customer-protection regime 
can provide the same or superior level of protections even for those 
users who access the platform directly.
3. The FTX Application Addresses Long-Standing Industry Pain Points
    FTX is eager to help contribute ideas and solutions to some of the 
challenges the global derivatives industry has faced, and we believe 
that approval of the FTX Application could promote this in some 
measure. There is a trend toward more derivatives trading taking place 
on exchanges or otherwise being cleared by clearinghouses, meeting a 
policy goal reflected in the Dodd-Frank Act and similar policy efforts 
globally.\18\ But this trend has witnessed the coincident rise in 
regulatory-related costs for intermediaries (including regulatory-
capital requirements), and the low interest-rate environment over 
recent years since the 2008 financial crisis (although the interest-
rate environment is changing).
---------------------------------------------------------------------------
    \18\ https://www.greenwich.com/fixed-income/derivatives-market-
structure-2022-identifying-opportunities-growth.
---------------------------------------------------------------------------
    These factors have led to some market concentration in the 
derivatives market, which could increase systemic risk, and limit 
access to markets and products in a way that ultimately could hamper 
risk-management efforts (for which derivatives markets are formed). For 
example, there were 176 FCMs registered with the Commodity CFTC in 
early 2008, while today there are only 61, with only 51 holding client 
margin for futures, and 18 for cleared swaps.\19\ Meanwhile, the amount 
of margin held by U.S. FCMs is at all-time historical highs, meaning 
risk is increasingly concentrated in fewer intermediaries, which in 
turn leads to higher capital requirements for these firms.\20\ (In 
Section 4 of this testimony below, I discuss market concentration in 
exchange trading among the small number of U.S. derivatives exchanges.) 
Additionally, efficient movement of collateral between market 
participants can be encumbered by legacy technology systems used by 
those participants.
---------------------------------------------------------------------------
    \19\ https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
    \20\ https://batonsystems.com/the-broken-fcm-model-could-
distributed-ledger-technology-be-its-saviour/.
---------------------------------------------------------------------------
    Approving the FTX Application could help address concerns related 
to market concentration, consequent systemic risk, rising costs, and 
collateral movements, albeit in measured ways. First, the FTX 
Application envisions the ``equitable access'' market structure earlier 
described that would allow investors to access the FUSD market directly 
if they choose, or through an intermediary. Importantly, this market 
structure not only promotes market access but also relieves cost 
pressures on those intermediary FCMs that choose to connect to the 
platform. This is so because the FUSD risk model does not require 
guaranty-fund contributions from the FCM, thus reducing the FCM's 
costs--including regulatory costs--related to connecting and offering 
the FUSD products to its customers.
    Second, the FTX real-time risk model promotes more efficient risk 
management that requires relatively less margin from investors compared 
to other models. This is due to the shortened period of risk that the 
risk system measures and relies on for collecting adequate margin from 
investors. Broader adoption of this type of model could eventually lead 
to less margin costs for a broader segment of the market, freeing up 
precious capital for other investments and uses.\21\ Reducing margin 
held by an increasingly smaller number of intermediaries also would 
lower systemic risk in the markets overall.
---------------------------------------------------------------------------
    \21\ The amount of margin posted to intermediaries and 
clearinghouses for derivatives markets has increased in recent years. 
See https://www.greenwich.com/fixed-income/derivatives-market-
structure-2022-identifying-opportunities-growth.
---------------------------------------------------------------------------
    Third, FTX is a digital-asset-native exchange and clearinghouse 
that has helped pioneer new technologies for more efficient payment and 
collateral transfers. Any reliable and resilient payment system that 
reduces the settlement times of payments and transfers reduces risk. If 
the FTX Application is approved and FTX can bring those innovations 
responsibly and through approval of the CFTC, the approval could help 
reduce settlement risk not only on the FUSD platform, but encourage the 
same on others. Broader adoption of payment technologies that reduce 
settlement times and risk also would benefit intermediaries in the 
ecosystem, whose regulatory costs would be reduced by such 
implementations.\22\
---------------------------------------------------------------------------
    \22\ See https://batonsystems.com/the-broken-fcm-model-could-
distributed-ledger-technology-be-its-saviour/.
---------------------------------------------------------------------------
    Approval of FTX Application Would Ensure Continued International 
Cooperation. Continued international cooperation among jurisdictions 
that host healthy derivatives markets also is important to risk 
reduction and other market efficiencies that benefit the public. It has 
been suggested that approval of the FTX Application might have an 
impact on international recognition of the CFTC's regulatory regime for 
purposes of equivalency determinations, on the basis that the FUSD DCO 
would not comply with the international Principles for Financial Market 
Infrastructures, or PFMIs.
    In 2012, the Committee on Payment and Settlement Systems of the 
Bank for International Settlements and the Technical Committee of the 
International Organization of Securities Commissions published the 
CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs). The 
PFMIs set out twenty-four principles to be followed to manage market 
risk in financial market infrastructure. The PFMIs were issued in the 
wake of the financial crisis in 2008 and reflect international 
standards that regulatory bodies in individual countries are 
recommended to implement. In 2013, the CFTC promulgated rules 
implementing the PFMIs that apply to a certain subset of CFTC-
registered DCOs that meet additional requirements under Subpart C of 
the CFTC's Part 39 regulations. Jurisdictions around the world, 
including the European Union, have made equivalence determinations 
based on their assessment of the CFTC's Subpart C of Part 39 
regulations.\23\ FUSD would not be able to receive recognition under 
another country's equivalence determination for the CFTC until it 
satisfies the Subpart C requirements.
---------------------------------------------------------------------------
    \23\ See e.g., Commission Implementing Decision (EU) 2016/377 of 15 
March 2016 on the equivalence of the regulatory framework of the United 
States of America for central counterparties that are authorised and 
supervised by the Commodity Futures Trading Commission to the 
requirements of Regulation (EU) No 648/2012 of the European Parliament 
and of the Council (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/
?uri=CELEX:32016D0377&from=EN).
---------------------------------------------------------------------------
    The FUSD DCO is not registered under Subpart C of Part 39 at this 
time, nor has the FTX Application been filed pursuant to Subpart C of 
Part 39. If the FTX Application is approved, the fact that the FUSD DCO 
is not registered as a Subpart C DCO would have no bearing on 
equivalency determinations made by other countries with respect to the 
CFTC's regulatory regime. Those determinations are based on a review of 
the CFTC's regulatory regime, not on an individual DCO's operations or 
compliance profile. Unless the CFTC's regulations are amended in a way 
that departs from consistency with the PFMIs, equivalency 
determinations of the CFTC framework made by other countries will 
remain in place. The CFTC's approval of the FTX Application would not 
change that.
4. The FTX Application Promotes Innovation and Competition
    One of the early actions of President Biden and his Administration 
was to issue the Executive Order on Promoting Competition in the 
American Economy (Competition EO).\24\ Section 1 of the Competition EO 
reaffirmed the U.S.'s pro-competition policy and observed:
---------------------------------------------------------------------------
    \24\ https://www.whitehouse.gov/briefing-room/presidential-actions/
2021/07/09/executive-order-on-promoting-competition-in-the-american-
economy/.

          ``A fair, open, and competitive marketplace has long been a 
        cornerstone of the American economy, while excessive market 
        concentration threatens basic economic liberties, democratic 
        accountability, and the welfare of workers, farmers, small 
        businesses, startups, and consumers . . . [and the] American 
        promise of a broad and sustained prosperity depends on an open 
---------------------------------------------------------------------------
        and competitive economy.''

The Competition EO goes on to assign responsibilities to all agencies, 
including the CFTC, to:

          ``Us[e] their authorities to further the policies set forth 
        in section 1 of this order, with particular attention to . . . 
        the influence of any of their respective regulations, 
        particularly any licensing regulations, on concentration and 
        competition in the industries under their jurisdiction.''

The CEA also specifically refers to competition as a policy goal of the 
statute, to wit:

          ``It is the purpose of this [Act] to serve the public 
        interests . . . and to promote responsible innovation and fair 
        competition among boards of trade, other markets and market 
        participants.'' \25\
---------------------------------------------------------------------------
    \25\ The Commodity Exchange Act, 7 U.S.C. section 5(b) (emphasis 
added).

Congress therefore has enlisted the CFTC to ensure there is competition 
in the U.S. derivatives markets industry. Indeed, Congress since the 
beginning of the republic has repeatedly re-affirmed the importance of 
competition to the continued strength of the American economy and thus 
the strength of the U.S. globally, including through the body of 
antitrust law referenced in the Competition EO.
    According to data provided by the Futures Industry Association, the 
total monthly volumes for futures trading in North America for March 
2022 was 504,852,212 futures contracts traded.\26\ For March 2022, the 
two largest U.S. derivatives exchanges reported trading volumes of 
488,727,555 futures contracts traded.\27\ This figure reflects 97 
percent of the total futures trading volume for March 2022.
---------------------------------------------------------------------------
    \26\ https://www.fia.org/resources/etd-volume-march-2022.
    \27\ See https://www.cmegroup.com/daily_bulletin/monthly_volume/
Web_Volume_Report_
CMEG.pdf; https://www.theice.com/marketdata/reports/8.
---------------------------------------------------------------------------
    These same two largest U.S. exchanges are the only CFTC-licensed 
venues offering margined futures on BTC at the moment. At the time of 
this writing, there were $1,126,498,100 of notional daily trading on 
one platform,\28\ and $1,334,715 on the other.\29\ FTX would be able to 
contribute to this data set only if the FTX Application is approved.
---------------------------------------------------------------------------
    \28\ https://bitcoinfuturesinfo.com/market-share-and-futures-curve.
    \29\ Id.
---------------------------------------------------------------------------
    If the FTX Application is approved by the CFTC, FUSD plans to list 
cash-settled futures contracts on BTC and ETH. The FTX Application and 
the model designed to risk manage these futures contracts is specific 
to digital assets and is based on several years of experience 
successfully operating a similar risk model on the FTX international 
platform. At the time of this writing, FTX has no plans to list futures 
contracts on other asset classes, and in any case would need to 
undertake the process of CFTC reviewing its risk model and product 
specifications for any additional products on different asset classes.
    FTX encourages the Committee to approach this hearing with this 
information, pertinent considerations and policy goals related to 
competition and innovation in mind. Indeed, this Committee should be 
commended for reviewing whether there is market concentration in other 
sectors of the economy under its purview, consistent with the goals of 
the Competition EO and longstanding U.S. policy related to 
competition.\30\ FTX respectfully requests that the Committee do the 
same in reviewing FTX's licensing matter. FTX strongly believes that if 
the FTX Application is approved, the company will help address the 
challenges facing the U.S. derivatives market place, reduce market 
concentration and unleash many of the broadly beneficial and impactful 
results that innovation and fresh thinking can bring to the U.S. 
economy. The over 1,490 public comments submitted to the CFTC in 
support of our application from academics, industry groups, investors 
and public-interest groups reflect that many Americans agree.
---------------------------------------------------------------------------
    \30\ This Committee held a hearing on April 27, 2022, titled ``An 
Examination of Price Discrepancies, Transparency, and Alleged Unfair 
Practices in Cattle Markets,'' where among other issues concentration 
in the meat packing sector were reviewed and discussed. https://
agriculture.house.gov/news/documentsingle.aspx?DocumentID=2491.
---------------------------------------------------------------------------
Conclusion
    FTX is grateful to this Committee for the opportunity to share 
information about the digital-asset industry, our business, as well as 
the FTX Application.
    It's extremely important that there is regulatory clarity and 
oversight for digital assets in the U.S. Currently, there is a lack of 
customer protection, with very little oversight of the transparency and 
products that customers are accessing. The U.S. economy is losing out: 
95% of digital asset volume is offshore, meaning a lack of revenue and 
income for Americans. Finally, U.S. investors are at a disadvantage 
relative to those from other jurisdictions, facing markets with much 
less liquidity. Having a clear framework applied for markets and assets 
in the digital asset ecosystem would protect customers, move the 
industry forward, advance U.S. economic interests, and protect against 
system risk.
    The CFTC has the tools to be a model regulator for digital assets. 
The agency and its staff have deep knowledge of the ecosystem; the 
staff has already dove into the details of blockchain-asset custody and 
safeguarding customer assets. The principles-based framework under the 
CEA is a good fit for the nascent ecosystem, which, combined with the 
bipartisan nature of the agency, allow it to nimbly but carefully apply 
its core principles and protections to new asset properties. By taking 
the lead on enforcement actions in the ecosystem on unregistered 
digital asset derivatives, the agency has created a pathway for 
licensure. Finally, the CFTC already oversees both direct-access 
platforms, and digital-asset futures--there is nothing fundamentally 
novel to the agency about FTX's margin application. The industry, 
Congress, FTX, and consumers have put their faith in the CFTC to 
provide Federal oversight and a pathway to registration and licensure 
for digital-asset venues.
    In addition, providing licensure for digital-asset exchanges would 
increase competition in the derivatives exchange industry. Promoting 
competition has been a focus of the agency, the Biden Administration, 
House Agriculture Committee Chair Scott, and our antitrust laws. 
Increased competition benefits U.S. consumers and the U.S. economy and 
ensures global competitiveness for the country.
    To be clear, we are not asking for a less thorough review from the 
CFTC than is always applied, nor are we looking to discard core 
customer protections. The CFTC has spent nearly a year digging into 
FTX's application, and done so with a level of rigor and comprehensive 
analysis that should make any regulator proud. It is up to the CFTC to 
make the judgments it feels are in accordance with the CEA and its core 
principles, and we respect that process and whatever conclusions it 
ultimately comes to on our margin application.
    In order to protect consumers, restore America's global 
competitiveness in digital assets, allow the industry to function, 
increase competition, and protect against systemic risk, it's 
imperative that the CFTC use its jurisdiction over digital-asset 
commodities to register marketplaces.
                               Exhibit A
Understanding FUSD's Guaranty Fund Sizing
Executive Summary
    Many of the questions that FTX US Derivatives has received in 
connection with its proposal to offer leverage for U.S. crypto futures, 
and its $250 million guaranty fund (of unencumbered USD cash), relate 
to perceived uncertainty around how or whether the 24x7 risk model and 
the guaranty fund will work in times of stress and/or volatility. 
Fortunately, through FTX's experience running the FTX.com trading 
platform over the last several years, we have objective and historical 
data based examples that show how well the FTX risk and clearing model 
works.
    In this post, we walk through the model and the real world 
experience showing that, even on days of 35% or higher movements in the 
price of bitcoin, FTX.com has never had to use more of its guaranty 
fund than FTX.com made in revenue for that day.
    We then observe that while the FUSD risk model will follow the 
FTX.com model concept, there are at least two important enhancements 
that allow it to provide an even greater level of comfort and 
protection to market participants and regulators.
    First, the FUSD risk model assumes that it will take 24 hours to 
start to close out undercollateralized positions (versus the reality of 
the risk program running in real-time)--meaning that the initial margin 
requirements themselves are materially more conservative than they need 
to be.
    Second, FUSD has sized its guaranty fund at a level that is many 
multiples of the amount that even its conservative risk model projects 
as the required guaranty fund level (i.e., approximately 100 times 
times the estimated highest daily draw on the default fund in extreme 
volatility scenarios).
    Finally, the FUSD initial margin model uses a sophisticated 
filtered historical simulation to capture market risk, concentration 
risk, and liquidity risk, incorporating anti-pro-cyclicality controls 
such as stress VaR and volatility floors.
CFTC Comment Period (Open Until May 11, 2022)
    As many are aware, FTX US Derivatives (``FUSD'') operates a futures 
exchange and derivatives clearinghouse in the U.S. via licenses issued 
by the U.S. Commodity Futures Trading Commission (``CFTC''). Currently, 
FUSD is only permitted to list and clear fully collateralized 
derivatives products; however, FUSD has requested that the CFTC amend 
FUSD's derivatives clearing organization (``DCO'') registration to 
permit FUSD to list and clear leveraged/margined futures contracts. 
Once approved, FUSD intends to list and clear leveraged/margined 
futures and options contracts on digital assets, including bitcoin and 
ether, among others.
    The CFTC has invited the public to comment on FUSD's request, 
through May 11, 2022. The CFTC's six-page request for comment is a 
straightforward list of questions and may be viewed here: https://
www.cftc.gov/media/7031/CommentFTXAmendedOrder/download. Any member of 
the public may submit a comment here, through May 11, 2022: https://
comments.cftc.gov/PublicComments/CommentForm.aspx?id=7254.
Robustness of the FTX Clearing Model and Guaranty Fund
    The FUSD clearing and risk model for leveraged futures products is 
patterned on the clearing and risk model that FTX has deployed and 
operated on its non-U.S. venue, FTX.com, for several years. FTX.com 
routinely handles the trading and clearing of $10 billion or more in 
transactions daily, measured on a notional basis (any interested 
observer can track daily notional volume and open interest levels for 
all of the major global crypto exchanges here: https://ftx.com/volume-
monitor). Notably, the FTX.com risk model operates on a 24 hours a day, 
7 days a week basis, and under this risk model positions that become 
undercollateralized are de-risked (or ``liquidated'') on an orderly 
step basis (i.e., the overall position is reduced/closed out some 
percent at a time, subject to prevailing liquidity and market 
conditions) through a process that runs essentially in real time. This 
is in contrast to the traditional clearing and risk model deployed by 
most of the U.S. futures market today--where undercollateralized 
positions may generally be held open for a day or more (particularly if 
over a weekend), even if the underlying collateral has been completely 
exhausted, while the clearinghouse and typically its clearing members 
wait for the owner of the undercollateralized position to respond to a 
request (i.e., a margin call) to deliver collateral (or margin) in an 
amount sufficient to bring the position back above water. Liquidation 
or close out of the position is then generally initiated only when the 
owner of the position has failed to meet this margin call after some 
determined period of time--which could be on a 24 hour delayed basis 
or, depending on the market and timing, several days delayed basis. 
During that gap, the position can continue to deteriorate and the level 
of insufficiently collateralized risk accumulates without being 
backstopped (other than by the assets of other market participants and 
the clearinghouse).
    Under FTX's model, risk is not permitted to build, unchecked, on an 
under- or uncollateralized basis, full stop. Instead the FTX risk 
model, on a 24x7 basis, operates to de-risk (and liquidate) these 
positions in real time, down to levels where the collateral that is 
posted is sufficient to support the remaining position (if any). Where 
the posted collateral is insufficient to support any remaining 
position, the positions may be given over to backstop liquidity 
providers (each, a ``BLP'', which generally are sophisticated trading 
firms with substantial balance sheets that have pledged, via 
contractual agreement and actually posted collateral, to take over 
liquidating positions programmatically and in real time; the BLPs 
collectively have billions of dollars of collateral sitting in FTX's 
clearinghouse at all times). If the BLP program is insufficient to take 
over the position, FTX's guaranty fund (which is funded fully by FTX in 
cash and has no assessment authority over any other trading 
participant, clearing member or otherwise) provides a backstop pool of 
capital to wind-up and close-out the position.
    As noted above, many of the questions that FUSD has received in 
connection with its 24x7 risk model and its $250 million guaranty fund 
relate to perceived uncertainty about how it may work in times of 
stress and/or volatility. Fortunately, through FTX's experience running 
the FTX.com trading platform over the last several years, we have 
objective and historical data based examples to demonstrate its 
performance.
Mapping the FTX.com Risk and Clearing Model Experience to the FUSD 
        Proposal
    The following core facts underscore our confidence in the 
implementation of the FTX.com risk and clearing model as it has been 
proposed by FUSD:
    While average daily volume ranges from $10 billion to $20 billion 
notional, per day, FTX.com has traded up to $50 billion/day of notional 
volume and has held up to $11 billion in notional open interest at one 
point in time.
    Over the last 3 years we have experienced single-day bitcoin price 
moves of up to 38%, and the insurance fund has paid out a net total of 
$9.5 million (across that entire time period). Generally, FTX.com 
operates on a 5% collateral threshold requirement. The single biggest 
daily drawdown from the FTX.com insurance fund was $4.7 million, on a 
week that the bitcoin price moved down 38%--notably, that drawdown was 
less than FTX.com's revenue for that day.
    Had FTX.com set margin requirements as high as we plan to for our 
U.S. platform, the insurance fund would not have had a drawdown at all 
and instead, over time, we would have actually added to the fund. Had 
FTX.com set margin requirements to the low end of the range we 
anticipate requiring in the U.S.--say, 15%--the single biggest daily 
drawdown would have been $1.7 million.
    FTX's experience running the FTX risk and clearing model provides 
very strong support for concluding that ``it works'', particularly as 
it is proposed to be implemented at FUSD. The FUSD default fund is 
super sized ($250 million versus a historical draw of less than 1% of 
that on FTX.com). In the U.S., the initial margin collateral 
requirements are meaningfully higher than the initial collateral 
thresholds used on FTX.com, meaning that we anticipate draws to be even 
smaller.
    Nonetheless, we have already committed to growing the guaranty 
fund's minimum size as activity on the platform grows: Instead of 
fixing the fund's size to sustain the failure of the largest clearing 
FCMs (``Cover-1'' or ``Cover-2''), we have instead voluntarily 
committed to cover 10% of total outstanding initial margin, up to a 
``Cover-3'' standard if required. This is substantially more 
conservative than is required by regulation.
    Regarding the risk engine's auto-liquidation feature, two questions 
often come up: (1) does the risk engine promote pro-cyclicality in the 
market; (2) what implications does the risk engine's behavior have for 
systemic risk and contagion; and (3) is there a way for an investor to 
opt out of the auto-liquidation feature of the risk engine. First, FTX 
has built in risk-mitigating protections to address pro-cyclicality, 
including price bands, position limits and concentration charges on 
platform users whose positions reach a certain threshold--all of these 
features together restrain the extent to which market prices will move 
in response to the risk engine liquidating a customer position.
    The anti-pro-cyclical nature of the FTX.com margin model has been 
proven over time: Orderly liquidation of undercollateralized positions 
has been refined and tested through multiple high volatility days and 
periods over recent years. The risk engine is also built to wind down 
positions in an orderly manner, limiting its activity to a small 
fraction of overall market volume so as to avoid undue temporary 
impact.
    Second, by quickly unwinding the riskiest, most undercollateralized 
positions, the risk engine prevents build-up of credit risk that could 
otherwise cascade beyond the platform, resulting in contagion. Because 
the risk engine operates 24x7, moves in the underlying cash markets, 
which are also 24x7, do not result in excessive credit risk buildup in 
derivatives markets. This is especially true during overnight, weekend 
or holiday times, when traditional derivatives markets remain closed. 
Instead, the platform reduces systemic risk by closing down or 
otherwise re-collateralizing these positions in real-time (as described 
below).
    Third, the FUSD platform offers multiple methods for connecting to 
the platform, including through an FCM--indeed, the FTX.com platform 
has brokers connected to the platform today. For users that connect 
through an FCM to FUSD, there are a variety of methods the FCM could 
deploy to ``shield'' an investor from auto-liquidation of her position, 
including the fee-service of re-collateralizing to the investor's 
account as necessary to prevent liquidation of the position.
    No one is more interested in ensuring that the risk and clearing 
model holds up in even the most extreme of conditions than us, as we 
are backstopping it with the guaranty fund. FTX.com's experiences have 
allowed the FUSD risk team to build a model that is time tested and 
exceptionally persistent (however measured, across any number of 
quantitative metrics). The chart below helps illustrate these points in 
a striking way: Based on historical data, the FUSD guaranty fund would 
have actually grown in size over time if the FTX margin model had been 
in operation over the past 3 years, under our anticipated minimum U.S. 
initial margin requirements.
Insurance Fund vs. Revenue

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Above, a graph over the lifetime of FTX.com of the 
        performance of its risk engine. The yellow line is a $250m 
        initial guaranty fund size; the blue line is the empirical 
        performance of the FTX.com insurance fund, and the orange line 
        is the performance the insurance fund would have had if it had 
        required 15% margin, which is on the lower end of FUSD's 
        anticipated range. The fluctuations are small under both the 
        FTX.com and FUSD risk models, and under the FUSD model the 
        guaranty fund actually grows over time. For reference, the gray 
        line is FTX.com's cumulative historical revenue. Net movements 
        in the guaranty fund are less than 1% of the initial size and 
        less than 1% of the revenue FTX.com collected over the period.

----------------------------------------------------------------------------------------------------------------
                                                Total                    Daily                     Max
----------------------------------------------------------------------------------------------------------------
                    Volume traded         $6,288,391,118,700            $5,833,386,938          $53,068,090,693
                          Revenue             $1,382,091,723                $1,282,089              $12,800,764
          Open Interest (approx.)         $7,000,000,000,000            $7,000,000,000          $11,000,000,000
                     Abs BTC move                   2,989.1%                      2.8%                    38.9%
                     Abs ETH move                   3,862.6%                      3.6%                    43.9%
         Insurance fund net usage                ^$9,468,974                   ^$8,784              ^$4,686,029
  Insurance fund with U.S. margin                $45,048,377                   $41,789              ^$1,628,656
----------------------------------------------------------------------------------------------------------------


    The Chairman. Thank you. And now Mr. Lukken, please begin 
when you are ready.

 STATEMENT OF HON. WALTER L. LUKKEN, J.D., PRESIDENT AND CHIEF 
              EXECUTIVE OFFICER, FUTURES INDUSTRY 
                 ASSOCIATION, WASHINGTON, D.C.

    Mr. Lukken. Chairman Scott, Ranking Member Thompson, and 
Members of the Committee, thank you for the opportunity to 
testify. It is indeed great to be back in this Committee room. 
I am President and CEO of FIA, a leading global trade 
organization for the futures, options, and centrally cleared 
derivatives markets. And today indeed is a healthy dialogue for 
our industry. As someone who has served as CFTC acting Chair 
and Commissioner, I am proud of the CFTC's mission to not only 
uphold strong customer protections and police the integrity of 
the markets but also promote responsible innovation and fair 
competition among market participants. In crafting this 
balanced mission, Congress and this Committee were careful in 
making sure innovation and competition were advanced 
responsibly and fairly without jeopardizing the integrity or 
financial stability of our markets or the protections afforded 
to customers.
    Today, we are at an inflection point that requires us to 
carefully consider the benefits of an alternative clearing 
structure and ensure it does not compromise the battle-tested 
protections and checks of the existing clearing model. The CFTC 
is now considering a proposal by FTX that would replace the 
traditional clearing model that distributes risk using futures 
commission merchants with a more automated and centralized one. 
Specifically, the FTX direct clearing proposal would for the 
first time combine margin futures with near real-time 
margining, 24/7 auto-liquidation to under-margin customers, and 
a self-funded CCP default fund without the benefits of FCMs 
managing, underwriting, and mutualizing customer risk.
    It is important to point out that the FTX proposal would 
permit futures trading at any underlying asset class transacted 
by any type of customer, including commercial hedgers. This 
requires us to view this proposal with an eye beyond retail 
cryptocurrencies. We must also consider the core users of our 
markets, including farmers, refiners, pension funds, and other 
main street businesses that use futures to hedge price risk in 
the real economy.
    When contemplating such transformative change, FIA 
encourages policymakers to consider the fundamental guiding 
framework articulated in President Biden's recent Executive 
Order on digital assets: same business, same risks, same rules. 
FIA believes the CFTC must analyze FTX's proposal against the 
important customer protections and risk management functions 
that registered FCMs currently provide the marketplace.
    As agents for their customers, FCMs hold various regulatory 
responsibilities, including vetting customers on the 
appropriateness of these leveraged products, policing clients 
for money laundering, segregating customer funds, guaranteeing 
customer trades, holding significant regulatory capital against 
those trades, contributing to clearinghouse default funds, and 
agreeing to further assessments should the CCP default fund 
need replenishment. Today, U.S. registered FCMs contribute more 
than $15 billion to CCP default funds and hold an additional 
$175 billion of their own regulatory capital. This layer of 
financial resources backstops the potential default of 
customers and protects the markets and the wider financial 
system from a contagion event.
    FIA believes there needs to be further analysis of the FTX 
risk model in extreme but plausible scenarios, especially for 
large commercial participants and other asset classes beyond 
retail cryptocurrencies. Given the model relies on continuous 
liquid markets that are open 24/7, questions remain around the 
market impact of auto-liquidation feature for close out of 
large positions in less-liquid markets. We must ensure that the 
model does not trigger a broader fire sale in the central price 
discovery market that harms hedgers and exacerbates further 
market disruption.
    To conclude, FIA supports efforts to further advance real-
time risk management in clearing and bring greater competition 
to the markets. The FTX proposal has advanced a healthy debate 
in our industry. However, we believe that further analysis and 
information are needed on the FTX proposal, and we look forward 
to the deliberative process of the CFTC that will help bring 
additional clarity and information to this unique clearing 
model. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Lukken follows:]

Prepared Statement of Hon. Walter L. Lukken, J.D., President and Chief 
   Executive Officer, Futures Industry Association, Washington, D.C.
    Chairman David Scott, Republican Leader G.T. Thompson, and Members 
of the Committee, thank you for the opportunity to testify about the 
U.S. derivatives market structure and the unique proposal set forth by 
FTX US.
    I am President and CEO of the FIA, a leading global trade 
organization for the futures, options and centrally cleared derivatives 
markets. As someone who also served on the Commission for many years, I 
am proud of the CFTC's long history of supporting innovation and 
competition in the derivatives markets.
    In fact, Congress wisely instructed the CFTC in its mission to, not 
only uphold strong protections for customers and police the integrity 
of the markets, but also ``promote responsible innovation and fair 
competition'' among market participants. In crafting this balanced 
mission, this Committee was careful in making sure innovation and 
competition were advanced responsibly and fairly without jeopardizing 
the integrity or financial stability of the markets or the protections 
afforded to customers.
    Today, we are at an inflection point that requires us to carefully 
consider the benefits of an alternative clearing structure and ensure 
it does not compromise the battle-tested protections and checks of the 
existing structure afforded to customers and markets. The CFTC is now 
considering a proposal by FTX that would replace the traditional 
distributed risk clearing model that utilizes Futures Commission 
Merchants (FCMs) with a more automated and centralized one that does 
not utilize intermediation.
    Specifically, the FTX direct clearing proposal would, for the first 
time, combine margined futures with near real-time margining, 24/7 auto 
liquidation of defaulting customers, and a self-funded CCP default fund 
without the benefit of FCMs underwriting customer risk.
    It is important to point out that FTX's proposal would permit 
futures trading in any underlying asset class transacted by any type of 
customer, including commercial hedgers. This requires us to view this 
proposal with an eye beyond retail cryptocurrencies. We must also 
consider the core users of our markets, including farmers, refiners, 
pension funds, and other main street businesses that use futures to 
hedge price risk in the real economy.
    When contemplating such transformative change, FIA encourages 
policymakers to consider the fundamental guiding framework articulated 
in President Biden's recent Executive Order on digital assets: Same 
Business, Same Risks, Same Rules. FIA believes the CFTC must analyze 
FTX's proposal against the many important customer protections and risk 
management functions that registered FCMs currently provide the 
marketplace.
    As agents for their customers, FCMs hold various regulatory 
responsibilities including vetting customers on the appropriateness of 
these leveraged products, policing clients for money laundering, 
segregating customer funds, guaranteeing customer trades, holding 
significant regulatory capital against those trades, contributing their 
own ``skin in the game'' capital to the central counterparty (``CCP'') 
default fund, and agreeing to further assessments should the CCP 
default fund need replenishment.
    Today U.S. registered FCMs hold roughly $175 billion in regulatory 
capital that backstops their guaranty of customer trades and serves as 
a first line of defense against a more serious contagion event that 
could spread to a CCP and beyond. Additionally, these FCMs contribute 
another $15 billion to clearinghouse default funds that serves to 
incentivize careful risk management and distribute risk among highly 
capitalized institutions during a stressed market crisis.
    FIA also believes there needs to be further analysis of the FTX 
risk model in extreme but plausible scenarios, especially for large 
commercial participants in other asset classes beyond retail digital 
currencies. Given the model relies on continuous liquid markets that 
are open 24/7, questions remain around the market impact of the auto-
liquidation feature for the close-out of large positions in less liquid 
markets. We must ensure that the model does not trigger a broader fire 
sale in the central price discovery market that harms hedgers and 
exacerbates further market disruption.
Conclusion
    FIA supports the efforts of FTX to further advance real-time risk 
management in clearing and bring greater competition to our markets. 
Their proposal has advanced a healthy debate in our industry. However, 
we believe that further analysis and information are needed on the FTX 
proposal, and we look forward to the deliberative process of the CFTC 
that will help bring additional clarity and information to this unique 
clearing model.

    The Chairman. Thank you, Mr. Lukken. And now Mr. Edmonds, 
please begin when you are ready.

          STATEMENT OF CHRISTOPHER S. EDMONDS, CHIEF 
DEVELOPMENT OFFICER, INTERCONTINENTAL EXCHANGE, INC., ATLANTA, 
                               GA

    Mr. Edmonds. Thank you, sir. Chairman Scott, Ranking Member 
Thompson, Committee Members, I am Chris Edmonds, Chief 
Development Officer, Intercontinental Exchange, or ICE. I have 
responsibility for all of ICE's clearinghouses and risk teams. 
I appreciate the opportunity to appear before you today to 
discuss the important role of clearing and the pending FTX 
application at the Commodity Futures Trading Commission.
    The U.S. is a global leader in capital and derivatives 
markets, enabling participants to hedge risk and manage their 
businesses. Throughout the market's history, there have been 
new and innovative technology-based ideas promising multiple 
efficiencies. ICE has a robust history of innovation. However, 
the adoption of new technology and processes comes with the 
potential risk for unintended consequences. Innovation cannot 
supersede the primary functions of futures markets for price 
discovery and hedging.
    As articulated by the leadership at FTX, the company's 
technology risk management processes and proposed regulatory 
framework have been constructed to revolutionize clearing and 
address purported issues with the current offerings. ICE is 
fully supportive of using new technology to deliver more 
efficient markets. But as policymakers examine this 
application, they must remain mindful of the risk.
    As this Committee is aware, years ago, executives from 
Enron stood in these halls before regulators offering new ideas 
as to how markets should operate. Under the current system 
codified by the Dodd-Frank Act, separately capitalized governed 
and regulated clearing organizations managed settlement of 
financial transactions executed by market participants 
typically via regulated clearing members. All of these 
participants serve important checks in the system against 
excessive leverage, new products that are not well-tested or 
appropriate for widespread use, and the introduction of 
unexpected counterparty risk.
    ICE believes these independent stakeholders provide 
significant benefits to helping deliver market consensus. 
Regulated clearinghouses, working in conjunction with regulated 
exchanges and in most cases market intermediaries, increase 
stakeholder confidence in fair markets, transparent pricing, 
and fully understood settlement processes.
    FTX plays a leading role in the markets for digital assets, 
and regulatory oversight will help lead to decision-making and 
risk management practices that are balanced. However, we do 
have concerns with the approach FTX has proposed for this 
application. Rather than following global guidelines and 
existing regulations, FTX has requested a new set of rules not 
currently compliant with CFTC regulations and global standards 
and potentially sets dangerous precedents. FTX's application 
raises significant questions around risk management, financial 
resources, investors' protections, and the collection and 
safeguarding of margin on non-intermediate clearing model that 
today has significant participation.
    ICE recommends the Committee explore the risks raised by us 
and others for the application and the potential market 
implications. Given my 25 years of experience in these markets, 
I am confident no Member of this Committee wants to learn of 
constituents losing their hedge protection because the market 
moved against them at 3:00 a.m. on a Saturday morning.
    The current system is a pay-as-you-go system whereas the 
FTX application is a go-as-you-pay service, meaning 
participants automatically lose their position if the market 
moves against them without the ability to bolster their stake 
with additional margin. The upshot of these model differences 
has the potential to impact users of futures markets 
significantly and detrimentally.
    This Committee should continue its globally recognized 
leadership in market structure when evaluating the proposal. 
Approval in its current form may lead other jurisdictions to 
challenge the pragmatic and principle-based approach the CFTC 
has championed.
    ICE has embraced competition from our founding, and we do 
not believe there is a single model for clearing that is 
appropriate for all products and markets. ICE operates 
traditional intermediated clearing for futures exchanges and 
over-the-counter derivative markets, as well as non-
intermediated clearing for certain energy products used by 
commercial and institutional market participants. In all cases 
ICE clearinghouses are compliant with global regulatory 
standards and CFTC rules as written today and did not require 
new CFTC rulebooks to be successful.
    I appreciate this opportunity to appear before you today 
and look forward to answering any questions the Members of the 
Committee may have. Thank you.
    [The prepared statement of Mr. Edmonds follows:]

    Prepared Statement of Christopher S. Edmonds, Chief Development 
         Officer, Intercontinental Exchange, Inc., Atlanta, GA
Introduction
    Chairman Scott, Ranking Member Thompson, I am Chris Edmonds, Chief 
Development Officer for Intercontinental Exchange, or ICE. I appreciate 
the opportunity to appear before you today, as this Committee looks at 
the FTX US Derivatives (``FTX'') request for an amended derivatives 
clearing organization (``DCO'') registration order to permit clearing 
of margined products through a retail, non-intermediated clearing 
model.\1\
---------------------------------------------------------------------------
    \1\ Available at https://www.cftc.gov/PressRoom/PressReleases/8499-
22.
---------------------------------------------------------------------------
    Clearing houses play a critical role in the financial markets that 
serve the needs of participants around the globe. Policy makers across 
the world, including this Committee, have an interest in safe and 
efficient markets. To further the common interest of well-functioning 
markets and well-regulated clearing houses, we appreciate the 
opportunity to participate in this hearing as it examines the FTX 
request to amend its DCO order to offer direct clearing to retail 
participants for margined derivative products.
Background
    Since launching an electronic over-the-counter (OTC) energy 
marketplace in 2000 in Atlanta, Georgia, ICE has expanded both in the 
U.S. and internationally. Over the past seventeen years, we have 
acquired or founded derivatives exchanges and clearing houses in the 
U.S., Europe, Singapore and Canada. In 2013, ICE acquired the New York 
Stock Exchange, which added equity and equity options exchanges to our 
business. Through our global operations, ICE's exchanges and clearing 
houses are directly regulated by the U.S. Commodity Futures Trading 
Commission (CFTC), the Securities and Exchange Commission (SEC), the 
Bank of England, the UK Financial Conduct Authority (FCA), the European 
Securities and Markets Authority (ESMA) and the Monetary Authority of 
Singapore, among others.
    ICE has a successful and innovative history of clearing exchange 
traded and OTC derivatives across a spectrum of asset classes, 
including energy, agriculture and financial products. Today, ICE owns 
and operates six geographically diverse clearing houses that serve 
global markets and customers across North America, Europe and Asia. 
Each of these clearing houses is subject to direct oversight by local 
national regulators, often in close coordination and communication with 
other regulatory authorities with important interests, and subject to 
regulations reflective of the G20 reforms and IOSCO principles.
    ICE acquired its first clearing house, ICE Clear U.S., as a part of 
the 2007 purchase of the New York Board of Trade. ICE Clear U.S. is 
primarily regulated by the CFTC and is recognized by ESMA and clears a 
variety of agricultural and financial derivatives. In 2008, ICE 
launched ICE Clear Europe, the first new clearing house in the UK in 
over a century. ICE Clear Europe clears derivatives in several asset 
classes, including energy, interest rates, equity and credit 
derivatives, and is primarily supervised by the Bank of England, in 
close cooperation with the CFTC, the SEC and ESMA. ICE Clear Credit was 
established as a trust company in 2009 under the supervision of the 
Federal Reserve Board and the New York State Banking Department and 
converted to a derivatives clearing organization (DCO) following 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act). ICE Clear Credit is primarily 
regulated by the CFTC and SEC and is also recognized by ESMA and clears 
a global set of credit default swaps on indices, single names and 
sovereigns. In 2017, ICE acquired ICE NGX as part of the sale of 
Trayport. ICE NGX operates a non-intermediated model for clearing of 
North American energy products and is regulated by the Alberta 
Securities Commission and the CFTC. ICE also operates ICE Clear 
Netherlands under the regulatory supervision of De Nederlandsche Bank, 
Autoriteit Financiele Markten and ESMA and ICE Clear Singapore which is 
overseen by the Monetary Authority of Singapore.
Clearing Houses Vital Role in the Derivatives Market
    The risk-reducing benefits of central clearing have long been 
recognized by users of exchange-traded derivatives (futures) and the 
pre-existing regulatory framework and efficacy of the clearing model 
throughout even the most challenging financial situations made it the 
natural foundation of the financial reforms put forward over the past 
decade. Clearing has consistently proven to be a fundamentally safe and 
sound process for managing systemic risk. Observers frequently point to 
non-cleared derivative contracts as a significant factor in the broad 
reach and complexity of the 2008 financial crisis, while noting the 
relative stability of cleared markets.
    As part of the increased use of clearing, clearing houses and 
market participants have worked to ensure that the clearing process is 
robust and resilient and supported by adequate financial, risk 
management, and operational resources. The Principles for Market 
Infrastructure (PFMI) represent the internationally agreed-to framework 
for achieving these goals and are intended to ensure that fundamental 
protections apply internationally and reduce the risk of regulatory 
arbitrage. National regulators in G20 jurisdictions have implemented 
the key aspects of the PFMIs into their regulatory frameworks. This 
process has set an appropriate standard across numerous jurisdictions 
for the regulation of a clearing house.
    The FTX model raises significant questions around risk management, 
financial resources, investor protections and the collection of margin 
in a retail non-intermediated clearing model. Retail non-intermediated 
clearing substantially differs from both the traditional mutualized 
clearing model and a non-intermediated clearing model restricted solely 
to commercial and institutional participants. FTX's proposal eliminates 
sound risk management practices and many customer protections for 
retail participants, which are key features of the centrally cleared 
derivatives markets. FTX's proposed structure creates risk-taking 
incentives that may serve to increase, rather than reduce, the risk to 
market participants and the global financial system.
    In addition, while FTX's current business focuses on digital 
assets, the proposed framework is not limited to digital assets. The 
proposed model significantly deviates from the current regulatory 
framework and the CFTC should evaluate the implications of these 
changes. If the FTX proposal is approved, clearing houses could apply 
this model to other markets such as traditional agriculture or energy 
commodities. The CFTC must consider the implications of the proposed 
model as a policy matter for all products and markets. Innovation 
cannot supersede the primary functions of futures markets for price 
discovery and hedging. The FTX proposal raises many questions and 
concerns. As such, the CFTC should use its rulemaking process to 
propose and fully vet any necessary modifications to the current rules 
to fit a retail non-intermediated market structure.
    In addition, while FTX's current business focuses on digital 
assets, the proposed framework is not limited to digital assets. The 
proposed model significantly deviates from the current regulatory 
framework and the CFTC should evaluate the implications of these 
changes. If the FTX proposal is approved, clearing houses could apply 
this model to other markets such as traditional agriculture or energy 
commodities. The CFTC must consider the implications of the proposed 
model as a policy matter for all products and markets. Innovation 
cannot supersede the primary functions of futures markets for price 
discovery and hedging. The FTX proposal raises many questions and 
concerns. As such, the CFTC should use its rulemaking process to 
propose and fully vet any necessary modifications to the current rules 
to fit a retail non-intermediated market structure.
Cross-Border Regulation and Equivalence
    Cross-border oversight and regulatory deference to home country 
regulators is essential to well-functioning markets. The CFTC and 
global regulators have worked together to implement relevant laws, 
standards, and policies that further the goal of financial stability 
and resilience, while minimizing supervisory duplication and conflict. 
Global regulators have recognized third-country clearing houses as 
equivalent allowing market participants to continue accessing global 
markets. ICE does not believe the FTX proposal fully satisfies the 
PFMIs and Commission regulations and as such, the CFTC should carefully 
consider the cross-border implications of approving a clearing model 
that fails to satisfy the PFMIs. Other jurisdictions including the 
European Union (``EU'') and the United Kingdom (``UK'') rely on 
compliance with the PFMIs to determine whether a jurisdiction has 
comparable or equivalent regulation. The current recognition of U.S. 
clearing houses in the EU and UK is based on this determination of 
equivalence. It is critical that any action by the CFTC not jeopardize 
the existing foreign equivalence determinations applicable to U.S. 
clearing houses.
Current Regulatory Framework
    The FTX proposal raises significant questions regarding compliance 
with the PFMIs and CFTC regulations. Specifically, the FTX proposal 
does not fully meet PFMI standards and CFTC rules for credit risks, 
sufficient financial resources to cover participant exposure, liquidity 
risks, default management, governance, and customer protections. Under 
the FTX proposal, the clearing house does not evaluate and monitor the 
credit risk of its participants. FTX does not have credit standards for 
participants nor are participants required to meet any minimum capital 
or asset requirements. The clearing house does not conduct any due 
diligence on a participant's ability to perform its obligations and the 
FTX proposal does not indicate that FTX would review individual 
participants financial reports. The clearing house would solely rely on 
margin provided by the participant and the automated close-out 
methodology. This approach removes a fundamental protection existing in 
other clearing models where the clearing house can look to the 
financial strength of the participants in addition to the posted 
margin. Moreover, the proposed auto-liquidation process would manage 
capital-related risks other than through participant capital 
requirements, as required.
    Moreover, there are fundamental differences between the traditional 
clearing house model and the FTX model related to the treatment of 
losses in a portfolio. Currently, clearing houses operate a ``pay as 
you go'' model, meaning losses are settled at least once a day. This 
model allows participants to maintain their positions notwithstanding 
negative market moves. Conversely, the FTX model is a ``go as you pay'' 
model. In this model, when a participant's collateral is eroded below a 
prescribed threshold, FTX liquidates the position and the participant's 
participation is stopped. The FTX participants lose their positions 
when the market moves against them, and they are liquidated at adverse 
prices. ICE notes the risks to the market and other participants when a 
clearing house is forced to automatically liquidate and the potential 
for a cascading downward spiral, especially in relatively illiquid 
markets.
    In addition, the financial resources supporting the clearing house 
are key to the management and mitigation of credit risk and to ensuring 
the safety, soundness and robustness of the clearing system. The cover-
1/cover-2 standard is designed for clearing arrangements with 
institutional clearing members. This standard, in addition to the FTX 
proposed cover-3 alternative, is not suitable for a retail non-
intermediated clearing model based on the large number of small retail 
market participants. Such an approach would include a small proportion 
of a DCO's exposure to a participant default against which to make a 
reasoned assessment of appropriate financial resource requirements. 
Nonetheless, it is essential that each clearing organization be subject 
to a robust financial resource standard--particularly when the 
participants at risk of a default by the clearing house are individual 
retail investors.
    Moreover, FTX proposes to allow itself to use customer funds for 
FTX operations and replace the funds at some point in the future. The 
FTX proposal states that in some cases margin provided by users may be 
used for liquidity purposes or haircut due to losses caused by other 
users. This approach is inconsistent with the approach taken by other 
clearing houses in default management where margin of a non-defaulting 
member is not subject to use in the default by another member. It is 
also inconsistent with the general principles under Section 4d of the 
Commodity Exchange Act and CFTC regulations which prohibit funds of one 
customer to be used to cover obligations of another.
Comparison to Other Non-Intermediated Models
    ICE has significant experience with non-intermediated clearing 
arrangements through its ICE NGX clearing house. ICE NGX operates a 
sophisticated commercial market, offering clearing services to 
producers, marketers and utilities in the physical energy markets of 
North America. Commercial and institutional participants utilize the 
ICE NGX markets to manage risk associated with a physical energy 
business. ICE NGX has been clearing physical energy products for over 
20 years and has a history of managing volatility and participant 
defaults. ICE NGX has a risk profile that differs substantially from 
the FTX proposal and has numerous features and protections that are not 
present in the FTX proposal. ICE NGX participation is restricted to 
commercial market participants that meet minimum financial 
requirements. ICE NGX can also call for additional collateral and there 
is no auto-liquidation function. Participants in cleared physical 
markets are also required to have the capability to make and take 
delivery of underlying energy commodities, which discourages pure 
speculative trading firms from participating. The ICE NGX commercial 
non-intermediated model includes robust risk management and financial 
protections that comply with CFTC regulations and the internationally-
agreed standards applicable to clearing houses. The FTX proposal does 
not share many of these features and raises issues that differ from 
those of existing institutional non-intermediated arrangements.
Conclusion
    ICE has always been, and remains, a strong proponent of open and 
competitive markets with appropriate regulatory oversight. As an 
operator of global futures and derivatives markets, ICE understands the 
importance of ensuring the utmost confidence in financial markets. To 
that end, the FTX proposal raises significant policy issues as well as 
questions about compliance with the PFMIs and Commission regulations 
that warrant further analysis. The approval of the FTX proposal could 
undermine the internationally agreed to framework and Commission 
regulations intended to achieve the goal of a robust and resilient 
clearing process.
    Mr. Chairman, thank you for the opportunity to share our views with 
you. I would be happy to answer any questions you and Members of the 
[Committee] may have.

    The Chairman. Thank you. And now, Mr. Perkins, you are 
recognized for 5 minutes.

    STATEMENT OF CAPT. CHRISTOPHER R. PERKINS, (RET.), U.S. 
 MARINES; MANAGING PARTNER AND PRESIDENT, CoinFund MANAGEMENT 
                       LLC, NEW YORK, NY

    Mr. Perkins. Chairman Scott, Ranking Member Thompson, 
Members of the Committee, and distinguished guests, thank you 
for giving me the opportunity to testify before this Committee 
today. It is an honor and a privilege to share my perspective 
on how America can embrace innovation and the promise of web3 
to reinforce our leadership in the global financial system 
while doing so responsibly in a manner that protects investors 
and manages risk.
    I serve as President of CoinFund Management LLC, a web3-
focused registered investment advisor founded in 2015. Prior to 
this role, I served as a global co-head of the futures, 
clearing, and foreign exchange prime brokerage businesses at 
Citi and also served on the executive committee and board of 
directors of the FIA. My views on risk management were 
initially shaped on the battlefields in Ar-Ramadi, Iraq, where 
I had the honor of serving as a United States Marine. I 
subsequently transitioned to Lehman Brothers where I witnessed 
firsthand the perils of unregulated, highly speculative 
derivatives markets that brought the global financial system to 
its knees.
    For over a decade that followed, I worked closely with 
global regulators and policymakers to implement reforms to the 
derivatives industry and in the process worked with my team to 
build one of the most prominent intermediary derivatives 
businesses in the world. I see the cultivation of deep, liquid, 
accessible and secure derivatives markets as an important 
cornerstone of our economy and an essential pillar of effective 
risk management.
    The arrival of web3 could potentially transform the global 
economy into a more creator-led, open, inclusive, and 
democratic ecosystem, aligning perfectly with shared, 
bipartisan, American values. With principles-based, 
transparent, and predictable policy and regulation, the U.S. 
will empower entrepreneurs to build and innovate onshore, which 
will fuel the economy, catalyze job creation, and reinforce 
U.S. leadership across the global financial markets.
    Like it or not, the risk-management realities and 
challenges of digital asset markets that function 24 hours a 
day, 7 days a week have arrived. According to a recent poll by 
NBC News, one in five Americans have invested in, traded, or 
used cryptocurrencies. The cryptocurrency market that is 
emerging is a more inclusive one with communities of color 
leading user adoption. Today, these communities can legally 
take risk via exposure to a vast array of spot digital assets, 
but their ability to hedge that risk through the derivatives 
market is extremely limited because the legacy intermediated 
derivatives market structure is unprepared to support the risk-
management realities of the digital asset class.
    However, the FTX proposal to allow direct access 
derivatives clearing powered by real-time risk and 
collateralization engines promises to bring much-needed 
innovation to U.S. digital asset derivative markets. From my 
perspective, the FTX proposal, if adopted, would reduce 
systemic risk through real-time collateralization and risk 
management, offer industry participants the ability to more 
dynamically hedge digital asset risk, introduce incremental 
competition and choice which will facilitate a more inclusive, 
cost-effective marketplace, and revitalize U.S. digital asset 
derivative markets at a time when leadership and innovation 
have migrated overseas.
    Certainly, there are risks to deploy new technologies, and 
any proposed model must prove that it can meet and exceed the 
same extreme but plausible stress scenarios applied to legacy 
clearinghouses via existing regulation. Moreover, appropriate 
disclosures must ensure that industry participants clearly and 
transparently understand the unique nuances and risks of 
participating in a direct clearing model, including the risk of 
liquidation.
    Finally, guardrails to dissuade excessive speculation as 
they exist today in traditional futures markets should continue 
to be considered by regulators. Appropriately implemented, the 
direct model proposed by FTX could catalyze a new era of 
responsible innovation and unlock new capabilities to hedge 
risk at a time when, by unofficial estimates, more than 90 
percent of crypto derivatives activity have migrated overseas.
    In conclusion, I support FTX's application to offer a 
direct clearing model for digital asset derivatives. Direct 
access will foster a more inclusive and liquid derivatives 
market in the United States, finally giving investors the 
ability to access derivative markets to hedge their risk. With 
the appropriate regulatory guardrails in place, this model will 
result in a more resilient, efficient, and dynamic system. I 
look forward to your questions today, and thank you.
    [The prepared statement of Capt. Perkins follows:]

   Prepared Statement of Capt. Christopher R. Perkins, (Ret.), U.S. 
 Marines; Managing Partner and President, CoinFund Management LLC, New 
                                York, NY
    Chairman Scott, Ranking Member Thompson, Members of the Committee, 
and distinguished guests, thank you for giving me the opportunity to 
testify before this Committee today. It is an honor and a privilege to 
share my perspective on how America can embrace innovation to reinforce 
our leadership in the global financial system while doing so 
responsibly, in a manner that protects investors and thoughtfully 
manages risk.
    I serve as President of CoinFund Management LLC, a web3-focused 
registered investment adviser founded in 2015. Prior to this role, I 
served as Global Co-head of the Futures, Clearing and Foreign Exchange 
Prime Brokerage (FXPB) businesses at Citi and also served on the 
Executive Committee and Board of Directors of the FIA. I am the co-
founder of Veterans on Wall Street (VOWS) and more recently, Veterans 
in Digital Assets (VIDA), an initiative designed to help transitioning 
military veterans and their spouses find fulfilling careers in the 
web3.
    I began my professional career in the United States Marine Corps, 
where I had the honor of serving our country on the battlefield in Ar-
Ramadi, Iraq. The violent urban warfare I experienced left me with a 
renewed perspective, deep sense of purpose and a thorough understanding 
of risk management. I subsequently transitioned to Lehman Brothers 
where I witnessed firsthand the perils of unregulated, highly 
speculative derivatives markets that brought the global financial 
system to its knees. For over a decade that followed, I worked closely 
with global regulators and policymakers to implement reforms to the 
derivatives industry, and in the process, worked with my team to build 
one of the most prominent intermediary clearing businesses in the 
world. My unique background blends deep experience in derivatives, 
market structure and risk management, coupled with ``sell side'' and 
``buy side'' market perspectives across traditional finance and digital 
asset ecosystems. I see the cultivation of deep, liquid, accessible and 
secure derivatives markets as an important cornerstone of our economy 
and an essential pillar of effective risk management.
    From my perspective, the United States needs to make a choice. We 
can embrace new technologies, like blockchain, to unlock responsible 
innovation and inclusion across finance and risk management, or we will 
risk being left behind by those that do. With principles-based, 
transparent and predictable policy and regulation, the U.S. will 
empower entrepreneurs to build and innovate onshore, which will fuel 
the economy, catalyze job creation, and reinforce U.S. leadership 
across the global financial markets.
    Recently, President Biden's Executive Order (EO) on Ensuring 
Responsible Development of Digital Assets outlined a comprehensive 
policy approach to balance the risk and promise of digital asset 
technologies.
    Bipartisan themes highlighted in the EO include:

   Protect U.S. and global financial stability and mitigate 
        risk

   Promote leadership in technology and economic 
        competitiveness to reinforce U.S. leadership in the global 
        financial system

   Promote equitable access to safe and affordable financial 
        services

   Support technological advances and ensure responsible 
        development of use of digital assets

    Applying these themes to digital asset derivative markets, it is 
clear that our legacy, intermediated derivatives market structure is 
unprepared to support the risk management realities of this new asset 
class, leaving market participants with few effective and efficient 
choices to hedge risk. However, the FTX proposal to allow direct 
access, margined derivatives clearing, powered by real time risk and 
collateralization engines, promises to bring much needed, responsible 
innovation to U.S. digital asset derivative markets, allowing it to 
compete globally by aligning with the shared, bipartisan ideals 
outlined above.
    From my perspective as a former head of one of the largest 
derivatives intermediaries, or Futures Commission Merchants (FCMs), in 
the world, the FTX proposal, if adopted, would:

   Reduce systemic risk in a U.S. derivatives industry that has 
        grown increasingly concentrated and chronically under-
        collateralized--largely due to operational shortfalls,

   Offer industry participants the ability to more dynamically 
        hedge digital asset risk,

   Introduce incremental competition and choice which will 
        facilitate a more inclusive, cost-effective marketplace, and

   Revitalize U.S. digital asset derivative markets at a time 
        when leadership and innovation has migrated overseas.

    Certainly, there are risks to deploying new technologies and any 
proposed model must prove that it can meet and exceed the same 
``extreme but plausible'' stress scenarios applied to legacy clearing 
houses via existing regulation. Moreover, appropriate disclosures and 
customer protections must be implemented to ensure that industry 
participants clearly and transparently understand the unique nuances 
and risks of participating in a direct clearing model--including the 
risk of liquidation (which is a risk that all current futures 
participants face today). Finally, guardrails to dissuade excessive 
speculation--as they exist today in traditional future markets--should 
continue to be considered by regulators. However, I believe that the 
impact of not embracing innovation and technology is a far greater risk 
to our economic future.
    Like it or not, the risk management realities and challenges of 
cryptocurrency markets--powered by blockchain technology--that function 
24 hours a day, 7 days a week, have arrived. According to a recent poll 
by NBC News, one in five Americans have invested in, traded or used 
cryptocurrencies.\1\ The cryptocurrency market that is emerging is a 
more inclusive one. A survey by Ariel Investment and Charles Schwab 
Corp revealed that 38% of Black investors under 40 years old own 
digital tokens, compared with 29% for their White counterparts.\2\ 
Today, these communities can legally take risk via exposure to a vast 
array of spot digital assets, but their ability to hedge that risk 
through the derivatives market is extremely limited due to the 
unavailability of FCMs and lack of available products. Unfortunately, 
legacy ``batch'' margining technology and existing processes simply 
cannot keep pace, leaving intermediaries with risk and capital 
challenges that impede their ability to support this rapidly emerging 
asset class.
---------------------------------------------------------------------------
    \1\ Thomas Franck, ``One in five adults has invested in, traded or 
used cryptocurrency, NBC News poll shows,'' CNBC, March 31, 2022.
    \2\ Kelsey Butler, ``Young Black Americans Wary of Stock Market Are 
Turning to Cryptocurrency,'' Bloomberg, April 5, 2022.
---------------------------------------------------------------------------
    The FTX proposal will give industry participants new choices and 
new capabilities to properly manage risk through hedging by unlocking 
regulated derivatives across the digital asset ecosystem. Moreover, the 
FTX proposal will cultivate a true ``defaulter pays'' \3\ clearing 
model, which secures the system through real time risk management, 
where risk is mitigated with the collateral of risk takers and the 
clearing house, itself. Appropriately implemented, the direct model 
proposed by FTX could catalyze a new era of responsible innovation 
across derivatives markets and unlock new capabilities to hedge risk at 
a time when, by unofficial estimates, more than 90% of crypto 
derivatives activity has migrated overseas.
---------------------------------------------------------------------------
    \3\ ``Defaulter Pays'' is when a defaulter's own contributed 
collateral is sufficient to cover losses during a liquidation scenario.
---------------------------------------------------------------------------
    In the aftermath of the Global Financial Crisis, the G20 
[1] doubled down on the central clearing model by committing 
to transition the $700 trillion OTC derivative markets into this 
legacy futures market structure framework. Without scalable technology 
that could be used to distribute and decentralize risk, policy makers 
had few alternatives--and instead chose a highly centralized and highly 
regulated, intermediated market structure where clearing members, known 
as FCMs, guaranteed the financial performance of their clients and the 
ecosystem itself.
---------------------------------------------------------------------------
    \[1]\ http://www.g20.utoronto.ca/2009/2009communique0925.html.
---------------------------------------------------------------------------
    Under this model, the clearing house is responsible for calibrating 
risk management standards of the system and must ensure that sufficient 
financial resources are collected under ``extreme but plausible'' 
scenarios to withstand market shocks. To meet collateralization 
shortfalls, clearing houses form a ``waterfall'' in their rulebooks and 
require their members to post capital to a ``default'' fund. To the 
extent a member fails to meet its obligations during an insolvency, the 
clearing house may use that member's default fund contribution to 
offset collateral shortfalls. However, if deficits remain after 
applying these funds, the CCP will utilize the other members' 
contributions (after exhausting limited proprietary capital known as 
``skin in the game'') even when those members may have nothing to do 
with the default. Though market participants universally agree that 
initial margin levels should be sufficiently calibrated such that a 
``defaulter pays'' model prevails, the mutualization and socialization 
of risk of the existing paradigm is real. As recently as 2018, clearing 
members were assessed millions in losses [2] after a power 
trader failed to meet his obligations on NASDAQ OMX.\4\
---------------------------------------------------------------------------
    \[2]\ https://www.reuters.com/article/us-nordic-power-nasdaq/
nordic-power-traders-loss-costs-nasdaq-and-members-114-million-euros-
idUSKCN1LT28G.
    \4\ Lefteris Karagiannopoulos, ``Nordic power trader's loss costs 
Nasdaq and members 114 million euros,'' Reuters, September 13, 2018.
---------------------------------------------------------------------------
    Though one would think that FCM businesses would thrive under a 
regulatory mandate, the number of FCMs has materially decreased over 
the last 2 decades from a high of 188 in 2004, to just 61 by 2022. 
Meanwhile, segregated client assets have skyrocketed, rising from about 
$60bn in 2002 to more than $470bn today.
Figure 1: Segregated Client Funds \5\ versus FCM Count (2002-2021)
---------------------------------------------------------------------------
    \5\ Segregated Funds include segregated futures, foreign futures 
and cleared swaps. Source: CFTC.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The obvious result of these two trends is concentration of risk, 
leaving market participants with fewer choices to access futures 
markets to hedge their risk. Today, the top five members control the 
preponderance of the segregated collateral pool.
    This consolidation and subsequent risk concentration have been 
caused by a number of factors:

  1.  Regulations including those introduced by the Dodd-Frank Wall 
            Street Reform and Consumer Protection Act resulted in 
            material fixed costs that uniformly apply to all clearing 
            members, regardless of size or activity level.

  2.  A loss of interest income due to macroeconomic and capital 
            optimization factors related to Basel [3] 
            capital rules, including the Supplemental Leverage Ratio 
            (SLR), negatively impacted FCM economics.
---------------------------------------------------------------------------
    \[3]\ https://www.risk.net/regulation/5307456/repeal-cem-reform-sa-
ccr.

  3.  Increased third party fees, including fees to maintain legacy 
            technology infrastructure further suppressed FCM 
---------------------------------------------------------------------------
            profitability.

  4.  With sizable fixed costs and low profit margin, the only solution 
            was to drive scale by acquiring market share. Smaller FCMs, 
            unable to achieve the scale needed to achieve 
            profitability, simply could not compete with larger players 
            and shuttered their businesses.

    The FCM community has been left in a bind. Dependence on decades 
old, notoriously archaic technology that is only capable of delivering 
slow and lumbering batch cycles has resulted in a mismatch of 
collateral flows and an accumulation of risk. Coupled with initial 
margin models that often fail to sufficiently cover this concentrated 
risk, the legacy clearing model leaves FCMs facing the potential of 
material stress losses at a time when profitability is challenged at 
best. The legacy derivatives collateralization cycle functions as 
follows:

  1.  Client executes a derivative (and the FCM guaranties against the 
            risk of default) on trade date ``T''

  2.  Clearing house calls FCM for collateral (typically on T or early 
            (2 a.m.) on T+1)

  3.  FCM issues margin call (typically before 10am, T+1)

  4.  Clients pay margin obligation by the end of the day (T+1)

    During periods of stress, it is common for clearing houses to 
justifiably call their members for incremental intraday collateral 
(which generally must be met in 1 hour according to clearing house 
rules), leaving unsecured FCMs scrambling to recoup collateral from 
their clients, often an impossible task. Unfortunately, this laborious 
process simply does not reconcile with the speed and volatility of 
crypto-derivative markets.
    Against the backdrop of these operational shortfalls, acute under-
collateralization continues to plague FCMs. Margin breaches are defined 
when intraday price movements cause the actual marked-to-market 
exposure in the account of a clearing member to exceed the initial 
margin held. Based on public statistics,[4] the derivatives 
markets have experienced thousands of margin breaches in recent years, 
including a $2.01bn margin breach in Q1 2021.\6\ Volatile markets often 
cause these breaches, leaving FCMs unsecured and undercompensated for 
the risk they assume from their clients.
---------------------------------------------------------------------------
    \[4]\ https://www.fia.org/margin-
breaches#::text=This%20visualization%20shows%20data%20
on,held%20against%20that%20member%20account.
    \6\ Alessandro Aimone, ``GameStop frenzy triggered $2billion margin 
breach at OCC,'' Risk Magazine, July 27, 2021.
---------------------------------------------------------------------------
    In an era where profitability requires scale and scale attracts 
meaningful risk, leading to questionable financial returns, FCMs are 
left in a predicament. Smaller clients, who do not offer scale and only 
transact to hedge a few times per year, are either left on the 
sidelines unable to find an intermediary or are subject to substantial 
minimum fees, effectively pricing them out of the market. For most 
FCMs, the scalable clearing of digital asset derivatives--even if 
clearing houses offered comprehensive product coverage--is out of the 
question because the accumulation of risk due to their batch processes 
cannot keep pace with 24 hour, volatile cryptocurrency markets. 
Moreover, Basel regulatory capital proposals [5] and 
internal risk limits leave bank FCMs simply unable to expand into this 
new asset class, leaving clearinghouses with little incentive to 
innovate. For this reason, it's no surprise that the vast preponderance 
of digital asset derivatives activity has largely migrated overseas in 
markets where there is no requirement for intermediaries.
---------------------------------------------------------------------------
    \[5]\ https://www.bis.org/bcbs/publ/d519.pdf.
---------------------------------------------------------------------------
    While legacy FCMs continue to retrench, a new model is emerging 
that could revitalize the domestic derivatives industry, especially for 
digital asset derivatives, and give U.S. persons the risk management 
capabilities they deserve. New technologies now enable near real time 
risk management and collateralization capabilities--without the need 
for an intermediary. Calibrated correctly and fairly, a non-
intermediated market structure can deliver a true ``defaulter pays'' 
model, by solely relying on the assets of the risk takers and clearing 
house, itself, eliminating legacy conflicts of interest, socialized 
losses and ushering in a new era of responsible innovation.
    End-users stand to benefit. Incremental competition will introduce 
new choices and capabilities to hedge risk, while lowering costs. The 
operational inefficiencies of the current model are costly (e.g., 
contingent liquidity funding due to the collateral timing mismatch is 
expensive), and the direct model will eliminate intermediary fees 
altogether. In theory, real time risk management should also unlock 
capital efficiencies across the system, since more collateral is needed 
to secure and backstop a system that depends on a daily batch process 
to collateralize--especially for volatile markets. Finally, billions of 
dollars in member capital, which would need to sit idly in default 
funds socializing risk in the system, could be redeployed back into the 
economy because in the direct model, the responsibility for 
collateralization sits with the risk takers, and is supported by the 
resources of the clearing house, itself.
    Competition is healthy for markets, and I believe that the direct 
model offered by FTX's proposal will actually benefit the legacy FCM 
community. In a world where direct and intermediated markets coexist, 
FCMs will be able to identify new opportunities to deliver operational 
and capital efficiencies for their clients, perhaps providing agency 
services to prevent liquidations, while continuing to offer high touch 
service to top institutional clients.
    In conclusion, I fully support FTX's application to offer a direct 
clearing model for digital asset derivatives. It is time for the United 
States to revitalize its derivatives markets by embracing the promise 
of new technologies to reduce systemic risk through real time and 
surgically precise collateralization. Direct access will foster a more 
inclusive and liquid derivatives market in the United States finally 
giving investors the ability to access derivatives markets to hedge 
their risk. With the appropriate regulatory guardrails in place, this 
model will result in a more resilient, efficient and dynamic system.

Christopher R. Perkins,
President, CoinFund.

    The Chairman. Thank you very much, and I want to thank all 
five of our very distinguished witnesses on the panel for your 
excellent testimonies.
    At this time, Members will be recognized for questions in 
order of seniority, alternating between Majority and Minority 
Members. You will be recognized for 5 minutes each in order to 
allow us to get as many questions in as possible. And as I 
always say, please keep your microphones muted until you are 
ready to ask your question so that we can minimize background 
noise.
    I now recognize myself for 5 minutes. We all know that 
cryptocurrency is a volatile market. We realize that. We 
witnessed what has been happening to them over the past few 
days on the markets. I want to ask Mr. Lukken, Mr. Duffy, and 
Mr. Bankman-Fried this question. And then, Mr. Edmonds, I have 
a question for you as well.
    First, to the three of you, Mr. Lukken, Mr. Bankman-Fried, 
and Mr. Duffy, how in your own words is this proposal not 
making an already risky market much riskier for the customer, 
particularly in light of what we are seeing and, as several of 
you pointed out, the emergence of an eagerness to get into this 
market from the public? Mr. Duffy, would you start off?
    Mr. Duffy. Sure, I would be happy to start. How is this 
adding more risk to the system? Well, the gentleman at the end 
of the table said that 90 percent of the crypto market is going 
overseas. I would assure you that 90 percent of the losses are 
also going overseas with them and that is not a bad thing from 
our perspective of our participants being protected from this.
    Listen, these asset classes are completely different, and I 
am not here to discuss the value of crypto one way or another. 
I think what is important is the structure that they operate 
under. The proposal as put forth is fraught with dangers. The 
traditional clearing model that we deploy at CME Group is 
something that we are passionate about. And the gentleman 
referred to the derivatives industry cratering in 2008 and what 
caused that. I assure you, it wasn't listed derivatives 
industry. It was levered bilateral derivatives that caused that 
collapse. So the risk associated with these products, if not 
properly regulated, could be catastrophic not only for the risk 
of their products but other products that this application 
could be applied to, especially every asset class that CME 
trades. So I have grave concerns.
    I could talk for hours on this topic, Mr. Chairman. I will 
reserve my time.
    The Chairman. Yes.
    Mr. Duffy. But I think as you deploy this against other 
asset classes, that is where the real risks come in.
    The Chairman. Thank you. Mr. Lukken, please.
    Mr. Lukken. Well, as far as customer protection, I mean, 
the FCM over the years has played a critical role in our 
ecosystem of making sure that customers are protected, their 
funds are segregated, that they are guaranteeing those funds, 
they are holding capital in case there is a default. So we have 
this layer of protection, as was noted, that helps protect 
customers that exist that is being taken out of the system.
    So, yes, I think FTX is making the argument that they can 
replicate that in other ways through the DCO application, but 
we have strong views that there is a reason that FCMs help to 
compartmentalize risk away from the CCP. Oftentimes, they are 
holding the capital to try to--like a ship. They may be taking 
on water, you close the watertight hatch, right, to make sure 
the rest of the ship does not go down.
    The Chairman. Right.
    Mr. Lukken. We think that diversified risk that the FCM 
provides is a helpful component of preventing a systemic event 
and helping protect customers.
    The Chairman. Okay. Thank you so much. And now, Mr. 
Bankman-Fried?
    Mr. Bankman-Fried. Thank you. I think that this would help 
make cryptocurrency markets less volatile and less risky for 
exactly the reasons that you guys have pointed out. The fact 
that there is no Federal oversight of them today is not good, 
and providing that Federal oversight with licensed 
cryptocurrency derivatives exchanges would help ensure that 
they do meet the standards and safety that we expect.
    And I will also say that, as was referenced, financial 
crises can be caused by unlisted, untracked contracts done in a 
bespoke manner where there is no central clearing. That is 
another reason that we are excited to bring this under CFTC 
jurisdiction with CFTC oversight of the clearinghouse.
    The Chairman. Well, thank you. I just have a question to 
Mr. Edmonds. Could you comment, Mr. Edmonds, on how the 
clearinghouse model proposed by FTX stands up to international 
regulatory standards such as those required to maintain 
equivalency with the EU and the UK markets?
    Mr. Edmonds. Mr. Chairman, the EU and the UK both have made 
the statement if it is the same risk, it is the same rules. And 
so I believe what you are asking for is you are asking me to 
determine what happens if the application is approved under the 
current rules. We--and Mr. Duffy has said this in his 
testimony--don't believe it can be approved in its current form 
under the current rules, so we would get to a point where it is 
not the same rules for the same risk. And I think that is the 
concern of the international community.
    The Chairman. Thank you very much. And now I recognize the 
Ranking Member, the gentleman from Pennsylvania, my friend, Mr. 
Thompson.
    Mr. Thompson. Mr. Chairman, thank you. Thank you to all of 
our witnesses.
    Mr. Bankman-Fried, thank you for speaking with us today 
regarding your proposal that is before the CFTC. And I know the 
CFTC's comment period closed yesterday and it is holding a 
roundtable in a couple weeks. And its experts will give careful 
consideration to all the information provided. I appreciate you 
taking the time to provide some additional color on your 
proposal and to address some of the concerns expressed by some 
market participants. Could you please tell us why the markets 
should deviate from the well-tested approach to clearing 
employed at CME or ICE, for this virtually unknown approach and 
why take the risk?
    Mr. Bankman-Fried. Thank you. So, first of all, I think 
that there should be diversity of risk models allowed so long 
as they are all deemed suitable and consistent with regulations 
by the CFTC. I personally believe that our application is 
consistent with the current rules and regulations of the CFTC, 
that there is no required rulemaking or changes for it, and 
that should the CFTC deem it to be appropriate and then it 
would not require any changes.
    I would also like to say, in terms of why I think this is 
worth doing--and again, I don't think that we should be banning 
other risk models here. I don't think we should be stopping 
other exchanges from being able to operate. I think we should 
have healthy competition here. I think that it has numerous 
advantages. In our risk model the collateral is held directly 
at the clearinghouses, the collateral for all the positions. 
There is CFTC oversight of that collateral, and it is 
guaranteed to be there to not be used for anything else, to be 
segregated, and that is a difference with traditional models. 
It provides an extra layer of security and guarantee of the 
assets backing these positions.
    I also think that having a faster risk model is appropriate 
for digital assets. This means that rather than having to 
choose between liquidating a position too early out of fear of 
what could happen over the next 2 days or exposing yourself to 
systemic risk like we saw with LME, that the risk model can 
make a real-time, more precise judgment about the health of the 
position. I think both of those are going to be healthy, and I 
think they particularly fit the digital asset ecosystem.
    I will note that we do not have any plans to launch 
nondigital asset contracts anytime soon through this model. And 
I think those are both advantages. I think the equitable access 
is an advantage. I think the open and transparent market is an 
advantage. I think that all of those have real advantages. And 
again, I don't believe that this is inconsistent or new from 
the perspective of the rules and regulations that it would 
require, and many of the people in the industry, including many 
of those on this panel today, are currently listing products 
with many of these properties.
    Mr. Thompson. Okay. Thank you. Mr. Perkins, in your 
testimony you highlight some of what you perceive as 
inefficiencies in the existing intermediated clearing approach. 
Besides a wholesale adoption of the FTX approach to clearing, 
what aspects of their proposal do you think today's 
clearinghouses should consider adopting?
    Mr. Perkins. Thank you, sir, for the question. In today's 
model there is a mismatch between 24 hour/7 days markets of 
cryptocurrency with the way we collateralize today in the 
futures markets. So essentially clients put on risk, we meet 
those obligations to the clearinghouse immediately, and then we 
have to wait to the following day to receive that collateral 
back from our clients. That doesn't reconcile with a highly 
volatile market that is moving, and so therefore, we are much 
better positioned from a systemic risk perspective if we are 
able to meet that collateralization in real time.
    And so the inefficiency that I am highlighting is the 
inefficiency of collateralization today that the FTX model 
addresses. And frankly, I don't see a way that the current 
intermediated model can deliver inclusion and provide services 
for crypto derivatives because of this collateral mismatch.
    Mr. Thompson. Thank you. Mr. Edmonds, in your testimony you 
noted that innovation cannot supersede the primary functions of 
futures markets for price discovery and hedging, but even today 
some innovations, most take for granted like electronic order 
books, algorithmic trading. My question is what is the line 
between bad innovation and good innovation?
    Mr. Edmonds. Well, I think the bright line is where does it 
fit within the regulatory construct? And the markets look for 
certainty at the end of the day. Users of the markets look for 
certainty at the end of the day. And so having potentially two 
standards that may develop over time creates uncertainty in the 
market. And I think if you look to some of the volatility 
around the crypto world as it sits today, it is a lack of 
certainty of what happens in different jurisdictions and how 
folks review that. So for me it is about how do you divide the 
world of regulation to make sure that those who are going to be 
in the game understand the rules of the game at all times.
    Mr. Thompson. Good. Thank you. Thank you to all the 
witnesses and thank you, Mr. Chairman.
    The Chairman. Thank you, Ranking Member.
    And now the gentlewoman from North Carolina, Ms. Adams, who 
is also the Vice Chair of the Committee on Agriculture, is 
recognized for 5 minutes.
    Ms. Adams. Thank you, Chairman Scott, Ranking Member 
Thompson, for hosting the hearing today. Thank you to the 
witnesses. I appreciate all of your diligence here. I want to 
thank the committee staff.
    I have heard many interesting perspectives on 
cryptocurrency today. Some say it needs to be defined before it 
is regulated, crypto or security or derivatives. Crypto, they 
also say, does it need an independent financial regulator or is 
the existing Commission sufficient? So let me ask Mr. Lukken. 
Your organization, the Futures Industry Association, represents 
over 80 percent of futures commission merchants today. If 
accepted, FTX's application would alter the role of U.S. 
registered FCMs proposing leverage without intermediaries. 
Chair Behnam has opened the floor for discussions on crypto 
derivatives. So what will happen if the model is applied to 
other commodity markets, Mr. Lukken?
    Mr. Lukken. Well, I have indicated that it needs further 
analysis because it is uncertain whether the customer 
protections that are afforded to commercial hedgers would be 
the same under this model. In addition, I think that the risk 
model, which is used to auto-liquidating small retail 
cryptocurrency products, once you get into large commercial 
hedgers that need to get into our markets and hold large 
positions to make sure that their agricultural products are 
hedged, that they are managing price risk, trying to auto-
liquidate those types of positions potentially could have 
disruptive effects on the marketplace and not off market but 
those other positions will have it in the central marketplace. 
So again, we want to understand better how this might work for 
commercial hedgers. It is one thing for a snake to swallow a 
mouse and digest it. It is another thing for a snake to swallow 
a pig. It is going to have a different----
    Ms. Adams. Okay. So let me move on. I have some more 
questions. But let me just ask you and follow up. Will FTX and 
similar players be expected to shoulder the systemic risk that 
clearinghouses were traditionally responsible for? Mr. Lukken?
    Mr. Lukken. I am sorry, repeat the question.
    Ms. Adams. Will FTX and similar players be expected to 
shoulder the risks that clearinghouses were traditionally 
responsible for?
    Mr. Lukken. Yes, and that is one thing we like about the 
FTX proposal is they have put up their own skin in the game 
into their default fund and they are willing to take that on. 
In doing so, however, they have wiped out a significant portion 
of the FCM capital that is held against the positions as well.
    Ms. Adams. Okay. So let me ask Mr. Bankman-Fried. If your 
company's proposal is accepted, can you tell us how you plan to 
protect consumers who use your platform?
    Mr. Bankman-Fried. Absolutely. Thank you, Congresswoman. 
We, to start off with, have all of the customer protections 
that are typically found in DCOs and DCMs in addition to all of 
the protections that are typically found in FCMs because we 
acknowledge that because there is a disintermediated option, we 
have a duty to provide all of those controls. And so we have 
done deep analyses both of the rules and regulations and of 
existing FCMs to ensure that we have similar sets of 
transparency, of suitability, of disclosures.
    And, when you bring up the anti-financial crimes 
perspective, we are subject to Bank Secrecy Act level KYC on 
FTX U.S. derivatives as well and have a standard know-your-
customer anti-money-laundering policy both for users and for 
all deposits and withdrawals of both cryptocurrencies and fiat 
currencies that go through the platform.
    Finally, we will be providing transparency around any 
assets, any digital assets that we do list on the platform in 
line with what we would expect would be helpful for consumers 
going far above what the current regulations require because we 
think that that is appropriate.
    Ms. Adams. Okay. Thank you. Mr. Duffy, let me ask you. We 
cannot doubt that the skyrocketing growth seen in decentralized 
finance is linked to its accessibility. And so as an exchange, 
FTX offers equitable access and a current model that gives us 
data for free. What is your philosophy on that sort of user-
friendliness, and how does your company prioritize financial 
inclusion?
    Mr. Duffy. Yes, it is an interesting question and Mr. 
Bankman-Fried is commenting on things that are outside of his 
application so I can only comment on his application. And when 
we talk about----
    Ms. Adams. I have 3 seconds.
    Mr. Duffy. Well, then----
    Ms. Adams. I am about out of time.
    Mr. Duffy. We have equitable access to everybody, ma'am. 
That is about what I can tell you. The model has worked for 
hundreds of years. We have amended it throughout time, and it 
continues to be a time-tested model.
    Ms. Adams. Thank you so much. Mr. Chairman, I am out of 
time. I yield back. Thank you.
    Mr. Duffy. Yes, we don't accept credit cards, though, like 
they do.
    The Chairman. Thank you very much. And now the gentleman 
from Georgia, Mr. Austin Scott, is recognized for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman. And 
at the outset I want to say a couple things. One is I am, and I 
believe the majority of my constituents are, more concerned 
about the price of food and energy than they are about the 
price of digital currencies. I don't mind telling you I don't 
understand the whole crypto thing. There is a tremendous amount 
of mining that goes on in the area that I represent. I do not 
understand why it consumes so much energy or what they are 
actually mining. But I do think the CFTC roundtable May 25th is 
going to provide a lot more information and a lot more 
understanding for all of us on the Committee, as well as those 
who will be directly impacted by this.
    For me, the issue is--and I majored in risk management and 
insurance and actually had my Series 7 before being elected to 
Congress. It is: does the risk outweigh the return? And I look 
at CoinFund and I go to your webpage and it says disruptive 
technology requires disruptive investors. And my concern--and I 
can't see Mr. Bankman-Fried--is does this disrupt the markets 
as a whole? I honestly don't think it is necessarily bad if the 
majority of crypto is traded overseas. I just don't. Now, if 
coin markets and energy markets moved overseas, that would be a 
significant concern for me.
    But my question for you, Mr. Bankman-Fried, is that, as I 
understand from your comments, FTX.com has been operating 
internationally and you allow this model overseas, is that 
correct?
    Mr. Bankman-Fried. Yes, that is correct.
    Mr. Austin Scott of Georgia. So can a U.S. investor not 
operate on your platform overseas?
    Mr. Bankman-Fried. That is correct. They cannot. We have a 
separate platform for U.S. investors that does not currently 
have a margin and futures product on the overseas application, 
which is licensed by a lot of the world today and overseen by 
many of the top financial regulators. We do offer a very 
similar product to what we are proposing here.
    Mr. Austin Scott of Georgia. But U.S.-based investors 
cannot transact through----
    Mr. Bankman-Fried. That is correct.
    Mr. Austin Scott of Georgia. Okay. That was one of the 
questions that I had. But, Mr. Edmonds, in your testimony you 
expressed concern that the proposal if approved could 
ultimately be applied to traditional agriculture and energy 
markets, and that is one of my primary concerns. You also 
stated innovation cannot supersede the primary function of 
futures markets for price discovery and hedging, and I agree 
with that statement. But can you elaborate on how you see this 
proposal potentially affecting markets and the farmers that I 
represent who use them. Especially in today's day and time with 
fertilizer and other input costs as high as they are, I am 
extremely concerned about this.
    Mr. Edmonds. Yes, I believe it raises the cost of their 
operation at the end of the day if you were to apply this model 
to those markets because you are going to pre-fund. And today 
when an FCM sits in the middle of the transaction and 
represents the end client to the exchange and clearinghouse, 
they have a very wide-ranging relationship with the end-user at 
the end of the day. They are looking at much more than just an 
individual transaction. In the FTX model, as it is proposed in 
the application, it is an individual transaction. And when you 
are under equity at that point you face the liquidation that 
Mr. Duffy and others have commented on here.
    Mr. Austin Scott of Georgia. Mr. Bankman-Fried, do you have 
anything to add to that? I mean, the energy and the commodity 
markets are my primary concern.
    Mr. Bankman-Fried. Yes. So, first of all, I completely 
acknowledge that this model would require further analysis for 
some asset classes before we would want to launch any products 
there. I believe the same would be true of what the CFTC would 
want. We are not planning to be launching energy products 
anytime soon with this model. We are going to be starting off 
with just digital assets because, as you say, when you look at 
assets that are not typically traded 24/7, assets that have 
physical settlement in physical warehouses, assets with 
different types of market participants, that does involve a 
further conversation.
    Mr. Austin Scott of Georgia. But your application is not 
limited to margin digital commodities is my understanding.
    Mr. Bankman-Fried. We are not intending to list them. I do 
not believe the CFTC would want us to list nondigital assets 
out of the gate and we----
    Mr. Austin Scott of Georgia. Then why does your application 
allow for it?
    Mr. Bankman-Fried. That is how standard applications are, 
but if this is something that you don't trust the CFTC to 
exercise their discretion on, we could look into writing some 
time period during which we could not do that in our 
application. Like that is the kind of thing we would be open 
to. Like I am not lying to you right now. I really do mean 
this. And I trust that the CFTC will enforce that as well. But 
you could look into other controls on this.
    Mr. Austin Scott of Georgia. You said time period. What 
about a permanent restriction?
    Mr. Bankman-Fried. Why would you think that there should be 
a permanent restriction? As I understand it, you are asking 
questions about the suitability, which I think are appropriate 
and would require further discussion. You can imagine something 
where it would require a further review by DCR in order to list 
them, which I think would be potentially appropriate.
    Mr. Austin Scott of Georgia. My time has expired. I look 
forward to the roundtable, Mr. Chairman.
    The Chairman. Thank you very much, Mr. Scott. And now the 
gentlewoman from Connecticut, Mrs. Hayes, who is also the 
Chairwoman of the Subcommittee on Nutrition, Oversight, and 
Department Operations, is now recognized for 5 minutes.
    Mrs. Hayes. Thank you, Mr. Chairman. And thank you to our 
witnesses for being here today. This is a very interesting 
topic for me as an educator. I am always interested to learn 
new things. And as a legislator, I realize that we cannot put 
our head in the sand and not evolve as markets are evolving and 
our economies are changing. So this is something that we really 
need to have these thoughtful conversations about, and we need 
to be doing that right now, not after it is too late.
    The digital asset market is expanding. In fact, in my state 
last year a firm was opened in Connecticut. So the 
cryptocurrency sector is emerging. Mr. Bankman-Fried, your 
proposal supports the idea of removing intermediaries as a 
means of democratizing the digital currency market. I am 
concerned that removing intermediaries from the equation could 
create an opening for fraud and abuse, particularly towards new 
customers that are entering the digital asset market for the 
first time. While these assets could present a path towards 
building wealth for some, I am concerned that the volatility of 
the market could lead to average customers losing even more, 
especially without proper oversight.
    So my question is how do you respond to the assertion that 
the elimination of capital investment, combined with your 
proposal to self-fund your guarantee fund will result in a lack 
of incentive for participants to mitigate their own risk?
    Mr. Bankman-Fried. Thank you for the question. There are a 
few different answers. To one of those it is absolutely 
important that we still have protections against fraud, against 
scams, and some of those protections are often provided by 
intermediaries like FCMs. To the extent that they are, it is 
absolutely incumbent upon our platform to have the same 
protections. We do have those. That is a piece of our proposal. 
And the entire platform is under CFTC oversight, and they would 
be enforcing that that would be true as well, that all of the 
necessary customer protections that typically exist were in 
there.
    Talking about the point you have raised about the capital, 
in addition to the first line of defense being our own skin in 
the game rather than our customers' or intermediaries' skins in 
the game, in our model the initial margin for the positions is 
posted directly to the clearinghouse. And so in addition to 
that guarantee fund, there is a lot of capital which is held 
directly with CFTC oversight, segregated accounts for margin 
for the customers' positions, which also provides a capital 
backstop for them and does not require trust on that side.
    I will just say that for institutions that do want to 
access it through intermediaries, as I imagine a number of them 
would, we are absolutely open and excited to work with FCMs on 
that front for them to fill a role as intermediary, especially, 
for their existing clients and other clients who want their 
services, as many do, and that when you talk about extending 
credit, that is something that an FCM could come to an 
agreement with, with their clients.
    Mrs. Hayes. Thank you. That is quite an optimistic 
viewpoint.
    Mr. Duffy, do you believe that this model would be secure 
enough for retail investors to build wealth, or do you believe 
conversely that the increased market volatility caused by lack 
of backstops will endanger their investments?
    Mr. Duffy. It is really difficult for me to predict what 
the retail investor will profit or not profit because you have 
seen a lot of them make a lot of money. And I like to remind 
people that I have seen a lot of people make a lot of money 
being wrong to market, and I have seen a lot of people lose a 
lot of money being right to market. So it is all a question of 
timing, so it is really difficult to make that assertion.
    I am concerned about the overall proposal. Now, Mr. 
Bankman-Fried continuously says that he will not apply this to 
other products. That is absolutely irrational for him to have 
the ability to apply to a single asset class while the rest of 
us sit on the goal line while he is at the 50 yard line and he 
decides to deploy it in other asset classes and we don't get 
the ability to do it.
    There are a lot of problems with this, but the educational 
knowledge that needs to go to the retail investor I think has 
been completely underserved. CME Group has been an 
institutional participant for many, many decades now, and we 
continue to do it. But we do a lot of education with the retail 
investor. We don't believe in the app model with a credit card, 
sign up, and good luck to you. We don't think that is a process 
that makes a lot of sense for retail investors.
    I made reference earlier, there is a publicly traded entity 
called Coinbase that you all may have noticed, these people are 
down 90 percent in value in 6 months, so they are all based off 
cryptocurrencies. So those participants are retail owners of 
that firm, not institutional.
    Mrs. Hayes. Thank you. My time has expired, but I will be 
submitting an additional question for the record because we 
heard from Chairman Rostin Behnam that they would need to 
expand their budget and their capacity to oversee 
cryptocurrency. I have some serious concerns about what that 
looks like, but I will submit that question for the record. 
Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman from Arkansas, Mr. Crawford, is 
recognized for 5 minutes.
    Mr. Crawford. Thank you, Mr. Chairman. Thank you all for 
being here today.
    Kind of following on with what my colleague, Mr. Austin 
Scott, was discussing with regard to agriculture producers, I 
mean, this is the Agriculture Committee, so if we are not 
concerned about ag producers, we are on the wrong committee. So 
I want to put it in the context of how this might potentially 
impact the ag markets. For example, I mean, the thing that--I 
talk to farmers all the time. You plant wheat, you are long 
wheat. You got a position in the market. You are long wheat. 
There is an underlying fundamental to that. You plant cotton, 
you are long cotton. It is just how it is.
    I am really struggling to understand--and in all 
earnestness, what is the underlying security of Bitcoin or any 
other cryptocurrency in the context of other commodities that 
make this--just as an example, one cryptocurrency in 24 hours--
I think it was yesterday--lost 97 percent of their value in 24 
hours. So I want to be forward-thinking. I want to be a modern 
guy and try to understand crypto, but I am really struggling 
with it. I am really struggling with it.
    And my concern is that farmers are looking at this and go, 
oh, heck, if we were ever going to try to incentivize farmers 
to get in the market and avail themselves of this fundamental 
risk management tool that we call the commodities futures 
market, I don't see this as an incentive. That is my concern. 
Am I missing something here?
    Mr. Bankman-Fried, I know that the proposal is only limited 
to Bitcoin and Ethereum futures and I get that, but I am 
concerned about the precedent that we are setting here. And so 
I guess my question is would approval of the proposal open the 
door for other exchanges to use this model for traditional 
futures contract like I mentioned, cotton, corn, wheat, other 
ag commodities? And what would prevent broader application of 
this sort of proposal beyond the current intent?
    Mr. Bankman-Fried. The CFTC has oversight of all of the 
clearinghouses and exchanges and would have oversight of any 
new risk model submissions and could deem those inappropriate 
if it believed that they were so. I think that if you have 
feedback to give to the CFTC that you think is important to 
give to them on what they should and should not deem 
appropriate, I suspect that they would probably welcome that. I 
don't see how that is relevant to our application. That is not 
what we are doing. But, I do think that would be appropriate to 
have a longer period of discussion on agricultural commodities 
and risk models prior to implementing any new models for them.
    Mr. Crawford. I got you, Mr. Duffy. I just indicated Terra 
as one example, a 97 percent loss in 24 hours, Bitcoin down 25 
percent in the last 30 days. Do these crypto market trends 
concern you with what we are discussing today specifically as 
it pertains to market risk and asset volatility?
    Mr. Duffy. So let me make a couple comments. First of all, 
Mr. Bankman-Fried has continually said that it would be up to 
the Commission to do this, but at the same time he has said to 
this body over and over again he has not eliminated, when Mr. 
Scott pressed him, would he not deploy this model into other 
asset classes, which he would. And if he doesn't, others would 
because it is a cheap model to do because the oversight goes 
down.
    Second, on your first question about what is a 
cryptocurrency worth if it goes down? It is worth zero. If corn 
goes to a certain price, you have an ear of corn. That is as 
simple as it comes. You have nothing when you have 
cryptocurrency that goes to zero.
    The risk of this going into other markets is extremely 
detrimental. We have two countries fighting each other right 
now--and I thank the gentleman for his service at the end of 
the table. We have two countries fighting that have \1/3\ of 
the wheat production that is going to be off the market. Don't 
worry about other products. You better worry about--the 
questions that need to be worried about, are we all going to be 
able to eat? And we need to have sound, prudent risk 
management. And I cannot be forced into a model that I will 
have no choice to deploy if in fact the CFTC goes down this 
path because I will deploy it because somebody else will. I 
have a fiduciary obligation to my shareholders and my clients 
to do certain things, and I will have no choice. Otherwise, I 
will be out of business. This is a proposal that is fraught 
with danger, and I have outlined that in my testimony. The 
application that has been put forth to the CFTC is completely 
different than some of the comments that are being said at this 
panel today. So I can only comment on what is out there. He has 
not eliminated other asset classes from his application to be 
clear.
    Mr. Crawford. Thank you. The volatility seems to be a 
recurring theme, and my concern is that this volatility is 
exacerbated by inflation, and inflation is exacerbated by this 
market volatility. Is that a fair statement?
    Mr. Duffy. It is a fair statement to some, and others would 
disagree with you, but I happen to agree with you.
    Mr. Crawford. All right. Thank you. I yield back.
    The Chairman. Thank you, Mr. Crawford.
    And now the gentlewoman from Ohio, Ms. Brown, is recognized 
for 5 minutes.
    Ms. Brown. Thank you, Chairman Scott and Ranking Member 
Thompson, for holding this hearing today. And thank you to our 
panel today. We appreciate hearing from all of you.
    I believe that, as our country modernizes and evolves, our 
financial institutions should also. In addition, ingenuity when 
it comes to market access and clearinghouse models is something 
that I have been pleased to see CFTC prioritized. However, this 
cannot be done at the expense of consumer protection.
    Mr. Bankman-Fried, how does FTX plan to strike the right 
balance between offering innovative financial products that may 
expand economic opportunities and eliminate barriers to entry 
for investors while still ensuring consumer protections are 
maintained?
    Mr. Bankman-Fried. Thank you for the question. We will have 
in addition to all of the customer protections that exist on 
traditional models, on traditional futures exchanges and 
intermediaries, additional suitability tests, transparency 
about the products to ensure that customers are fully informed, 
fully aware of what they are doing, that they have an 
understanding of these assets and these products. We are going 
to be going through voluntary disclosures and analyses that 
will be made public of any assets that are listed on the 
platform and make sure that those are obvious to users of the 
platform in addition to the mechanics of the platform on it.
    I think that it is important to be able to offer equitable 
access to investors, as you said, that affords equitable 
opportunities to accrue wealth, but I also think that it is 
important that people are extremely aware of what they are 
trading, of how it works, of its mechanics, that they are not 
accessing things that they do not at all understand and that 
they are accessing products that have liquidity support, the 
demands on it. So I think it is extremely important. We spent a 
lot of time on it, and if it is helpful, we are happy to follow 
up with you as well and send over what some of those materials 
that we have are on the transparency and disclosure and 
suitability.
    Ms. Brown. Thank you. Because I consider consumer education 
to be a critical segment of consumer protection, investors 
should have access to the necessary tools to make informed 
decisions about their financial wallet.
    Just to kind of expand on that point, Mr. Bankman-Fried, 
how does FTX ensure that customers have an appropriate 
understanding of derivatives trading before engaging in trades 
on the FTX platform?
    Mr. Bankman-Fried. Yes, absolutely. So in addition to 
having our entire rulebook, all of the market data, and 
everything made publicly available, before you can access any 
trading on the platform, you have to go through a walk-through 
of the FTX US Derivatives platform that explains how every 
piece of it works, that explains the products you would be 
trading, and for smaller users a test that tests your knowledge 
of how those products work to ensure that there is basically 
forced disclosure, transparency, and checks that people 
understand the mechanics of the products and of the platform. 
Again, super, super happy to follow up, happy to have a further 
discussion about this and show you the materials that we have 
on that.
    Ms. Brown. Thank you. Same question to you, Mr. Perkins. 
How does Coinbase ensure that customers have an appropriate 
understanding of derivatives trading before engaging in trades 
on your platform?
    Mr. Perkins. Thank you, Congresswoman. I am with CoinFund, 
and we do not provide access for customers. We are not an 
exchange. We are an investment management firm, so maybe I can 
follow up with you offline on that.
    Ms. Brown. All right. Well, thank you, Mr. Chairman. And 
with that, I yield back.
    The Chairman. Thank you. And now the gentleman from North 
Carolina, Mr. Rouzer, is recognized for 5 minutes.
    Mr. Rouzer. Thank you, Mr. Chairman. This is a very 
interesting subject. I am pleased to have everybody here.
    Walt, great to see you again. Walt and I fought battles in 
a previous life as Senate staffers years ago, and really great 
to see you.
    Mr. Duffy--and I don't have any pre-bias with any of the 
questions that I have. I am just trying to understand the 
situation a little better. But my understanding is the CME 
Group proposed its own direct clearing model in 2016. What 
problems were you hoping to address in the futures market at 
that time, and do those problems still exist today?
    Mr. Duffy. It is interesting because I think people believe 
that I am opposed to the direct clearing model. I have never 
said I was opposed to a direct clearing model. I said I oppose 
the FTX's direct clearing model. So I want to make sure that we 
are crystal clear on that. The model that you are referring to 
in 2016, as you are I am sure aware, the illustrious Federal 
Government's and Federal Reserve's central banks around the 
world decided to come up with what is called the leverage ratio 
that made it extremely punitive for banks to participate, and 
their capital balance sheets were being consumed by the 
leverage ratio under Basel III. So what we were trying to help 
accomplish was to get clients to be on CME's books directly but 
still have to adhere to all the rules and procedures and 
protocols of the futures commission merchants at the same time.
    We eliminated that program for a couple reasons. One, the 
CFTC asked me to for starters. That is who told me to get rid 
of the program. Second, we got rid of it because they changed 
the leverage ratio on Basel III, which made some of the banks a 
little bit more compelling to do customer business. But it was 
a very punitive time in the leverage ratio if you recall back 
in that time period of 2016. That is the reason why we 
abandoned the direct participant model.
    I am not opposed to it, sir. I am opposed to this 
application for a lot of reasons, because it does not conform 
to the existing Commodity Exchange Act of 2000.
    Mr. Rouzer. I understand. Thank you. Mr. Bankman-Fried--and 
you may have testified on this earlier and I just missed it--
but what has been the experience in other countries? How many 
other countries have authorized----
    Mr. Bankman-Fried. Yes, we are working with regulators in a 
large number of countries across the globe. On our platform we 
are licensed and regulated in a number of them, including 
Japan, Switzerland, European Union, Australia, and others. We 
have had productive conversations with a number of them. And, I 
think that they have, obviously, I will let them speak for 
themselves; but, they have become comfortable with the model as 
it operates.
    The model that we would be proposing for FTX US Derivatives 
is a more conservative model than what we operate overseas. I 
think that it has provided a large number of helpful risk 
features and safeguards on the product. We comply with anti-
money laundering, know-your-customer standards globally, and 
are helpful wherever we can with regulation law enforcement. 
So, I look forward to working with the CFTC to continue to dive 
into our application and ultimately come to the judgment that 
they think is appropriate.
    Mr. Rouzer. Mr. Lukken, do you believe that your members 
might find it attractive to participate in an exchange that 
does not charge for data, connectivity, or to require 
contributions to the clearinghouse guarantee fund?
    Mr. Lukken. Yes. I think FCMs over the years have indicated 
that a certain amount of regulatory data is necessary for the 
risk management functions that they provide. So getting access 
to that data in cost-effective ways is very important for the 
downstream market users of that data. So that is certainly an 
innovative thing that FTX is doing, as well as an appropriate 
amount of skin in the game in the capital fund, the default 
fund.
    Mr. Rouzer. Do you think two exchanges controlling 97 
percent of U.S. futures trading volumes is a competitive 
market?
    Mr. Lukken. Is that to me? We would love to see more 
competition. I mean, that is really--but this is a scaled 
business. We understand that. It is a volume business, and so 
the DNA of our industry is that liquidity comes to a few 
exchanges. But we are always looking for new exchanges to 
complete globally and make sure that everybody is checked in 
the system and make sure that prices are fair and products are 
offered.
    Mr. Rouzer. Yes, I guess my only final comment in the last 
15 seconds is I think crypto is here to stay. I think America 
needs to be on the forefront of it. A number of us are quite 
concerned about our debt as it relates to--or at least I am 
very concerned about the debt as it relates to our ability to 
keep the dollar as the reserve currency of the world. So I do 
think that moving forward we have to be very thoughtful about 
this subject area because I think it has real long-term 
implications. Mr. Chairman, I yield back.
    The Chairman. Thank you. Now the gentlewoman from New 
Hampshire, Ms. Kuster, is recognized for 5 minutes.
    Ms. Kuster. Thank you, Mr. Chairman. I appreciate the 
opportunity to have this conversation, and I agree with my 
colleague that crypto is likely here to stay, but it is very 
complex and we all need to have a good understanding of it.
    The Commodity Futures Trading Commission is weighing this 
FTX application, and I think it is important for Congress and 
the public to understand the context here as fully as possible. 
And, Mr. Chairman, I would like to enter for the record an 
article in today's Forbes and in many, many media 
organizations. The title is, $1 Trillion Crypto Meltdown-Huge 
Crash Wipes Out The Price Of Bitcoin, Ethereum, BNB, XRP, 
Cardano, Solana, Terra's Luna And Avalanche. And it goes 
through all the rest. So obviously there is some volatility 
here that we need to understand. I appreciate the witnesses 
being here to walk us through it.
    The Chairman. Yes, so ordered.
    [The article referred to is located on p. 199.]
    Ms. Kuster. Thank you. It is clearly a growing financial 
field and important for American consumers to have access and 
to understand the crypto marketplace but also the level of risk 
that they can expect when trading. In my lifetime I have never 
read of a $1 trillion meltdown. So FTX's application has 
obviously generated a lot of discussion, as evidenced not only 
the views we have heard by our witnesses today but the 
extraordinary number of public comments that CFTC received 
about it.
    The factor of the application that I want to focus on first 
and foremost for my constituents involves taking intermediaries 
out of this clearinghouse model. I know there are certainly 
some exceptions, but historically, intermediary stakeholders 
have played roles in derivative markets by vetting traders, 
assuming some risk, and shoring up the clearinghouse itself in 
an event where the clearinghouse's long-term viability is in 
jeopardy.
    Mr. Duffy, from CME's perspective do you believe that all 
moves toward disintermediation in derivatives organizations 
create risks similar to those you noted in your testimony 
regarding FTX proposal?
    Mr. Duffy. I think I understood your question, ma'am, but I 
think you--I didn't hear it completely. So why do I believe 
what? I am sorry.
    Ms. Kuster. That all moves toward disintermediation in 
derivatives create risks similar to those you noted in your 
testimony regarding the FTX proposal?
    Mr. Duffy. No, I mean, here, I think when you look at the 
FTX proposal base as what we deploy today, the 
disintermediation model that you referred to is a concern. I 
said I was not opposed to the direct model, but at the same 
time I am not running the lead to charge on disintermediation. 
I do believe when you look at margin today, CME has a certain 
margin that we charge, but what is really important is the 
firms that Mr. Lukken represents also puts a surcharge on top 
of that which you would not have in the disintermediated model, 
so meaning if I charge $1 for margin, that clearing firm might 
charge an extra $2 or $3 to its client, which gives them the 
ability to manage their risk. So that is one of the huge 
benefits of having the model that we have, so I am not leading 
the charge against disintermediation. I don't think it is 
appropriate. But at the same time, I have to be prepared to 
move our firm forward. So we are looking at innovative ways no 
different than Mr. Bankman-Fried and the rest of the industry 
is. I do not want to lead the charge toward disintermediation 
though.
    Ms. Kuster. Okay. Thank you. So, turning to Mr. Bankman-
Fried, could you elaborate on what considerations were front of 
mind as FTX was developing this non-intermediated model and if 
any alternative structures were considered specifically to 
protect consumers from the risk of a $1 trillion crash?
    Mr. Bankman-Fried. Thank you for the question. I will note 
that stock markets have probably lost more than $1 trillion 
over the last few days as well. It has been a brutal month for 
markets.
    A few notes on this, we did consider a number of different 
models. This has a lot of similarity to the models that are 
used in every other country today. For cryptocurrency futures 
exchanges this is how hundreds of billions of dollars of volume 
are processed on a daily basis, and it has withstood large 
market moves, including over the last few days.
    That being said, there are advantages to an intermediated 
model. There absolutely are. To give one clear example of this, 
if you have a trading firm that is using a prime brokerage 
service through which much of their flow goes and their assets 
are held and they very well might want to send their FTX orders 
through that as well, we absolutely welcome that. We welcome 
them going through that FCM. And more generally when people 
talk about, well, you could have FCMs requiring additional 
margin, there is the credit relationship with their customers, 
they can absolutely do that in our model as well. We require 
that the clearinghouse has capital posted to it, but the 
intermediaries and FCMs are absolutely welcome to have bespoke 
arrangements with their clients where they request additional 
margin in order to buffer positions, where they can give credit 
to customers if they trust those customers and that collateral 
is deposited, whichever system works best for them and for 
their clients.
    Ms. Kuster. Thank you, and my time is up. I yield back.
    The Chairman. The gentleman from Illinois, Mr. Davis, is 
now recognized for 5 minutes.
    Mr. Davis. Thank you, Chairman Scott and Ranking Member 
Thompson, for holding this hearing. While this Committee I 
believe is still not addressing the impact that 40 year high 
inflation rates are having on ag inputs, gas prices, and 
grocery bills may be because inflation rates are down a 
whopping \2/10\ of a percent this month, but I am glad we are 
having this discussion, really given the impact that this issue 
is going to have on ag commodities.
    There is a lot of attention and engagement in the 
cryptocurrency market. It is not the role of Congress to pick 
winners and losers, tell people what they should or shouldn't 
invest in, what platform investors should use, or the tools and 
technologies companies should seek to adopt. Right now, we are 
talking about clearing cryptocurrency derivatives, but in my 
opinion there is no real distinction between the clearing of ag 
commodities and cryptocurrency in terms of the risk management 
standards that we currently have on the books.
    My concern here is with the impact on futures markets' 
stability and the risk management of volatility in ag commodity 
prices for everything from corn to soy to energy and natural 
gas. The farmers in my district, they are not mining Bitcoin in 
their spare time, and it is not because they are worried about 
climate change. And yet this issue before the CFTC could 
potentially affect them in the same way, the same as crypto 
traders. The major concern I have is that the CFTC, they have 
the ability to create a de facto regulatory structure via 
piecemeal applications that do not lend to clear guidelines or 
a level playing field for all market participants and 
stakeholders.
    Financial services regulations in this country overall are 
extremely complex. And as a Republican, I actually find many of 
them to be overreaching and unnecessary. But the fact that a 
politically appointed Commission or even its staff can set 
singular market standards for one company that impact an entire 
market is somewhat astonishing. This is not how far-reaching 
market structure changes should be made in this or frankly any 
other financial market.
    If you look at crypto prices right now, the last thing our 
farmers can afford to see today is a new layer of volatility 
that stems from one-off CFTC decisions. And I agree market 
volatility has been across the board. These potential changes 
in risk management practices and therefore their impact on 
volatility I fear could become a reflection of a piecemeal 
regulatory framework and not a thoughtful, consensus-driven 
approach.
    I am really not here to bash a company or an idea. But I do 
think that the Commission needs to act with caution and go 
through a proper rulemaking process to ensure fairness and 
clear rules for all market participants and those potentially 
impacted.
    So my question is this, and I will start with Terry. Would 
you like to respond to that?
    Mr. Duffy. To your statement, sir?
    Mr. Davis. To the statement.
    Mr. Duffy. I agree with your statement wholeheartedly. I am 
very concerned that the Commission is unilaterally looking to 
make a proposal for a single asset class. And if in fact they 
do that, they would have to amend the application that is put 
forth already today by every legal mind in the world. Now, once 
that application is amended, it is open to all asset classes, 
so otherwise it is deemed arbitrary. And the Commission cannot 
be arbitrary. And Mr. Lukken knows this as well as anybody.
    So we would have no other choice because this model, as I 
said earlier, is a cheap way around jurisdiction, and we would 
have to compete. Otherwise, I am going to have either FTX or 
somebody else competing in the asset classes that I am trying 
to provide liquidity and risk management for across the board. 
And that includes every single commodity known to man, wheat, 
corn, soybeans right across the board, energy, natural gas, 
mortgages, foreign exchange, equity futures, everything.
    Mr. Davis. Which affects my farmers in my district.
    Mr. Duffy. It will affect every farmer because they will 
have to be up, as Mr. Edmonds said earlier in his testimony, at 
1 o'clock in the morning on a Saturday finding out that they 
just lost their hedge on their crop that they already have in 
the ground. Why? Because they got auto-liquidated.
    Mr. Davis. Well, Sam, it was great meeting with you 
yesterday. Obviously, as we mentioned, I have some concerns 
about the issue that we are discussing today. Can you tell me, 
based upon your testimony earlier, what kind of impact do you 
think the proposal that you have put forth and your team has 
put forth could have on my farmers? Can you help me understand 
my concerns about the impact to the ag commodity industry?
    Mr. Bankman-Fried. Yes, thank you for the question. Unlike 
Mr. Duffy, I would consider whether it was an appropriate risk 
model before deploying it and would only do that if I thought 
it was healthy for markets. I do think that this is healthy for 
markets at least in digital assets. That is why we have put it 
forward. I think it is a more conservative risk model that is 
nonrecourse with respect to the participants that requires that 
the collateral is submitted to the clearinghouse and is 
definitely there beforehand with clear and transparent 
guidelines and rules around the risk engine. And I think that 
all of those could help decrease volatility and increase 
liquidity in markets. All of that being said, I will reiterate 
that I am not planning to launch this in agriculture markets 
anytime soon. Doing so would require further DCR review of any 
risk----
    The Chairman. The gentleman's time has expired.
    Mr. Davis. Thank you.
    The Chairman. Thank you very much.
    Mr. Davis. Thanks, Mr. Chairman.
    The Chairman. And now I recognize the gentleman from New 
York, Mr. Maloney, you are recognized for 5 minutes.
    Mr. Maloney. Well, thank you, Mr. Chairman. What a 
fantastic hearing. I really commend you for holding it, for the 
Ranking Member, and for the diverse views represented here.
    Well, first, I feel like I should have made better career 
choices. But second, I have to tell you, Mr. Bankman-Fried, I 
am fascinated by this, and I think this is a really interesting 
idea. You sure got everybody stirred up, and they hate it. They 
hate this idea. I mean, understandably because of what it might 
do to their businesses, but they are also concerned about 
whether it blows up their business model or just the world 
economy, and that is where we come in, I think.
    So, clearing disintermediated margin derivative trades 
directly to retail customers, that is the subject comes up a 
lot at my townhall meetings. And dynamically setting margin 
levels and auto-liquidation and transparent models, I mean, it 
is actually a really cool idea, so I really commend you on it. 
I really want to understand it more. And I am completely 
agnostic about it. Help me understand the auto-liquidation 
point that Mr. Duffy is making.
    Mr. Bankman-Fried. Yes. So I can tell you how I see it. 
Obviously, different people have different viewpoints on it. 
But the way I see it, you have some user that has put on a 
position. There is some collateral for that position. In our 
case it is held transparently with the clearinghouse. And, at 
some point if markets moved far enough against that position, 
they would be out of collateral. And at that point, the 
position in our model has to be closed down because otherwise 
they would be more than out of collateral. Their account would 
be net negative.
    There are a few options for what you could do there with 
different risk models. One thing that you could do is have a 
recourse-based risk model where you let them keep the position 
open and then go after their house if it gets negative enough. 
That is not what we intend to do. We intend to instead 
deleverage the positions if they are out of collateral.
    But on the point of the speed of the risk engine, right, of 
whether you are liquidating quickly or whether you are waiting 
a few days, if you wait a few days to do it, you have a choice 
between either beginning a margin call and liquidation way 
earlier than may be necessary in case markets move against that 
position over the next few days or waiting until a position is 
almost underwater and might be way beyond bankrupt by the time 
you could finish that liquidation leading to scenarios like 
what we saw with LME.
    Mr. Maloney. Yes.
    Mr. Bankman-Fried. The advantage of the real-time one is 
that you can actually precisely measure where a position is, 
wait to liquidate until the last moments that you preserved the 
positions if at all possible, while still protecting the 
systemic risk.
    Mr. Maloney. Well, I will let Mr. Duffy get in here, but I 
also want to talk about your models. How do we know you have 
the right models? How do we know you have the right risk 
models? What if you get your models wrong?
    If you get your models wrong, it is all wrong, right?
    Mr. Bankman-Fried. Yes, absolutely. So there are a number 
of things. We have gone through an extensive process with the 
CFTC on this, on the details of the model, on the back-testing 
of it, both the historical data, with simulated data under all 
of the necessary standards. In addition to that, we have been 
running a model that this be more conservative than 
internationally for the last 3 years has gone through days with 
40 percent moves in markets in a single day. We just went 
through a 40 percent move over a few days. It has been 
functioning well in that environment, handling tens of billions 
of dollars of daily volume. We have never had to mutualize 
losses. We have never gotten close to that point. The entire 
insurance fund draw over the history is a tiny fraction of what 
we are proposing for our own skin in the game for the initial 
guarantee fund, and so that is sort of an empirical test on it 
as well.
    Mr. Maloney. All right. Fifty seconds left, Mr. Duffy, I 
know you hate it. And I know you said you are not against it, 
you just don't want to lead the charge. It is a hell of a 
disruption, let's face it, and it doesn't mean you are wrong. 
Help me understand. I mean, so are you saying no or are you 
saying not now?
    Mr. Duffy. I am saying an industry----
    Mr. Maloney. Mr. Lukken's statement was exquisitely worded. 
He just doesn't want to do anything right now, he wants to look 
at it more, very thoughtful, tough debate. What do you think?
    Mr. Duffy. I believe that there should be a formal 
rulemaking process at the Commodity Futures Trading Commission 
where everybody gets to participate in that process and do not, 
do not make this just about crypto. Make it about market 
structure. That is what I am here to discuss. And on that 
proposal about a liquidation, sir, one of the things that FTX 
does not tell you or this Committee is what they do for 
collateral. When I take on collateral, whatever form it may be, 
cash, treasuries, gold, whatever I have a mix of, we have to 
haircut that at a certain value. Their haircut on their 
collateral for Bitcoin is five percent. Their margin to trade 
Bitcoin is 15 percent of margin. This auto-liquidator will be 
going with smoke coming out of it at those price levels. That 
is the problem with this application. And you need to hear the 
whole truth about this.
    Mr. Maloney. Thank you.
    The Chairman. The gentleman's time has expired. Thank you.
    And now the gentleman from Kansas, Mr. Mann, is now 
recognized for 5 minutes.
    Mr. Mann. Thank you, Mr. Chairman. I appreciate Mr. 
Maloney's comments and questions. I also would like to 
associate myself with Congressman Davis's comments and 
questions and really getting at the heart of what will the 
impact of this, if it goes through, be on production 
agriculture, on the agriculture markets as we know them and 
obviously a whole host of other issues?
    First question would be for you, Mr. Bankman-Fried. When we 
talk about market structure, what is the difference between the 
FTX proposal and the ICE NGX model that currently exists?
    Mr. Bankman-Fried. Thank you for the question. And as you 
were pointing out, there exist a number of licensed futures 
exchanges with the CFTC that have various properties of our 
proposal already, ICE NGX being one of these. The difference we 
have is we are combining together a few different things, each 
of which is found in other exchanges but not always together, 
one of which is collateral help with the clearinghouse, the 
real-time margining system, and the option for disintermediated 
direct access to the platform for all participants put together 
is to the extent there is something novel, I guess that is what 
it is.
    Mr. Mann. Okay. And the second question will be for you as 
well. There has been a lot of discussion of course. Can we just 
elaborate a little bit on whether or not your $250 million 
guarantee fund is sufficient relative to the billions of 
dollars maintained by CME and ICE in their guarantee funds? 
Could you please elaborate on what you believe that your 
holdings would be sufficient relative to the risk in the 
market?
    Mr. Bankman-Fried. Yes, thank you for the question. First 
of all, and there are different terms used by the different 
models for similar things, which makes it a little bit 
confusing. I probably haven't done a perfect job of describing 
all this. In addition to the $250 million that we have put in 
the guaranteed fund, that is our own skin in the game. None of 
that is mutualized. We also require margin held with the 
clearinghouse from all open positions. And so internationally 
we have tens of billions of dollars of collateral in the 
equivalent of the clearinghouse today collateralizing customer 
positions on the venue. And so that is a very significant piece 
of it that plays the role of collateral held at various 
intermediaries to some extent in other models and is 
backstopping customer positions.
    I will also say that we have done an extensive analysis 
historically of this model internationally. Total historical 
insurance fund draw was only a few percent of the guarantee 
fund that we are proposing, and that is over the last 3 years 
combined, and that is with a less conservative model than what 
we would be proposing, so it has functioned successfully.
    I would also just tack on one thing. The numbers that Mr. 
Duffy quoted are not necessarily numbers for the U.S. platform. 
That was for the international platform, although I will also 
note that empirically it seems to have worked. So I don't know 
where that smoke is ending up; but, apparently it has been 
successfully managed, as I would predict it would be given the 
premise in the risk model.
    Mr. Mann. Okay. Thank you. A question for you, Mr. Duffy. 
You have raised concerns about the volatility and market 
disruptions spilling over from a direct access market into the 
traditional market.
    Mr. Duffy. Yes.
    Mr. Mann. Can you elaborate on how you see that risk 
transferring?
    Mr. Duffy. Well, and I have said several times in my 
testimony in the hearing. Here is the way it is going to play 
out. Again, it is a market structure change when you go to a 
direct model that FTX's proposal is asking for. When that is 
deployed against other asset classes, the participants are not 
crypto participants. They are farmers, ranchers, they are 
producing oil, they are writing mortgages, all the products 
that I trade. So I have been through that. They are not 
prepared in my opinion for this type of model today because the 
auto-liquidator that is being proposed is something that will 
be unsuspecting to the client.
    Now, he can talk about the margin that he has and the 
collateral that he has, but the bottom line is people at my 
institution, as I have said, have margin from CME, then have 
additional margin from their clearing firms. So those clearing 
firms are in touch with their clients. And if in fact they 
touch certain levels, they get calls and they determine either 
put up more money or we are going to take you out of the 
market. So an auto-liquidator is not revolutionary new 
technology by any stretch of the imagination. But the way they 
do it is different. But when you deploy that and you have to 
keep these markets open 24 hours a day, 7 days a week against 
agribusinesses and others, I think it could be extremely 
detrimental not only at a time that we are living in now but 
going forward for the food industry. They need risk management 
tools. They don't need casinos to do risk management.
    Mr. Mann. Great. And thank you. With that, my time is 
expiring. I yield back.
    The Chairman. The gentleman from Arizona, Mr. O'Halleran, 
is now recognized for 5 minutes.
    Mr. O'Halleran. Thank you, Mr. Chairman and Ranking Member, 
for organizing this important hearing. Thank you to the panel.
    To be open, I am a former member of the Chicago Board of 
Trade and their board of directors, so I have a little bit of 
background on this subject. I understand the importance of 
innovating and updating our marketplaces. It is extremely 
important, and it has happened over time. I also understand 
that what I have heard here today are issues that impact 
consumers. It impacts the marketplace in general the ability to 
hedge risk, the taxpayer, and the economy in general. And this 
type of a change is important to look into in a way that 
includes everybody that should be at the table.
    I am awful upset with the idea that we are even referring 
to the words skin in the game. This is no game. This is about 
the economy of America, and we have seen too many issues over 
time.
    I also have a message for the CFTC. They need to work on 
this with us on an ongoing basis, not a little bit of the time, 
not a surprise. Don't even come to us, I don't think, before 
you talk to the community in general that is involved in this 
on an ongoing basis.
    So, however, I am also aware of the risks that can appear 
if we approach these changes thoughtlessly. And so that is my 
opening statement.
    And while on the board I saw markets crash. I watched 
firsthand as the clearinghouses provided stopgaps to protect 
consumers. It is a model that has worked over time and kept 
losses to a minimum. And there is no way in this marketplace 
that we are going to see a new model come forward and if it is 
going to work in the process and people are going to start to 
push for that model, it will expand. That is all there is to 
it. There is no ifs, ands, or buts. After looking at the FTX 
proposal, I wonder if a shift towards an all-in-one approach 
can offer these same protections.
    I appreciative the CFTC's deliberate and public approach to 
answering this question as this decision will likely set 
precedent for future regulation. But we have to be very 
thoughtful going into this, and I think this is a process that 
has begun way too late and has not spent enough time at the 
process.
    Mr. Lukken, in your testimony you note that the FTX 
proposal would replace the traditional distributed risk 
clearing model with a more automated and centralized model, 
absence of intermediation. Will collapsing the functions of 
various market participants into a centralized entity create 
potential conflicts of interest that may impact key risk 
management functions?
    Mr. Lukken. That is our concern. I think, traditionally we 
have put certain responsibilities in different entities. The 
FCM has overseen the client, the clearinghouse is overseeing 
the FCM and the clients' money there, and the regulator is 
overseeing everything. And when you start to integrate that, 
there are conflicts of interest that arise. Making sure that 
customers when they are liquidated, you are trying to hold them 
whole as best you can when doing so and not making impacts on 
markets. So when you start to combine things, I think we have 
to be very thoughtful about conflicts of interest and how that 
is managed.
    Mr. O'Halleran. Thank you. Mr. Duffy, one way the FTX plan 
accounts for risk management is through auto-liquidation. I 
have heard a little bit of discussion about that today. Can you 
please explain how you see this process functioning from your 
perspective? And the digital assets are known for being 
volatile, highly volatile. Do you fear this new structure may 
lead to a greater number of liquidations?
    Mr. Duffy. Again, I am always cautious about trying to 
predict the direction of a market. I think that is really 
difficult to do, and my job is to manage risk of market 
participants and make sure both sides, the pays and collects 
are done properly, and that is exactly what we do at our 
clearinghouse, as you know, sir.
    I have been in this business for 42 years, and I have seen 
a lot of things. And when we look at risk management, I think 
what is really important is that CME is never in the history of 
its company ever had to draw on its guarantee fund to cover 
losses. So I am referring to the 1987 crash. I am referring to 
the meltdown of 2000, things that we have all seen. I am not 
referring to the last 36 months where the market went straight 
up in crypto and hasn't had a loss. So I think there is a bit 
of a difference here.
    I am very concerned that when you put new proposals 
forward, they are interesting, but they need to have the input 
of all participants and not just one particular segment.
    Mr. O'Halleran. Thank you, Mr. Chairman, and thank you, Mr. 
Duffy, and I yield back.
    The Chairman. Thank you. And now the gentlelady from 
Minnesota, Mrs. Fischbach, is now recognized for 5 minutes.
    Mrs. Fischbach. Thank you, Mr. Chairman. And thank you all 
for being here. I appreciate the opportunity to ask a couple of 
questions.
    But I do want to--I know that Mr. Davis had started a 
little bit talking about ag and ag-related markets, and so I 
did want to ask, obviously the ag market is facing incredibly 
difficult times right now. Inflation is hitting them, and risk 
management tools are even more important than ever. But, Mr. 
Lukken, you know that farmers in the agriculture community are 
core users of the derivatives market. Why are these markets so 
important to that community, and what tools in the existing 
market help this community manage the risk?
    Mr. Lukken. Well, farmers deal with incredibly thin 
margins, as you know, so our markets are ways that they can 
manage risk. They are planting in this spring and harvesting in 
the fall. In that time period you don't know what the price of 
corn may be when you harvest. So our markets are there for your 
constituents to make sure they can manage that risk 
appropriately.
    And, they have lots of other things they must worry about. 
They don't want have to worry about the price of corn or wheat 
up in Minnesota. So, these markets are incredibly important, 
and that is why I think today's discussion is important because 
this is a precedent-setting event.
    Mrs. Fischbach. And do you have anything else that you 
could add about maybe how the proposal--I know that Mr. 
Bankman-Fried said that it doesn't deal with the ag markets 
right now, but do you have anything to add about potential 
issues with the ag market?
    Mr. Lukken. Well, I mean, the proposal before the CFTC is 
open to any asset class. This is really not about 
cryptocurrencies. This is, as Mr. Duffy was saying, about 
market structure. Futures markets are well-regulated, best-in-
class regulatory system that this Committee helped to 
construct. And so if we are pivoting from that, that is going 
to have impacts beyond simply cryptocurrencies. So we want to 
be thoughtful about this. We want to be deliberative about this 
and make sure the rules of the road are the same and at the 
highest levels of risk management. So it does have the 
potential to impact ag markets. Again, they need access to risk 
markets, and we want to make sure it is fair and safe for them.
    Mrs. Fischbach. Thank you very much. And, Mr. Bankman-
Fried, do you have any response to the issues with the ag 
market? And, like I said, I know earlier you mentioned that it 
didn't involve that, but I am curious as to your reaction.
    Mr. Bankman-Fried. Yes, and I can just reiterate again like 
we are not planning to get into ag anytime soon, and we are 
open to making that legally binding in some ways, to making 
that formula.
    I think that I would be really interested in doing a deeper 
dive with the Committee, with the constituents on risk models 
in the ag markets. I think there are parts of this risk model 
that I think could be helpful and appropriate. There are also 
things that we need some deeper thought around weekends, around 
physical delivery and how that would interplay with the risk 
engine. I basically still think that some processes may end up 
being very helpful and attractive for those markets when you 
look at the easy, equitable access, when you look at the clear, 
transparent margining, and when you look at not making our 
farmers pay for market data that is supposed to be providing 
public price discovery. But I would also welcome a longer 
process around ag products.
    Mrs. Fischbach. Thank you. And, Mr. Duffy, I have to call 
on you because you are making faces, so did you have a 
response? You looked like you were ready to say something, like 
I say, making faces.
    Mr. Duffy. Well, I am always ready to say something. It is 
in my nature. I can't help myself.
    Mrs. Fischbach. Okay.
    Mr. Duffy. First of all, on the market data question that 
Mr. Bankman-Fried continually says how it is free, we never 
charge for market data historically at CME Group. We never did 
until just a few years back. The reason why we charge for 
market data, it is just not your data you are paying for. You 
are paying for a constructed amount of data that has a 
tremendous amount of value that I have to put a lot of effort 
in and cost into accumulating that data for people to do their 
risk management, whether it is historical data, whether it is 
derived data, or other data. It is not just market data on 
pricing. So it is really important to make that distinction 
about this free data that he keeps referring to. We sell 
quality data that brings benefits to the participants. But it 
would cost us a lot of money to do it.
    The model that is going to potentially be deployed, Mr. 
Bankman-Fried keeps reminding everybody that he does not have 
any intention right now to go into other products. He has the 
ability to do so. His application says he can do it. So I am 
supposed to sit on the sideline while they decide if they are 
going to do it or not, and they will be way ahead of me because 
they are doing it in a crypto asset class. So what will happen 
is they will do it--the ag community will go with him when 
times are stable. When they hit the fan, they are going to want 
to come with me. I am not going to be there because I will be 
deploying the same model. This is a nightmare for the 
agricultural community.
    Mrs. Fischbach. Thank you, Mr. Duffy. And I have 6 seconds, 
and I will yield all of those 6 seconds back. Thank you.
    The Chairman. Thank you very much. And now the gentleman 
from California, Mr. Khanna, is recognized for 5 minutes.
    Mr. Khanna. Thank you, Mr. Chairman. Thank you for your 
leadership. Thank you to Ranking Member Thompson for his 
leadership.
    Mr. Duffy, you obviously have very strong opinions about 
cryptocurrency, so let's start with the basics. Could you tell 
the Committee what you understand and how you define 
blockchain, and can you tell us some of the use cases of 
cryptocurrency for the American public?
    Mr. Duffy. Yes, I had a conversation with somebody in the 
industry, and I believe that the use case of cryptocurrency----
    Mr. Khanna. If you could start with the definition of 
blockchain. How do you understand blockchain?
    Mr. Duffy. The blockchain is a node either centralized or 
decentralized run by different platforms with parts of 
information that only certain people that have access to it can 
change that information. And once it is in the blockchain, it 
stays there. And in order to amend the information, there are a 
lot of procedures and protocols to go through the blockchain. 
It is a very complicated procedure. I think it is an excellent 
form of commerce for medical records, things of that nature, so 
I do think that----
    Mr. Khanna. And what do you see as some of the use cases?
    Mr. Duffy. Use cases of blockchain?
    Mr. Khanna. Yes, and cryptocurrencies and some of the----
    Mr. Duffy. Well, I don't know if there is a use case of--
here, the one blockchain that has been talked about today is 
Ethereum----
    Mr. Khanna. Do you see a use case for stablecoins?
    Mr. Duffy. Do I think there is a use case--I am happy to 
answer your question, but which one do you want me to answer?
    Mr. Khanna. Stablecoins, yes or no, do you think there is a 
use case?
    Mr. Duffy. Do I think there is a use case for stablecoins? 
I think there was until the other day. That didn't go so well 
for stablecoins, so I am not so sure if there is a use case for 
them. I do believe central governments----
    Mr. Khanna. You don't think there is a use case for 
stablecoins? Okay. Do you think there is a use case for----
    Mr. Duffy. I think the United States Government, sir, needs 
to be involved and central banks----
    Mr. Khanna. I am just asking you do you think there is a 
use case for Solana or some of the other--of the top-ten 
cryptocurrencies----
    Mr. Duffy. I am not a crypto expert, sir. I list Bitcoin 
and----
    Mr. Khanna. Well, you certainly have opinions about 
cryptocurrencies.
    Mr. Duffy. I do. I have opinions on----
    Mr. Khanna. You are testifying----
    Mr. Duffy.--an application, sir, not about cryptocurrency.
    Mr. Khanna. Now, you talk about under oath, you say, if I 
could just quote you because you may want to take this back, I 
don't know----
    Mr. Duffy. I don't take anything back.
    Mr. Khanna. You say the FTX--well, you are under oath, sir.
    Mr. Duffy. I am not under oath.
    Mr. Khanna. FTX has no capital requirements for 
participants. Are you going to stick to that under oath? 
Because the CFTC's part 39 regulation requires capital 
requirements for FTX or for any of these exchanges. Are you 
really saying they have zero capital requirements, or do you 
want to amend that statement, given you are under oath?
    Mr. Duffy. No. Sir, you are moving away from your 
microphone. Can you read the statement that you would like me 
to----
    Mr. Khanna. Yes, I am asking you, sir, you have a saying 
that FTX has, quote, ``no capital requirements for 
participants.'' I think that is on its face a false statement 
given that the CFTC part 39 regulation requires capital 
requirements, and FTX does have a capital requirement for 
margins.
    Mr. Duffy. I said the capital requirements are not the same 
as they are for other institutions.
    Mr. Khanna. Well, that is not what you said, sir. Under 
oath you have submitted to this Committee a statement that is 
false. You have said the regime has no capital requirements for 
participants. I would strongly recommend that you have someone 
on your team amend that statement----
    Mr. Duffy. Well, I would like to read that statement 
because I happen to disagree with you, sir.
    Mr. Khanna. Well, it is your testimony. It is your 
testimony.
    Mr. Duffy. I get it. I would like to see the statement that 
you are referring to.
    Mr. Khanna. I am reading from own testimony.
    Mr. Duffy. I can't just go off of what you are reading.
    Mr. Khanna. You are here to----
    Mr. Duffy. Capital is not the same as margin, Congressman.
    Mr. Khanna. Well, sir, I want you to, after this, submit 
something that is accurate, recognizing you are giving 
testimony to the United States Congress. You don't know much 
about cryptocurrencies, you are opining on cryptocurrencies, 
and then you are giving false statements to the Congress that 
you aren't even knowing that you are submitting. You write FTX, 
quote, ``has no capital requirements for participants.'' That 
is just false.
    Mr. Duffy. Sir, I will be happy to read my testimony back 
to you if you would like, but if you want to make this into a 
court of law, I am happy to participate in that as well.
    Mr. Khanna. Well, it is not a court of law. It is that you 
can't give false statements to the United States Congress. You 
can't come in and say----
    Mr. Duffy. I am well aware, sir. I have testified in front 
of this Committee over 50 times. I am well aware of the 
procedures of this Committee.
    Mr. Khanna. Well, then can you--I would submit that you 
need to correct the record because you have, quote, your 
testimony, ``no capital requirements for participants.'' Anyone 
who has basic understanding of the CFTC knows that part 39 
would make that a completely wrong statement. Of course there 
are capital requirements, and I suggest in the future that you 
do some homework on what cryptocurrencies are----
    Mr. Duffy. Well, I appreciate you telling me to do my 
homework. I assure you, sir, in the amount of years I have been 
in this business I forgot more than most people ever know.
    Mr. Khanna. Well, I appreciate it. I hope you will correct 
the record so you are accurate and not giving false testimony--
--
    Mr. Duffy. I don't give false testimony, sir. It is not 
what I do.
    Mr. Khanna. I yield back my time.
    The Chairman. The gentleman from Indiana, Mr. Baird, is 
recognized for 5 minutes.
    Mr. Baird. Thank you, Mr. Chairman and Ranking Member, for 
holding this hearing. I always appreciate the effort that the 
witnesses make and the testimony that you give. To have such 
expertise before this Committee is extremely valuable to us, 
and I think it is valuable to whatever issue we are discussing.
    But I am going to change just a little bit and ask this 
question. And I hope I can get each one of your response. So to 
do that, I better quit talking and start asking I guess.
    The U.S. lags behind other countries in the adoption of 
digital assets with over 95 percent of the trading volumes 
occurring overseas, and I know you know that. So my question 
is, like some of my predecessors, how would this benefit 
Americans, including farmers and ranchers, if more of this 
trading activity were to be on-shored and take place in the 
United States? I think that is kind of the core of what we are 
trying to do here. So I guess I want to do this in a specific 
order. Mr. Lukken, would you mind starting this discussion?
    Mr. Lukken. No, I do think there has been an identified gap 
of regulation by many that cryptocurrencies need--we need to 
develop a framework in the United States to do that. I think it 
is a reality that they are here to say. I think it would be in 
our interest as a nation to try to develop a strong regulatory 
system for cryptocurrencies to attract that to the United 
States.
    Mr. Baird. Great. So then I want to go to Mr. Edmonds. 
Since you are involved internationally, I would like to know 
your opinion of how that affects that market.
    Mr. Edmonds. Well, right now, I believe the delta that 
exists in the world is we don't know what regulator is 
responsible for what version of a crypto asset for the lack of 
a better term. You have the SEC expressing a desire to regulate 
parts of it. They will call those securities. You have the CFTC 
that will regulate part of it based on their charter. You have 
the United States Treasury who have made comments about that 
about the oversight they need to have. You have the Federal 
Reserve system exercising comments or providing comments around 
what they should do when it comes to stablecoin. So right now 
there is not a clear known path that we can all sit back and 
make rational commercial decisions at that moment in time to 
say these are how we are going to offer services if we so 
choose to do so. And so until that is settled, it seems very 
difficult of how you are going to regulate a market. And I 
think what FTX and others may be doing at the time is finding 
the closest thing they can get because they there still lacks a 
very consistent national message.
    Mr. Baird. Thank you. And, the next one goes to Mr. 
Perkins. And as a Vietnam veteran, I will always let the 
Marines go in first.
    Mr. Perkins. Semper fi, sir.
    Mr. Baird. But I would appreciate your opinion about 
bringing it onshore.
    Mr. Perkins. Absolutely. Web3 is here, and we can't put the 
genie back in the bottle. And what we do--we owe it to U.S. 
persons to have a very robust, regulated, thoughtful 
derivatives regime that allows them to hedge their risk. My 
belief is that what FTX has proposed is viable and needs to be 
considered because it addresses a few things. It addresses 
thoughtful risk management and what we call defaulter pays. The 
people that are putting risk into the system are paying for 
that risk via collateral.
    It is more inclusionary. I ran an FCM, and it was very 
difficult for us to give capacity to anyone other than our top 
clients. And so what I would like to see here is to give the 
ability for market participants to hedge their risk. We talk 
about volatile markets. Right now, we haven't given these 
market participants the ability to hedge because the activity 
is offshore, and that is how I would answer it, sir.
    Mr. Baird. Thank you very much. And so then, Mr. Bankman-
Fried, would you care to comment about that same issue?
    Mr. Bankman-Fried. Yes, thank you. I completely agree, 
almost all of the activity is offshore. I think that does not 
do a service to our country. I think that means that the 
traders in our country do not have Federal oversight of 
cryptocurrency markets. It means they don't have access to the 
same level of liquidity, depth of order book, or hedging that 
users in the European Union, in Japan, in Australia, and a 
number of other jurisdictions do today. It means that we don't 
have that economic impact here. We don't have those jobs here. 
And I think that it would serve a lot of interests at once to 
regulate these in the United States. And that is what we would 
love to be a part of doing.
    Mr. Baird. Thank you. And, Mr. Duffy, we have about 25 
seconds, so you got keywords.
    Mr. Duffy. On the business being overseas versus the U.S.?
    Mr. Baird. Yes.
    Mr. Duffy. Listen, I think markets are global in nature. 
They have a tendency to go to certain jurisdictions, certain 
products do. Certain products are very domestic to the United 
States. Other products are domestic to the European Union, and 
others are to the Asian communities. So if cryptocurrency needs 
to be a global product, I am not so sure that is the case. I 
think when you look at who is participating in the crypto 
business today, someone made reference that one in five people 
have traded crypto. I truly believe that is mostly retail 
participants that have been in this market, not institutional 
participants managing risk.
    Mr. Baird. Thank you. I yield back.
    The Chairman. The gentleman's time has expired.
    The gentlewoman from Washington, Ms. Schrier, is now 
recognized for 5 minutes.
    Ms. Schrier. Thank you, Mr. Chairman. And welcome to our 
witnesses.
    Look, my biggest priority here is making sure that 
consumers and my constituents have options for investing 
safely. Even the most discerning consumers can face challenges 
navigating potential tricks and pitfalls when making a 
financial trade. I think it needs to be really clear that all 
derivatives clearing organizations are abiding by the Commodity 
Exchange Act, which regulates commodity markets. I am really 
grateful that the CFTC is taking such a thoughtful and diligent 
approach to considering all the different facets of this new 
proposal to keep our markets fair and safe. I want to make sure 
we are doing the same thing here on the Agriculture Committee.
    And so, Mr. Bankman-Fried, it is good to see you again. Can 
you tell me, how does FTX plan to strike that right balance 
between offering new financial products that may expand 
economic opportunities for investors while still ensuring 
consumer protections are maintained?
    Mr. Bankman-Fried. Thank you for the question, and great to 
see you as well. I think the central balance to strike here is 
extremely important. On the one hand we want to be able to 
offer equitable access to the platform, to the data so that the 
consumers have that same fair, level playing field as the 
largest trading firms do. On the other hand, we have to have 
all of the customer protections that we are used to in 
financial markets here. So, every piece of this is overseen 
directly by the CFTC in our proposal, and they would have 
oversight over it. We would be giving full transparency and 
disclosures about the products that we are listing, about the 
mechanics of the exchange of the venue, about how it works, 
educational material about it, tutorials that you have to go 
through before using it, quizzes about how the product works, 
along with full explanatory material on it, and we are also 
looking to create sort of template registration type statements 
for the assets that we are thinking of listing so that there is 
a lot of transparency data around the products that people 
would be trading and that we should only be listing things that 
are suitable for access here, and so that means working with 
the CFTC on that topic as well. These are just really, really 
important topics.
    Ms. Schrier. I want to thank you for listing off all of 
those elements because when I hear the words--just as a 
consumer, myself, when I hear the words transparency and a list 
of all the risks, when I think of it, it is a lot of really 
small print that is really hard to understand, to read through, 
and to really grasp the concepts. I appreciate your talking 
about things like big print, common language, information 
sheets, and even quizzes to make sure people really understand 
what their risks are. Do you have any information about those 
quizzes or whether they paint--I mean, even pictures of things 
gone sideways so people really understand risk in terms of a 
story. We find stories work well.
    Mr. Bankman-Fried. Yes, and I completely agree that it is 
one thing to literally have text somewhere on a website, and it 
is another thing to have a clear, transparent, and 
comprehensible and intuitive explanation of what is going on. 
We can follow up with you and send you materials that we have 
put together on this that show graphically what many parts of 
this look like and would love to do that.
    But, yes, I mean, this should be something that is 
intuitive when it is displayed and that you can't avoid looking 
at before you start using the platform because everyone knows 
that clicking confirm once for a giant scrolling box of text is 
something that people have gotten very good at doing.
    Ms. Schrier. That is right, myself included. I want to 
thank you very much. I look forward to getting that 
information, learning more, and I appreciate your attention to 
protecting consumers. Thanks very much, and I yield back.
    The Chairman. The gentleman from South Dakota, Mr. Johnson, 
is recognized for 5 minutes.
    Mr. Johnson. Thank you, Mr. Chairman. I appreciate it. My 
question will be for Mr. Lukken, and then Mr. Bankman-Fried can 
offer any contrary thoughts he might have. But, sir, I listened 
with interest the exchange you and Ms. Adams had where you 
noted this auto-liquidate model mechanism particularly with 
regard to hedgers could impose, I think you said, ``disruptive 
effects on the broader market.'' Educate me. Help me explain 
what those disruptive effects could be, and, again, maybe to 
people who are a few levels away from the transactions that are 
being reviewed?
    Mr. Lukken. Well, typically when there is a default in the 
marketplace, the FCM will take those positions and try to 
manage that default and making sure that either hedging those 
positions or making sure that it is not being dumped 
necessarily into the marketplace because the last thing they 
want to do is either disadvantage their customer or--and FCMs 
are required by CFTC regulation not to have an impact on the 
market. That is a rule. And so when you get into auto-
liquidation, there is not a lot of discretion or judgment 
there, right? You are having to dump into the marketplace 
according to the algorithm.
    So I think one of the things we are trying to explore with 
this new model, as the positions get bigger--and often times, 
hedgers have very large positions--as you start to put things 
into that auto-liquidation feature, is that going to have not 
only for the hedger but for other people that may be hedged in 
that price of that product, it may have an impact. And so that 
is something I think we are considering. Again, for small 
positions, auto-liquidation may not have a market impact, but 
as they get bigger, that is where we have some concerns.
    Mr. Johnson. There has been some insinuation and probably 
even somebody said it explicitly that this particular mechanism 
could create more cascading waterfall-type impacts and a 
contagion-type environment. That may be. I just don't know that 
I understand that that is the case. Why do you think it would 
have more risk for the system?
    Mr. Lukken. Well, it is like a typical financial run on a 
bank. As prices start to decline, defaults start to happen. 
When you start to cover those defaults, more auto-liquidation 
happens, and it starts to cascade. And, typically what CCPs 
like to do--and I worked at the CFTC as acting Chairman during 
the Lehman crisis. The futures business, by the way, was left 
whole. It was not the problem. But we were able to work slowly 
to move those positions to FCMs that could take on those 
positions. I know Chris was there in the trenches as well. But 
that is a way that we prevented a liquidation into the market 
so that the price and other futures hedgers weren't impacted.
    Mr. Johnson. The FTX proposal, though, has some of their 
capital in a reserve, I think to be able to respond to some of 
these situations you are talking about. Is this suggestion then 
that that is an insufficient degree of capital?
    Mr. Lukken. It is hard for us to know. I think they have 
scaled that, and it is a significant amount of money. However, 
for us, you are really trying to measure extreme but plausible 
situations. And whether three of their largest clients is 
extreme but plausible is a little different than the FCM model 
where they are extremely large. If you take two of the largest 
FCMs, that is \1/3\ of the volume on an exchange. I don't think 
the FTX model necessarily to Cover-3 is extreme but plausible. 
I think that is worth exploring and understanding better.
    Mr. Johnson. So, Mr. Bankman-Fried, the allegation has been 
that that is not a sufficient capital to cushion systemic risk 
and impacts. Your thoughts?
    Mr. Bankman-Fried. First of all, I agree with a lot of what 
Mr. Lukken said, and I think these questions are in good faith 
because they are important. Here is sort of my sense of them. 
First of all, I will note that our liquidations are partial. We 
go piece by piece. This doesn't solve all problems. At the end 
of the day, if a position needs to be closed, it needs to be 
closed, but we do take measures to attempt to do less if 
possible.
    I will note, Mr. Lukken pointed out correctly that there 
are a lot of cases where it can be helpful to have an 
institutional party which manages a position rather than 
liquidating it. We do have two systems in place for that. The 
first is the backstop liquidating provider system where there 
are institutional trading firms that are passed off positions 
in extreme market conditions if the order book can't handle 
them. But the second is that we do have optional intermediation 
where FCMs are welcome to play that same role with their 
clients where they can post the margin for the position and 
then work with their client or themselves or however they want 
on managing that, so we do have that as an option.
    I will say on the amount of collateral here, I do actually 
think that the top three users on the exchange are going to be 
quite large. That is true if you look internationally right now 
that the top two users are a significant fraction of volume on 
the exchanges. These are generally either large intermediaries 
or large global multi-asset-class trading firms. But I will 
also say that the amount that we will put in the guarantee fund 
is way above what the standard would have required by a pretty 
substantial factor.
    The Chairman. The gentleman's time has expired. And now the 
gentleman from California, Mr. Carbajal, is now recognized for 
5 minutes.
    Mr. Carbajal. Thank you, Mr. Chairman. And thank you to all 
the witnesses testifying before our Committee today.
    It is extremely important that the U.S. is a place that 
innovation and digital assets can flourish and that U.S. 
consumers can enjoy the financial benefits associated with 
cryptocurrency. It is also, however, absolutely critical that 
innovations do not come at the expense of consumers. There must 
be protections in place to safeguard consumers so that they do 
not face financial ruin while some companies profit off that 
loss.
    I think digital assets entice a lot of people because they 
offer an opportunity to quickly make a lot of money. But as is 
the case with any investment, not everyone will see the level 
of success they hope for. I know that whether you invest in 
traditional stocks, trade, derivatives through a traditional 
clearinghouse or purchase digital assets, there is always a 
risk.
    Mr. Bankman-Fried, I think I am on the same page as you 
that increasing equitable access to markets is a good thing. 
You noted in your testimony that all users should have 
equitable access, quote, ``so long as they are sufficiently 
informed and can demonstrate that they understand what they are 
trading,'' end quote. To that end, what steps is FTX taking to 
ensure new users, specifically retail users who may not be as 
experienced as traditional client base, are informed and able 
to demonstrate they understand what they are trading? How will 
you ensure individuals fully understand the risks they are 
taking should they choose to trade cryptocurrency on margin?
    Mr. Bankman-Fried. Thank you for the question. And I 
completely agree that that is incredibly important. The first 
thing that I will note is that the majority of the low 
engagement retail users who are not sophisticated traders do 
not access leveraged futures on the platform. They don't do 
that internationally today. The majority of them are accessing 
the spot markets, and we anticipate the same thing in the 
United States.
    It is worth noting that today on the futures markets in 
particular over 90 percent of the volume is coming from users 
trading at least $100,000 per day. And so the bulk of the users 
here are larger users.
    All that being said, in addition to having a large amount 
of transparency, disclosures, and material, there is a 
mandatory walk-through before you can trade on the platform, 
which explains how it works, how the products work and, for 
smaller users, a quiz that you have to take to demonstrate that 
you understand how this product works. And, we think the 
demonstrating understanding of the product and the exchange is 
an appropriate and extremely valuable test for who should be 
accessing this product while still allowing equitable access to 
the disadvantaged.
    Mr. Carbajal. Thank you. That is very encouraging. Mr. 
Duffy, I agree that innovation must not fail to protect the 
consumer. As the digital asset market continues to grow, do you 
see potential ways for the clearinghouse model to evolve to 
better accommodate cryptocurrencies?
    Mr. Duffy. I would absolutely say yes to that, sir. I think 
that there is always ways to evolve the clearinghouses to 
manage risk. And again, I am not opposed to innovation at all. 
I am not opposed to the direct clearing model, as I have said. 
I am opposed to an application that does not allow all of us to 
participate and everybody to come together to see what this 
market structure is about.
    I am here to discuss market structure. I am not here to 
discuss the value of cryptocurrencies or blockchains or 
anything else. I am here to talk about market structure.
    And if I may, can I please for the record, sir, Mr. 
Chairman, if I may make the following statement. When I was 
getting badgered by your former colleague asking me a bunch of 
different questions, he was cherry-picking my testimony. What 
he failed to say that when I said there is no capital, there is 
no capital being held at the FCM. Today, there is capital of 
$170 billion you heard from Mr. Lukken and others. So the 
gentleman was completely wrong when he said that I gave false 
testimony. I gave absolutely correct testimony. There is no 
capital being held at the FCM under this proposal. So I just 
want to make sure I cleared the record. I apologize for not 
answering----
    Mr. Carbajal. Thank you. You did take up my time----
    Mr. Duffy. No, I apologize.
    Mr. Carbajal.--but I will accept your apology.
    Mr. Duffy. I hope the Chairman will give it back to you.
    Mr. Carbajal. With that, Mr. Chairman, I yield back.
    The Chairman. All right. That is fine. Thank you. And thank 
you, Mr. Duffy, for clearing your record. Thank you.
    Now the gentlelady from Florida, Mrs. Cammack, is now 
recognized for 5 minutes.
    Mrs. Cammack. Well, thank you, Mr. Chairman. And as the 
millennial in the room--well, I guess now there are two of us 
in the room--I want to open up with saying, as a disrupter, I 
like disrupters. And I think it is very clear, given the amount 
of comments and feedback that we have received and the CFTC has 
received on this very rulemaking process, that there is a lot 
of interest and a lot of concern and vested interest in this 
process.
    So looking at how 95 percent of crypto derivatives and the 
trading volume occurs outside the United States, I would say 
that this is an opportunity. And I like opportunities. I 
believe America is based on equal opportunity, not equal 
outcome. So there are some issues that we need to overcome, and 
I think we can. And I believe that innovation is going to be 
absolutely critical as we move forward.
    So I am going to dive right into it. We don't need to 
separate you all, do we? All right. Well, it has been a very 
colorful hearing thus far, so we are looking forward to all of 
the feedback from you all.
    Mr. Bankman-Fried, how are investors impacted by the 
current system in which derivative marketplaces demand users to 
pay for market data, order books, and market access?
    Mr. Bankman-Fried. Yes, I think that makes it very hard to 
have the same level of access as a smaller user as the largest 
trading firms have. It means that you don't get to see what is 
happening in the markets you are sending orders to. It means 
you don't have the same transparency about what orders are in 
the book about depth. And that is all relevant trading 
information, which is gated on the amount that you are willing 
to pay for it. It also means that price discovery is not made 
fully public, and that is one of the core goals of 
marketplaces, in addition to hedging.
    And so I think that those are all reasons I--and I will add 
one more as well, which is I think frankly it increases 
operational costs to have gated market data. It is not always 
well-defined exactly what it means to use market data, exactly 
what it means to consume it. I know firms that spend large 
fractions of their time arguing with other platforms over 
exactly what market data is required exactly where and licenses 
required for that, and I think it is also just cleaner and lets 
people innovate on our data if they want to, to make it open.
    Mrs. Cammack. Well, you answered two of my follow-ups, so 
thanks for that. Would the FTX--or I guess how would the FTX 
real-time risk management of margin products affect market risk 
and asset volatility, especially during times of market 
uncertainty like we have seen with the war in Ukraine, for 
example?
    Mr. Bankman-Fried. Yes.
    Mrs. Cammack. And I will throw another one at you. So would 
it have prevented--your system, would it have prevented like 
what we saw with the nickel futures and that market meltdown 
with the London Metal Exchange?
    Mr. Bankman-Fried. Yes, thank you. I do think it would have 
helped prevent that. And, the way I see it is that if you have 
a real-time precise risk engine that knows the exact amount of 
collateral that a user has and can act promptly, I think it is 
often viewed as being punitive to the user. I don't think that 
is how it is. I think what it means is that you don't have to 
preemptively liquidate them out of fear of where our markets 
will move, and it means that you don't have to ask for as much 
collateral at the beginning or if you do ask for the same 
amount of collateral that they have a much bigger buffer before 
their position would be in danger of liquidation, given the 
promptness with which it can act. And it means that you can 
operate a model without recourse so that people know that they 
can't lose more than they deposited to the platform, that they 
are not worried you are going after their bank account or their 
house. You can accomplish all of those things more cleanly with 
a real-time risk model that can wait until a position is 
nearing being out of margin before closing it down while still 
preventing systemic risk and being on recourse.
    I think those sort of things would have helped 
substantially prevent what we saw with the LME nickel futures 
where, first of all, it was unclear where the collateral was if 
it was even there, and then it took days for the exchange to 
figure out what had even happened, by which time nickel had 
kept moving. The position was billions of dollars underwater 
before there was any transparency to the system on what 
happened. And so I think all of these would likely have helped 
mitigate that.
    Mrs. Cammack. Well, thank you. I have only got about 30 
seconds left and, Mr. Edmonds, I have a very lengthy question 
for you, so I am going to have to submit it for the record. 
There just simply isn't enough time to really cover what we 
need to cover here in talking about market structure and this 
proposal. So with 13 seconds left, Sam, you mentioned that you 
are not getting interested, in your words, into getting into 
the ag markets anytime soon. Can you explain that just a little 
bit?
    Mr. Bankman-Fried. Yes, I mean, I think I am interested in 
the markets, but I think they need more analysis. I think, as 
other people have been pointing out, different market 
structure, different settlement, different timing, it just 
needs more thought.
    Mrs. Cammack. Thank you.
    The Chairman. Thank you very much. And the gentlewoman from 
Virginia, Ms. Spanberger, who is also the Chair of the 
Subcommittee on Conservation and Forestry, is now recognized 
for 5 minutes.
    Ms. Spanberger. Thank you very much, Mr. Chairman. I have 
appreciated this conversation. It has been incredibly 
interesting, so thank you to our witnesses for participating.
    Mrs. Cammack, I should have additional time if you would 
like for me to yield to your to continue your question. I am 
happy to do it because I have so many questions I actually want 
to just diverge completely and speak from the perspective of 
someone who is the Chair of Conservation and Forestry. I really 
just want to have a general conversation, though quick because 
I have already offered Mrs. Cammack my time, about the impacts 
of digital assets, particularly cryptocurrencies have on the 
environment and really what these investments mean potentially 
for sustainability. We know according to the University of 
Cambridge Bitcoin mining alone requires 132.48 terawatt hours 
of energy annually. And for context, this energy use easily 
surpassed the annual energy use by the nation of Norway in 
2020. So roughly 35 percent of all Bitcoin mining takes place 
in the United States. And according to the Energy Information 
Agency, this is translated into roughly 40 billion tons of 
carbon dioxide produced by U.S. Bitcoin mining in 2021 alone.
    Certainly, Mr. Bankman-Fried, I know that you speak to the 
commitment of carbon neutrality in your testimony, but I would 
like for you just to expand on that a little bit. Like how can 
we make sure that as we are looking at a forward-looking 
technology, et cetera, et cetera, that we are also finding 
opportunities to really reduce emissions? I think people don't 
think about the environmental impact of Bitcoin, but I do think 
it is a serious issue to consider.
    Mr. Bankman-Fried. Yes, thank you for the question. I 
completely agree. And, there is one practice where we do buy 
carbon offsets and on top that we invest in R&D. Let's put that 
aside for a second though because I can only scale so much. In 
the end, my real answer is that if you would see the crypto 
industry scale 10, 100 times as big as it is today, it would be 
insane for the energy usage to be scaling as much as well for 
the reasons you are point out.
    I also don't think it would, and the reason is that while 
Bitcoin is a proof-of-work blockchain that is energy intensive, 
most other blockchains are proof-of-stake blockchains that have 
effectively no energy cost to them. The bulk of transactions 
already are happening on low-cost proof-of-stake blockchains. 
And for economic reasons as well as environmental reasons those 
have to be the ones that scale. You can't be paying $10 for 
every transaction in a scalable system. And so while Bitcoin 
may or may not end up being a large storer of value--don't want 
to give investment advice or anything--that doesn't mean that 
it has to be the blockchain on which millions of transfers are 
happening per second. And to the extent that blockchains do 
grow in size, I think it has to be and will be the low-cost 
proof-of-stake networks that will not be expanding the climate 
impact of the ecosystem.
    Ms. Spanberger. Thank you. I might follow up with 
additional questions for the record, but as I have offered my 
time, and I am curious to hear the question, Mrs. Cammack, in 
the interest of bipartisanship, over to you.
    Mrs. Cammack. Well, thank you, Representative Spanberger. I 
appreciate you yielding your time.
    This is a little bit in the weeds so bear with me here, all 
right? Mr. Edmonds, you noted that, quote, ``FTX participants 
lose their positions when markets move against them, and they 
are liquidated at adverse prices,'' end quote. But some market 
participants in volatile markets, especially agriculture 
markets, have noted a similar effect occurs with exchange 
circuit breakers when trading is halted for the day if prices 
move too much. In traditional markets, significant volatility 
plus a halt in trading can result in large unaffordable margin 
calls at the end of the day. If a participant cannot make their 
margin call, their position is liquidated and their initial 
margin is taken up to make up the difference, both closing out 
a potential hedge and costing the participant their initial 
margin. But the real kicker comes when the market reopens and 
the volatile price swings back the other way, returning the now 
liquidated position to profitability. How different is that 
scenario under traditional markets from the scenario that you 
laid out in your testimony? In both cases, the hedger is out of 
a hedge and collateral.
    Mr. Edmonds. Right, but in the----
    Mrs. Cammack. Sorry, I know that was a mouthful.
    Mr. Edmonds. I will try to be as brief as possible. In the 
traditional marketplace, you have the FCM in most cases 
intermediating that relationship. They may be in certain 
circumstances extending you credit based on their knowledge of 
your known physical position. And they see that and that is a 
relationship you have and that is a credit relationship you 
have with that intermediary. There is no chance for that in the 
case here.
    I would also say as to the point of volatility, the price 
in the morning can be very against your position and a few 
hours later that position before the market session closes can 
come back into your position. In this case without a 
liquidation you have already lost that. In the other case you 
are going to have that position on an overnight when the market 
closes and the price is set and you are going to determine 
whether you pay for that or not, and that is going to be 
between you and the relationship you have with your FCM.
    Mrs. Cammack. Well, and I know I just ran out of time. I 
would love to get your rebut to that as well just so that all 
of us can really understand all sides of this.
    [The information referred to is located on p. 217.]
    Mrs. Cammack. But with that, I yield back unless any other 
Members want to yield their time.
    The Chairman. The gentleman from Georgia, Mr. Allen, is 
recognized for 5 minutes.
    Mr. Allen. Thank you, Mr. Chairman.
    And, the market is very volatile, as we know. In fact, Mr. 
Bankman-Fried, you have had a tough couple of days here. In 
fact, it reminds me of the story in 1987 I think Sam Walton, 
which we all know was the first investor to lose $1 billion in 
a day. And he was asked the question, my goodness, what are you 
going to do? And he says, well, it is only paper, and we are 
still in business.
    So with that, Mr. Duffy, obviously, we are seeing 
tremendous fluctuations in obviously the market, crypto, 
otherwise. Your protections, how much are they fluctuating?
    Mr. Duffy. Which protection are you referring to?
    Mr. Allen. Your collateral.
    Mr. Duffy. Sorry?
    Mr. Allen. Your collateral----
    Mr. Duffy. My collateral at the clearinghouse fluctuates--
it is probably sitting out about $225-$240 billion right now 
sitting in my clearinghouse protecting positions on the 
exchange.
    Mr. Allen. Okay. As I understand the purpose that we got 
into this business is to get rid of volatility for our farmers. 
In other words, they produce a crop, and they make a 
substantial investment to produce that crop, and so they need 
to know about what that crop was going to be worth when they 
harvest it. And of course we had what happened in 1982 that we 
lost a lot of our agriculture industry in that one sweep. And 
of course we started coming up with other ways to stabilize the 
markets.
    And of course your system, I think there are two companies 
that largely have been in this business to stabilize. A farmer 
comes to you, he says I will sell my corn at this, you place 
it, and then the risk is appropriately shared. So how much 
fluctuation--like we are talking like, Mr. Bankman-Fried, I 
understand it was half of his value was lost. What would it 
represent as far as your market and your collateral? Like would 
it be ten percent down or 20 percent down or based on these 
fluctuating markets right now?
    Mr. Duffy. The fluctuating markets in the agricultural 
markets?
    Mr. Allen. Yes, sir.
    Mr. Duffy. Very de minimis, sir.
    Mr. Allen. Okay. That is----
    Mr. Duffy. Very de minimis.
    Mr. Allen. Which is what we are trying to accomplish with 
this whole business anyway.
    Mr. Duffy. Yes, sir, and it would be very, very small.
    Mr. Allen. Yes. And the other question, Mr. Bankman-Fried, 
for you, is you have submitted an application to the Commission 
for approval. Why is that application incomplete?
    Mr. Bankman-Fried. Sorry, can you--why is it incomplete?
    Mr. Allen. Okay. Well, you are saying that there are other 
measures that need to be implemented to sustain your 
collateral. And you are looking for guidance from the 
Commission on that? In other words, let me understand what you 
are up to here. You are the one that is coming to ask for 
approval, yet you are basing your approval on whatever the 
Commission says you have to do. I would think you would have 
all of your ducks in a row before you submitted the 
application.
    Mr. Bankman-Fried. We do think we have all of our ducks in 
a row.
    Mr. Allen. Okay. So then why do you think the Commission is 
going to require you to do other things?
    Mr. Bankman-Fried. What are you referring to?
    Mr. Allen. Well, I don't know. What I gathered from 
comments my colleague from Georgia, Mr. Scott, said from your 
collateral standpoint and the fluctuations this commission--
because again, we are talking about agriculture here, the 
farmer, and stability. How are you going to provide that when 
you are seeing these fluctuations in the market?
    Mr. Bankman-Fried. Are you asking how we would provide to 
agricultural parts in particular or are you asking about the 
collateral volatility? I am sorry, I think I don't understand 
what you are referring to.
    Mr. Allen. Okay. Well, we will try to educate Mr. Bankman-
Fried on how agriculture works. Thank you, and I yield back.
    The Chairman. Thank you, Mr. Allen.
    And now the gentlewoman from the U.S. Virgin Islands, Ms. 
Plaskett, who is also the Chair of the Subcommittee on 
Biotechnology, Horticulture, and Research, is recognized for 5 
minutes.
    Ms. Plaskett. Thank you so much, Mr. Chairman, and thank 
you for you and your staff's leadership in assembling this 
really great panel of witnesses for us to try to understand and 
to get into what is happening at the CFTC, what is happening 
with regard to the commodities exchange, and what is actually 
going on within crypto.
    A little earlier in the discussion I was right there in the 
hearing room, and one of my colleagues said that he had decided 
that he had made maybe the wrong decision in terms of his 
career choice, and everybody laughed. But we recognize that 
those of you who are witnesses are there because you have 
obtained a level of intellect and a level of understanding of 
these that doesn't come very quickly. And to make such a 
statement to me really reveals a kind of sense of failing 
forward. There are those of us in our society who are allowed 
to fail forward and those of us who are not, who do not have 
that luxury.
    And I feel it is part of my responsibility to be concerned 
with, one, the consumers who may fail forward and fail because 
of the activities of all of the witnesses that are here today, 
whether it is a commodities exchange that has kept certain 
classes of farmers out of the benefits over 100 years of the 
use of the commodities practice and commodity farming, or 
whether it is the young individuals who are underbanked who see 
crypto as a way to gain wealth, which is very tenuous at best 
for them. And so I believe that we as Members of Congress have 
a responsibility to safeguard all of those areas.
    Some of the questions and the testimony I thought was very 
instructive to me, Mr. Perkins, one of the things that you 
discussed in your testimony was that you did not believe that 
there was a negative impact of embracing the innovation. 
However, some guardrails needed to be put in place. What 
guardrails? Have you thought about that, what the guardrails 
might be that would be best to put in place to ensure 
safeguarding and allowing the innovation and allowing this 
growth in technology while preserving the American farmers, as 
well as those individuals who even engage in cryptocurrency?
    Mr. Perkins. Thank you, Congresswoman, for your question. 
Related to the issue at hand with central clearing, it would be 
my belief that the same principles should be applied to FTX as 
applied to the CME and everyone else. And so when you look at 
ways to collateralize the system, it should be extreme but 
plausible. We need to make sure that there are sufficient 
disclosures for people who understand the risks of 
participating as well.
    But if you step back, I think it is imperative for all of 
us to make sure that people are educated not only on the 
opportunities but also the risks of entering into these asset 
classes. And I look forward to working closely with the 
regulators on ensuring that the approach is always principles-
based, right. And, listen, the CFTC today, they have full 
authority to police issues of fraud, manipulation, and abuse. 
We should have very little tolerance for those types of things 
in this environment, along with the other regulators.
    Ms. Plaskett. Thank you for that. I agree with you, and I 
think the education portion is very important. I am always 
very, very skeptical of a new product or a new scheme that is 
actually even attempting to go after minority communities, 
individuals who have been kept out. Why are they all of a 
sudden being allowed in? It could be altruism but it could also 
be to their detriment.
    One of the things that I think has not been asked to Mr. 
Bankman-Fried is, sir, one of the discussions is that we should 
have followed a longer process, the regular process that CFTC 
does, which is to have public comment, regular rulemaking. 
Would you be averse to a discussion of regular rulemaking?
    Mr. Bankman-Fried. So I think we have followed along with 
the standard CFTC process. It is not standard to----
    Ms. Plaskett. I think that they created a process that is a 
little ad hoc for you, but it does not follow the regular 
public comment period.
    Mr. Bankman-Fried. I don't think that it is normal to have 
rulemaking as part of a margin order amendment. I think that is 
actually quite unusual. I think it is unusual to have a House 
hearing as part of a margin amendment. I think it is unusual to 
have a public roundtable. I think it is unusual to have a 
public 60 day comment period. To the extent that it is unusual, 
it is in the increased transparency and thoroughness of it 
rather than the opposite. But I would be happy to follow up 
with you after and go through cases and see what the standards 
and precedents are here.
    Ms. Plaskett. Thank you. And I have quite a number of other 
questions, Mr. Chairman, but I will save those for in writing. 
And I want to thank you again for allowing us this opportunity.
    The Chairman. Yes. Thank you, Ms. Plaskett.
    And now the gentleman from Texas, Mr. Cloud, is recognized 
for 5 minutes.
    Mr. Cloud. Thank you, Mr. Chairman, for this very 
informative Committee hearing, and thank you all for 
participating in it and sticking through it for this long. It 
has been a lot of fun for me, maybe not so much as much for you 
all, but it has been very enlightening, nonetheless. And 
whoever's idea was to sit you two gentleman next to each other, 
genius. No.
    But it is very helpful to have the back-and-forth. So many 
committee hearings it is kind of the debate is decided before 
we actually get to the committee hearing, and this is one I 
think where your expertise and your wisdom weighing into this 
is extremely helpful to us who are trying to grasp this new 
developing technology and how it would be.
    Speaking of first principles right off, I am concerned 
anytime about the government stepping in and picking winners 
and losers. I think it is important that we don't stop what 
would be disruptive technologies just because it protects the 
status quo, especially when the status quo is a middleman. And 
I am just speaking broadly here. But I also am very concerned 
about the government stepping in and endorsing one business 
model as well and what that would mean. And especially just in 
the context of where we are at right now, you mentioned the 
food shortages, which I wish this Committee would focus more 
on. And right now we have White House more concerned about 
disinformation than we do baby formula and those kind of 
things. So I am very concerned about that. We need to spend 
more time on that. And to have a disruptive technology in this 
window is a concern to make sure that that doesn't go wrong.
    If you all could help me with this, kind of entertain me, 
Mr. Bankman-Fried, if I can see that correctly, and Mr. Duffy. 
If you all could each kind of do this for a second. If we were 
to assume that his model was going to be accepted, what would 
you say, okay, let's do that but these are the provisions that 
we have to consider, and likewise? If it was to not be, like, 
okay, what are the considerations here about going--the future 
that we are not creating, the things that we are not protecting 
going forward? If you all could----
    Mr. Duffy. I would be happy to start if you would like.
    Mr. Cloud. Okay.
    Mr. Duffy. If Mr. Bankman-Fried's model was to be accepted, 
I would say a couple things. One, it needs to go through a 
regular rulemaking process to answer the gentlelady's question 
earlier because it is not just a margin model. This is a market 
structure issue that affects the entire industry, not just 
margin. So that is for starters. That is the reason why it 
needs to go through a full review. So the gentlelady was 
correct.
    So what would happen, what I would do if in fact it got 
passed, I would implement the model myself. And I do not think 
it is appropriate to do at this given time. I would want to 
implement the model if it was approved with the communities 
that is affected throughout the globe that trade these global 
markets in nature. That is critically important to make sure 
that people are brought into the process and not surprised by 
the process. So I am not opposing it. I am saying let's do it 
in a way that makes sense for everybody.
    Mr. Cloud. Yes, one of the things you mentioned, too, was 
weekends seemed to be a concern that kind of came up, I mean, 
one of the little pragmatic things. I know that is not a 
systemic thing, but how much of that is part of----
    Mr. Duffy. Systemic risk in the----
    Mr. Cloud. In weekend trading.
    Mr. Duffy. Oh, I am sorry, I didn't hear the weekend 
trading. You know what, I guess for some people there is no 
systemic risk. I know Sam likes to kind of go 7 days a week 
hard. There are other people that are in our farm community and 
others that need a day off and they really don't want to be 
interrupted with their hedges being auto-liquidated in a time 
when they are trying to at least take an hour off in their day 
of providing food for the country.
    Mr. Cloud. Yes, thank you.
    Mr. Bankman-Fried. Thank you. So, in terms of what would 
happen--and I think I want to talk less about our application 
in particular. I am taking this is a policy question rather 
than a competitive or anticompetitive question around like our 
company in particular. I think if in general there were not to 
be licensure of digital asset platforms in the United States, 
we would continue to see a regime where the United States is 
the only developed country that cannot access deep liquidity in 
crypto markets that cannot access hedging for them. It is the 
only developed world in which there is very little Federal 
oversight of the digital marketplace, very little anti-fraud, 
anti-market manipulation oversight, no clear Federal regulator 
for the majority of the platforms, and it would mean that this 
industry would continue to grow offshore rather than here with 
oversight from offshore regulators, not from our regulator. It 
would grow in other currencies as the base currency for the 
cryptocurrency system rather than the U.S. dollar. And I think 
that all of those would harm American consumers and the 
American economy.
    Mr. Cloud. Thank you. Mr. Lukken, I wanted to get to you 
but I only have 5 seconds. I am really curious to hear your 
thoughts because I have seen you nodding on all sides of this 
argument, and you were the only one that I heard use ag and 
livestock metaphors, and so I know this Committee really 
appreciated that. So do you have a quick--okay. Thank you.
    The Chairman. The gentleman from Florida, Mr. Lawson, is 
now recognized for 5 minutes.
    Mr. Lawson. Thank you, Mr. Chairman and Ranking Member. 
This is quite interesting. Mr. Bankman-Fried, you mentioned in 
your testimony that FTX would utilize real-time liquidation 
features to prevent the buildup of risk in the customer 
portfolio. How would this risk management and liquidation 
affect market risk and asset volatility, especially during the 
times of market uncertainty, as we are seeing of course 
recently with what is going on in Ukraine?
    Mr. Bankman-Fried. Yes, thank you for the question. 
Derivatives markets can help to buffer volatility, to reduce 
it, and to add liquidity. They can also help exacerbate 
volatility, in some circumstances or if poorly defined. I think 
that our model would help reduce volatility and increase 
liquidity. And the reason for that is that by having precise 
knowledge of the collateral in the system and having a fast 
margin engine that can act swiftly if needed, it allows the 
risk engine to avoid having to liquidate positions that might 
not need to be liquidated until it becomes clear that they are 
in fact nearly out of collateral while also still successfully 
closing them down before an account would go bankrupt. And so I 
think it does a good job of balancing against the market risk 
and the systemic risk there, which is massively harder to do if 
you have less transparency, less clarity, and a less fast-
acting risk system.
    Mr. Lawson. Okay. Thank you very much. Mr. Perkins, I think 
it was stated earlier that U.S. lagged behind other countries 
in the adoption of digital assets with over 95 percent of the 
trading volume currently overseas. The question is for you and 
maybe some of the other panelists can speak on it. What facts 
do you believe are preventing the growth of cryptocurrency 
trading in the U.S., and how would Americans, particularly 
farmers, benefit from these type of trading platforms?
    Mr. Perkins. Thank you for the question. I think one of the 
reasons why we haven't seen derivatives migrate into the U.S., 
regulated derivatives for purposes of risk management, is 
because the current structure as it exists today is inadequate 
to handle the volatility of the products. The risk builds up 
with the FCMs, the intermediaries, and they simply don't have 
the capacity to offer this hedging mechanism to clients. And to 
the extent they do, they can only give it to their tippity-top 
clients, which isn't very good from an inclusive perspective.
    And so I welcome innovation that we are seeing like with 
this direct model which does look at things such as thoughtful 
risk management, inclusion, and competition, and how will this 
benefit community members. I think competition will lead to 
better pricing. And in fact, you are eliminating the pricing of 
the intermediary, so I think it would be very beneficial to 
endorse a model such as this to allow our communities to hedge 
their risk.
    Mr. Lawson. Anyone else on the panel who would like to make 
a statement on this?
    Mr. Lukken. Well, I would take a little issue with the idea 
that the demise of the FCM, that they are not able to handle 
access. I mean, there are plenty of firms under the current 
clearing system that handle retail clients, that handle retail 
crypto clients, that we have exchanges that are offering 
products for crypto. So certainly this is another method for 
access, but we have lots of great firms that are willing to 
take on these clients in our industry.
    Mr. Lawson. Okay, thank you. One other question, and this 
is for Mr. Bankman-Fried, if the Commodity Futures Trading 
Commission approved your proposal, do you have mechanisms and 
programs in place to address the barriers small and socially 
disadvantaged farmers may have to utilize this platform as an 
exchange?
    Mr. Bankman-Fried. Sorry, could you repeat the last bit?
    Mr. Lawson. Do you have the mechanisms and programs in 
place to address the barriers small and socially disadvantaged 
farmers may have to utilize the platform in this exchange?
    Mr. Bankman-Fried. Oh, thank you, a really important 
question. I will say it is really important that we have 
transparency, disclosure, education, suitability, and testing 
on the platform to ensure that the users do understand it. But 
at the same time it is really important that disadvantaged 
communities are able to get real financial access in a way they 
have not historically had an easy time doing. We offer the full 
product suite. We offer it online. We offer it on a phone. We 
offer it via API. We offer all the tools that you need to do 
it. The compliance is built into it, but you can fund it 
directly. And, we are actually overrepresented in minority 
communities on our platform.
    Mr. Lawson. I yield back, Mr. Chairman.
    The Chairman. Thank you, Mr. Lawson.
    And so, gentlemen, we come to the end of this extraordinary 
and very beneficial and informative hearing. And I want to 
thank each of you. We are going to do two things. I want to see 
if our Ranking Member would like to make a closing statement, 
and then I will make my closing statement on what we have 
experienced today. And, first of all, before--oh, here is our 
Ranking Member, and I was just letting them know the order.
    But before that, I want to thank each of you. I want to 
thank you, Mr. Terry Duffy, Chairman and Chief Executive 
Officer of the CME Group. Your testimony was very, very 
helpful.
    I also want to thank you, Mr. Sam Bankman-Fried, who is 
Chief Executive Officer and Founder of FTX US Derivatives. 
Thank you for your informative and helpful presentation.
    Our other witness, my friend Mr. Walt Lukken, we have 
worked together over a number of years as you were Chairman of 
the CFTC when I was Chairman of our Commodity Exchanges, 
Energy, and Credit Subcommittee. Thank you.
    And our fourth witness was Mr. Christopher Edmonds, Chief 
Development Officer of the Intercontinental Exchange, which we 
all affectionately call ICE.
    And our fifth and final witness today, Mr. Christopher 
Perkins, the President of CoinFund Management LLC, thank you 
for your very helpful and beneficial presentation and 
testimony.
    And before I give my closing remarks, I am going to turn it 
over. He is writing feverishly getting all of it down, our 
distinguished Ranking Member, Mr. Thompson of Pennsylvania, and 
then I will end it with my closing remarks. Ranking Member?
    Mr. Thompson. Mr. Chairman, thank you so much. And to each 
of the witnesses, thank you for being here. I appreciate we 
were able to do a balanced hearing on an important issue.
    The Chairman. Please mute your phones, please, Members. 
Thank you.
    Mr. Thompson. All right, thanks, Mr. Chairman.
    The Commodity Futures Trading Commission is empowered to 
use a transparent, principle-driven-based process to consider 
any proposals, including the ones submitted that was the point 
of discussion today, although we did talk a little more broadly 
on, quite frankly, that process. And I think the process is the 
important part of the discussion today.
    I am hopeful that this transparent, principle-driven 
process, the CFTC, that the discussions today may be 
informative. We heard a diversity of views, and so that is my 
hope, that what we heard today will help to be informative of 
the process that they are engaged with this specific proposal.
    CFTC must ensure that stakeholders and the public have a 
seat at the table. The Agriculture Committee's role is not that 
decision making. It is oversight of the CFTC, to include where 
the CFTC fails to follow the appropriate process, where we have 
a role. That is part of our oversight role. Where the CFTC 
would deviate from the law, we have a role to play. Where the 
CFTC unnecessarily limits debate, we have a role. The 
Agriculture Committee has a role to play. And let's be clear, 
none of this has happened. None of this has happened so far.
    At the CFTC, my understanding is we have had right around 
1,000 comments have been received, and when they publish for 
public comments, I am assuming that some of those, a number of 
those, hopefully a lot of them will be instructive and 
informative in this process. The stakeholder roundtable is 
scheduled for later this month, the 25th of May, so that is 
much appreciated. They are going to bring experts to the table 
to really kind of do an analysis of those public comments.
    And, as the House Agriculture Committee, the trading of 
traditional agriculture commodities obviously is critical, and 
that is why CFTC was born within the U.S. Department of 
Agriculture. But as we saw how effective that was, other 
commodities were added under the CFTC's jurisdiction. So our 
jurisdiction over the CFTC provides a responsibility for other 
critical commodities, energy, gold, digital commodities. And I 
have confidence in CFTC that the Commission will continue their 
informed, transparent review of this proposal and all other 
proposals. This is not the only proposal obviously they 
received and will receive in the future. That is why making 
sure the process is the way it should be, that is why it is so 
important.
    I would be remiss if I didn't encourage every Member of 
this Committee--and this is outside of this issue--but to join 
Mr. Khanna and myself as a cosponsor of H.R. 7614, the Digital 
Commodity Exchange Act of 2022, that would establish effective 
oversight of digital commodities, define oversight of digital 
commodity markets without diminishing the innovation and the 
creativity that has established, quite frankly, the United 
States as a global leader in this field.
    And so to the witnesses once again for your testimony and, 
Mr. Chairman, thank you so much.
    The Chairman. And thank you, Ranking Member, for your 
excellent closing remarks.
    Ladies and gentlemen, again, thank you, all five of you. 
You have been extraordinarily helpful. First, I also want to 
thank my committee staff, who has worked hard to pull this 
together. They have done an excellent job, and I am most 
grateful for their hard work on this.
    What today's hearing showed us is that we have a serious, 
serious issue here. What concerns me is we have to make sure 
that we have the protections there for our clearinghouses 
because they are the anchors for dealing with this growing 
derivatives market.
    The other point is that this is international. And, ladies 
and gentlemen, we have enemies out here. You have Russia, you 
have Iran. I guarantee you they are watching this hearing. They 
are all looking for--not just them, the Revolutionary Guard of 
Iran. They are looking for ways in which to weaken our 
financial system. This is what makes us the greatest, most 
powerful nation on this Earth. And the good Lord has blessed us 
with bountiful agriculture, which is the major piece of 
derivatives and swaps. They deal in commodities, and that is 
why this Agriculture Committee is determined to make sure that 
this is protected.
    Now, this new cryptocurrency, you have heard from the 
witnesses here. Everybody knows it is new, it is vulnerable, it 
is going through its growing processes. Nobody is against it. 
What we are for is to make sure we deal with this new 
cryptocurrency with its vulnerability, with its volatility, we 
have to solve that. It cannot be handled and entered into our 
financial system until and unless we eliminate this 
vulnerability, this uncertainty.
    And so this is why I mentioned to the Chairman of the CFTC 
when he was here and let us know he was dealing with this to 
hold up until we could get this hearing going on. I appreciate 
that. We are all in this together.
    But I want you to know that we have enemies around this 
world who want to destroy this nation. And the one most 
vulnerable way, history is cluttered with the wreckage of great 
nations because they did not protect their financial systems. 
And so with that I wanted you to know the importance of this 
hearing, and you all have delivered to us valuable information. 
And this Committee, as you heard from the questions and the 
differentiation, are very much concerned that, as we go down 
this road, we go down it with the understanding that the future 
of our nation's security is in our hands.
    Thank you all very much, and I look forward to working with 
each and every one of you as we move forward. Thank you. Oh, 
now, thank you for that. I must take care of this business 
before we go.
    Under the Rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any question posed by a Member.
    Therefore, this hearing of the Committee on Agriculture is 
adjourned. Thank you all very much.
    [Whereupon, at 1:00 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
 Submitted Material by Hon. David Scott, a Representative in Congress 
                              from Georgia
         the ftx proposal--ledgerx llc d/b/a ftx us derivatives
Item 01_CFTC Press Release

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

[https://www.cftc.gov/PressRoom/PressReleases/8499-22]

Release Number 8499-22
CFTC Seeks Public Comment on FTX Request for Amended DCO Registration 
        Order
March 10, 2022

    Washington, D.C.--The Commodity Futures Trading Commission (CFTC) 
has received inquiries from derivatives clearing organizations (DCO) or 
potential DCO applicants seeking to offer clearing of margined products 
directly to participants, such that participants would not clear 
through a futures commission merchant intermediary (non-intermediated 
model). Currently before the CFTC is a formal request from LedgerX, LLC 
d.b.a. FTX US Derivatives (FTX) to amend its order of registration as a 
DCO to allow it to modify its existing non-intermediated model. FTX 
currently operates a non-intermediated model and clears futures and 
options on futures contracts on a fully collateralized basis. In its 
request for an amended order of registration, FTX proposes to clear 
margined products for retail participants while continuing with a non-
intermediated model.
    The CFTC is seeking public comment on FTX's request, including both 
on specific questions and policy issues raised by use of a non-
intermediated model in this manner. The questions are available 
here.\1\ CFTC recommends potential commenters to review FTX documents 
at this link \2\ as you are considering your comments. Comments may be 
submitted electronically through the CFTC's Comments Online \3\ 
process. All comments received will be posted on the CFTC website. 
Comments should be submitted on or before April 11, 2022.
---------------------------------------------------------------------------
    \1\ https://www.cftc.gov/media/7031/CommentFTXAmendedOrder/
download.
    \2\ https://sirt.cftc.gov/sirt/
sirt.aspx?Topic=CommissionOrdersandOtherActionsAD&Key=47841.
    \3\ https://comments.cftc.gov/PublicComments/
CommentList.aspx?id=7254.
---------------------------------------------------------------------------
Item 02_CFTC Press Release

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

[https://www.cftc.gov/PressRoom/PressReleases/8505-22]

Release Number 8505-22
CFTC Extends Public Comment Period on FTX Request for Amended DCO 
        Registration Order
March 24, 2022

    Washington, D.C.--The Commodity Futures Trading Commission is 
extending the deadline for the public comment period on a request from 
LedgerX, LLC d.b.a. FTX US Derivatives (FTX) to amend its order of 
registration as a derivatives clearing organization (DCO).
    FTX currently offers clearing of futures and options on futures 
contracts on a fully collateralized basis directly to retail 
participants (non-intermediated model). In its request for an amended 
order of registration, FTX proposes to clear margined products for 
retail participants while continuing with a non-intermediated model.
    On March 10, 2022, the CFTC announced that it is seeking public 
comment on FTX's request, on both specific questions as well as policy 
issues raised by use of a non-intermediated model in this manner. The 
CFTC is extending the deadline by which comments must be received by 30 
days, such that comments should now be submitted on or before May 11, 
2022.
    The CFTC is seeking public comment on FTX's request, including both 
on specific questions and policy issues raised by use of a non-
intermediated model in this manner. The questions are available 
here.\1\ CFTC recommends potential commenters to review FTX documents 
at this link \2\ as you are considering your comments. Comments may be 
submitted electronically through the CFTC's Comments Online \3\ 
process. All comments received will be posted on the CFTC website. 
Comments should be submitted on or before April 11, 2022.
---------------------------------------------------------------------------
    \1\ https://www.cftc.gov/media/7031/CommentFTXAmendedOrder/
download.
    \2\ https://sirt.cftc.gov/sirt/
sirt.aspx?Topic=CommissionOrdersandOtherActionsAD&Key=47841.
    \3\ https://comments.cftc.gov/PublicComments/
CommentList.aspx?id=7254.
---------------------------------------------------------------------------
Item 03_February 8, 2022 Letter from Julie L. Schoening, Ph.D., Chief 
        Risk Officer, FTX US Derivatives to CFTC
February 8, 2022

Via Email

  Mr. Clark Hutchison,
  Director, Division of Clearing & Risk,
  Commodity Futures Trading Commission,
  Three Lafayette Centre,
  1155 21st Street, N.W.,
  Washington, D.C. 20581

  Re: Financial Resource Requirements under Core Principle B and CFTC 
            Regulation 39.11(a)(1) in the Absence of Clearing Futures 
            Commission Merchants (``FCMs'')

    Dear Mr. Hutchison:

    FTX US Derivatives (``FTX'') seeks to clear derivatives products 
that are not fully collateralized through a direct access market for 
both retail and institutional participants. In doing so, FTX plans to 
leverage its experience offering exchange and clearing services 
directly to market participants. Instead of weighing the credit 
worthiness of chains of intermediaries, FTX will margin all products 
directly against each market participant, which enables FTX to know and 
manage the precise amount of risk held by each portfolio, as well as by 
all portfolios in aggregate, at any given moment. FTX deploys a 
sophisticated real-time risk management system to support derivatives 
on cash markets that are always open, and commits to $250 million in 
dedicated, unencumbered cash to cover any remaining risk to the 
clearing house or its customers.\1\
---------------------------------------------------------------------------
    \1\ As set forth in Exhibit G to the FTX application for an 
amendment to its Amended Clearing Order, FTX also relies on other 
default resources.
---------------------------------------------------------------------------
    Historically, clearinghouses have sought to manage their 
counterparty credit risk, in part, by mutualizing that risk among a 
relatively small number of clearing futures commission merchants 
(``FCMs''), who in turn managed the direct relationships with their 
much more numerous clients. Naturally, this created a relationship of 
reliance on those clearing FCMs to support the resilience of the 
clearinghouse. As a result, clearinghouses have been required to hold 
reserves against the possibility that such clearing FCMs themselves may 
default on their obligations, thereby requiring the clearinghouse to 
intercede.
    Section 5b of the Commodity Exchange Act (``CEA'') sets forth 
various core principles in the regulation of derivatives clearing 
organizations (``DCOs''), which have been implemented by the Commodity 
Futures Trading Commission (``CFTC'') in Part 39 of the CFTC 
regulations. One of those core principles, namely Core Principle B, 
describes the minimum financial resources required of a DCO to ensure 
its financial resilience. Those requirements, however, likely 
presuppose a relatively small number of large FCM clearing members. The 
following analysis, therefore, describes the standard in existing law 
for calculating minimum financial resources a DCO is required to 
maintain, and explores how those standards might be viewed with respect 
to a clearinghouse that utilizes a direct-access model without clearing 
FCMs, but that is nonetheless likely to have large direct-access 
clearing members.
A. Legal Standard
    The Commodity Exchange Act (``CEA'') establishes both general and 
specific financial resources requirements for CFTC regulated 
clearinghouses in DCO Core Principle B. Generally, each DCO is required 
to have ``adequate financial, operational, and managerial resources, as 
determined by the Commission, to discharge each responsibility of the 
derivatives clearing organization.'' See CEA  5b(c)(2)(B)(i). 
Additionally, a DCO is required to possess financial resources that, 
``at a minimum, exceed the total amount that would--(I) enable the 
organization meet its financial obligations to its members and 
participants notwithstanding a default by the member or participant 
creating the largest financial exposure for that organization in 
extreme but plausible market conditions . . . .'' See CEA  
5b(c)(2)(B)(ii). This specific requirement is generally referred to as 
``Cover-1,'' and is memorialized in CFTC Regulation 39.11(a)(1). 
Additionally, CFTC Regulation 39.11(c)(1) grants DCOs ``reasonable 
discretion in determining the methodology used to compute such require-
ments . . . .'' By contrast, a systemically important DCO is required 
to cover the default of ``the two clearing members creating the largest 
combined loss to the derivatives clearing organization in extreme but 
plausible market conditions'', otherwise known as the ``Cover-2'' 
standard. See CFTC Reg. 39.33(a)(1).
B. Proposed Methodology for Computing FTX Guaranty Fund Requirements
    Although FTX does not have clearing FCMs, it does nonetheless have 
large, institutional direct-access members. In an abundance of caution, 
FTX proposes to account for the possibility that FTX's largest direct-
access clearing member could be smaller than the largest clearing FCM 
at a comparable clearinghouse. FTX proposes to calculate its minimum 
financial obligations under CFTC Regulation 39.11(a)(1) using the 
following methodology: FTX will calculate the amount needed to meet its 
financial obligations to members and participants notwithstanding the 
default of: (a) the single largest clearing member (i.e., the Cover-1 
amount); or (b) if Cover-1 is less than 10% of total initial margin 
(``IM'') at the clearinghouse, then the two largest clearing members 
(i.e., the Cover-2 amount); or (c) if Cover-2 is less than 10% of IM, 
then the three largest clearing members (i.e., the Cover-3 amount).
    FTX's Guaranty Fund (GF) minimum sizing methodology explicitly 
meets or exceeds the regulations in 39.11 and conforms with the CFTC's 
principles based regulatory framework. The method starts by calculating 
the regulatory standard Cover-1 requirement. The Cover-1 standard sizes 
the GF to allow the DCO to continue operations even if the largest 
single participant defaults in an extreme but plausible scenario. FTX's 
largest exposure may be smaller than what is envisioned by the 
regulations due to the absence of clearing FCMs; however, FTX's largest 
clearing members are still highly likely to be institutional, rather 
than retail participants. Nonetheless, to allow for the possibility 
that such institutional clearing members could possibly be smaller than 
the largest clearing FCMs, we compare the percent of Initial Margin 
(IM) the Cover-1 entity is required to post relative to the total IM 
required from all participants. If the largest FTX clearing member 
holds less than 10% of the total IM at the DCO, FTX moves to a Cover-2 
standard. The Cover-2 standard is outlined in Subpart C of CFTC 
Regulations, specifically CFTC Regulation 39.33, and requires that 
certain important or complex DCOs can absorb the joint default by the 
two clearing members creating the largest combined financial exposure, 
again in an extreme but plausible scenario. As yet another layer of 
protection for the clearinghouse, if the Cover-2 entities combined hold 
less than 10% of the total IM at the DCO, FTX will then move to a 
Cover-3 standard, which is more conservative than current CFTC 
regulations.
C. Appropriateness of FTX's Cover-1 Proxies
    FTX is taking an innovative approach to determine the minimum size 
of the GF to meet the letter and the spirit of CFTC regulations. The 
regulations balance the severity versus the likelihood of default 
scenarios on DCO operations. Regulation 39.11 specifies Cover-1 as the 
standard requirement for a DCO's GF sizing. Cover-1, which assumes the 
largest exposure defaults in an extreme but plausible scenario, is a 
reasonable and conservative benchmark; if the DCO can cover the largest 
single default in an extreme event, any lesser default will not 
threaten the DCO's ability to operate.
    Increasing the number of the largest participants that are assumed 
to default at the same time makes a scenario more extreme but naturally 
decreases the plausibility of such a scenario. If a DCO is large and/or 
complex as specified in Sub Part C, a Cover-2 standard may apply which 
further increases the conservativeness of the GF size. Here the CFTC 
has determined that, while the likelihood of the largest two entities 
defaulting at the same time in the worst case scenario is even less 
than Cover-1, this exceptional coverage is warranted if the DCO is 
important enough.
    FTX's GF methodology considers not only Cover-1 and Cover-2 but 
also allows for a highly conservative Cover-3 sizing. The regulations 
do not explicitly consider Cover-3, likely because of the low 
probability of such a default event in a traditional, intermediated-
clearing model. FTX's adoption of a Cover-3 standard for sizing the GF 
is conservative and exceeds the regulations, given the low probability 
of such a scenario. Note that the largest participants on FTX are 
highly unlikely to be retail participants, but instead large 
institutional participants.
    To determine whether FTX should consider additional participants in 
the GF sizing calculation (e.g., moving from Cover-1 to Cover-2 to 
Cover-3), we consider how much IM the participants are required to post 
relative to the total IM at the DCO. This metric proxies what a Cover-1 
might look like at a more traditional DCO operating with an 
intermediated-clearing model.
    The following analysis shows that 10% of IM is a conservative 
estimate of the percent of IM that a Cover-1 participant might post at 
a traditional DCO. The analysis uses information from the CPMI-IOSCO 
Quantitative Disclosures for major Central Counterparties (CCPs), which 
is a more generic term that includes DCOs, in Q3 of 2021.

----------------------------------------------------------------------------------------------------------------
   Field                       IM ACCOUNTS                      CME \2\      ICUS \3\     ICEU \4\     OCC \5\
----------------------------------------------------------------------------------------------------------------
      6.1.1  House Account IM (mm USD)                            $32,027       $8,129      $11,978      $24,451
\2\ See
 https://
 www.cmegro
 up.com/
 clearing/
 cpmi-iosco-
 reporting.
 html.
\3\ See
 https://
 www.theice
 .com/
 clearing/
 quarterly-
 clearing-
 disclosure
 s.
\4\ See id.
\5\ See
 https://
 www.theocc
 .com/Risk-
 Management/
 PFMI-
 Disclosure
 s.
      6.1.1  Client Gross IM (mm USD)                            $132,135      $15,445      $61,348       $2,518
      6.1.1  Client Net IM (mm USD)                                    $0           $0      $17,114      $88,078
      6.1.1  Total IM (mm USD)                                   $164,162      $23,574      $90,440     $115,047
   18.1.1.1  Clearing Members                                          40           30           65          107
-------------------------------------------------------------
  Clearing Member Margin %..................................          20%          34%          13%          21%
----------------------------------------------------------------------------------------------------------------

    For each clearinghouse shown above, all the clearing members' house 
positions combined represent between 13% and 34% of the total margin 
posted. This is determined by taking the House Account IM and dividing 
it by the Total IM at the relevant CCP. What might reasonably be 
considered the largest 40 accounts combined at CME only hold 20% of the 
total IM at that clearinghouse. Similar ratios are seen at the other 
relevant clearinghouses presented. Thus, it is not likely that the 
largest single participant at any of these clearinghouses holds 10% of 
total IM. This analysis suggests that the 10% threshold selected by FTX 
is an appropriate and conservative measure to determine if additional 
coverage participants are warranted.
    FTX's proposed approach to calculate the minimum GF size will meet 
the Cover-1 requirement at a minimum and likely exceed it. The above 
analysis shows that covering 10% of IM is a conservative proxy for what 
could be considered a large clearing member at a traditional DCO and 
may represent a larger percentage than any current clearing member at 
the DCOs discussed above. Further, sizing the GF to cover up to the 
three largest simultaneous exposures is more conservative than current 
regulations require. FTX believes, therefore, that its GF methodology 
is appropriate and innovative and in the spirit of the CFTC's history 
of principles based and prudent risk management.
    Thank you for considering our proposed methodology, and we would 
welcome any questions or comments the CFTC may have in that regard.
            Sincerely,
            
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Julie L. Schoening, Ph.D.,
Chief Risk Officer, FTX US Derivatives.
FTX Letter re Financial Resource Requirements 2022-02-08
Final Audit Report 2022-02-09

Created: 2022-02-09

  By: Brian Mulherin ([email protected])
  Status: Signed
  Transaction ID: CBJCHBCAABAA2jq6lrMvxCnj3W1x6boNmlehr0j3ah1f
``FTX Letter re Financial Resource Requirements 2022-02-08'' History

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    2022-02-09--4:05:55 AM GMT
    
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    Agreement completed.
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Item 04_February 8, 2022 Letter from Brian G. Mulherin, General 
        Counsel, FTX US Derivatives to CFTC
February 8, 2022

Via Email

  Mr. Clark Hutchison,
  Director, Division of Clearing & Risk
  Commodity Futures Trading Commission
  Three Lafayette Centre
  1155 21st Street, N.W.
  Washington, D.C. 20581

  Re: Permissibility and Benefits of Direct Clearing Model under the 
            Commodity Exchange Act and CFTC Regulations

    Dear Mr. Hutchison:

    LedgerX LLC, d/b/a FTX US Derivatives (``FTX''), recently submitted 
an application requesting that the Commodity Futures Trading Commission 
(``CFTC'') amend its Amended Order of Registration as a derivatives 
clearing organization (``DCO''), thereby allowing FTX to offer margin 
directly to customers. In support of that application, FTX offers the 
following explanation of how this approach, which would not rely on 
intermediation, is permitted by the Commodity Exchange Act (the 
``CEA'') and CFTC Regulations. FTX will also demonstrate how its 
proposed risk management framework is comparable to the clearing-
related requirements imposed on clearing futures commission merchants 
(``FCMs'').
    As set forth below, FTX plans to lead futures markets in the United 
States into the 21st century, without compromising traditional risk 
management, customer protection, or systemic risk mitigation 
expectations. With dramatic improvements in technological 
infrastructure over the past twenty years, companies such as FTX are 
now able to provide their customers with direct access to exchange and 
clearing services, as FTX has now done for several years. FTX aims to 
build on these technological advancements by offering margin directly 
to its customers.
    FTX fully appreciates the risks that arise from offering margin and 
plans to implement the following risk management standards that will 
exceed historical expectations. First, instead of relying on 
traditional weekly margin calculations, FTX will assess its customers' 
abilities to meet their margin requirements approximately once per 
second. Second, by operating 24 hours a day, 7 days a week, 365 days a 
year, FTX can implement real-time market monitoring tools to 
immediately react to market changes and avoid major risks to 
clearinghouse stability. Third, FTX will remove friction, delay, and 
reduce operational risk in the assessment and timely derisking of 
accounts, as appropriate, through direct interactions with customers. 
Finally, to support the resilience of our clearinghouse, FTX will rely 
on backstop liquidity providers and the $250 million in unencumbered 
cash it has contributed to its Guaranty Fund--one of the largest self-
funded cash contributions for a derivatives clearinghouse in the United 
States.
    While FTX understands that historical market practices envisioned 
an intermediated marketplace where brokers interfaced directly with 
customers, the CEA does not mandate a one-size fits all approach. As we 
look to the future of regulated derivatives markets, crypto-asset 
platforms and other nascent exchanges have pursued a direct-membership 
model where investors onboard directly to the trading and clearing 
platforms, and not through an intermediary or broker.\2\ * The 
traditionally manual modes of interacting with markets, intermediated 
or not, have largely been replaced with technology that provides 
immediate, direct access. These technological developments have enabled 
the use of automated or programmed strategies for faster and more 
efficient trading decisions. By utilizing this technology, FTX and 
others already directly provide services to customers who do not have 
the infrastructure or relationships to support the involved clearing 
mechanisms other firms require.\3\ In other words, the direct-access 
model democratizes futures trading access.
---------------------------------------------------------------------------
    \2\ See FTX's Key Principles for Market Regulation of Crypto-
Trading Platforms, available at https://blog.ftx.com/policy/
ftx_key_principles/.
    * Editor's note: there is no footnote 1 in this submission. It has 
been reproduced herein as submitted.
    \3\ See Eris Exchange, LLC, KalshiEx LLC, and Nadex.
---------------------------------------------------------------------------
    Having operated a direct-access exchange and clearinghouse without 
intermediaries for several years now, FTX has already developed DCO 
operations that often exceed or are comparable to key FCM duties 
prescribed by CFTC Regulations, including: (a) maintenance of adequate 
financial resources; (b) safeguarding customer money, securities, and 
other property; and (c) implementing appropriate eligibility access 
criteria.\5\ * Additionally, other clearing-related functions 
traditionally performed by FCMs, including know your customer (``KYC'') 
and anti-money laundering (``AML'') functions,\6\ are currently 
performed by FTX.\7\ For other clearing-related requirements, the FTX 
clearinghouse is also already subject to an enhanced set of regulations 
relative to an FCM, such as the CFTC's rigorous systems safeguards 
regime related to cybersecurity and other operational risks\8\ and 
recordkeeping requirements.\9\
---------------------------------------------------------------------------
    \5\ While FTX is currently seeking an amendment only to its DCO 
order of registration, and the focus of this analysis is on clearing-
related duties, a comprehensive list of both clearing and exchange-
related FCM duties and requirements prescribed by both CFTC regulations 
and NFA rules may be found here: NFA Regulatory Requirements for FCMs, 
IBs, CPOs, and CTAs (August 2021), https://www.nfa.futures.org/members/
member-resources/files/regulatory-requirements-guide.pdf.
    * Editor's note: there is no footnote 4 in this submission. It has 
been reproduced herein as submitted.
    \6\ See CFTC Regulation 42.2 and NFA Interpretive Notice 9045--NFA 
Compliance Rule 2-9: FCM and IB Anti-Money Laundering Program; NFA 
Interpretive Notice 9070--NFA Compliance Rules 2-9, 2-36, and 2-49: 
Information Systems Security Programs.
    \7\ For example, both Eris Clearing LLC and FTX are required to 
comply with the Bank Secrecy Act, the International Emergency Powers 
Act, the Trading with the Enemy Act, and any Executive Orders and 
regulations issued thereto, as a condition of their DCO Orders of 
Registration. See Eris Clearing, LLC DCO Registration Order (Nov. 2, 
2020) and LedgerX, LLC Amended Order of DCO Registration (September 2, 
2020).
    \8\ CFTC Regulation 39.18.
    \9\ DCO Core Principle K and CFTC Regulation 39.20 set forth 
clearing-related recordkeeping requirements comparable to those imposed 
on FCMs through CFTC Regulation 1.36.
---------------------------------------------------------------------------
    With this application to amend its DCO registration, FTX seeks to 
build on its years of experience of offering direct access by offering 
margin directly to its customers, without clearing FCMs. For the 
benefit of the CFTC and the public, FTX provides the following summary 
of: (I) the risk management process for FTX's non-intermediated model; 
(II) how FTX intends to perform relevant clearing functions that an FCM 
traditionally undertakes; and (III) trading-related functions that an 
FCM may perform that FTX believes to be outside the scope of this 
request to amend its clearing order.
I. DCO Risk Management With A Direct-Access Business Model
    Building on years of experience offering exchange and clearing 
services directly to customers, FTX now also seeks to extend margin 
directly to its customers. Although the traditional clearinghouse model 
has resulted in the risk of margin mutualized among DCO clearing 
members, the CEA does not require this historical business practice. 
Rather, the CEA merely requires that DCOs manage their risks 
appropriately. FTX aims to manage such risks by monitoring its 
customers' positions in real-time and taking appropriate and timely 
action to de-risk accounts in default in the following manner. First, 
FTX will seek to liquidate a position on FTX's central limit order book 
(``CLOB''), which remains open at all times.\10\ If that is not 
practicable, FTX will attempt to lay off positions with backstop 
liquidity providers. Finally, FTX will use its reserve of $250 million 
in unencumbered cash to cover any remaining residual risk to the 
clearinghouse or its customers. At the end of the waterfall, in the 
unlikely event the Guaranty Fund is exhausted, traditional DCO default 
management tools will be available.
---------------------------------------------------------------------------
    \10\ An FCM's or broker-dealer's authority to liquidate a 
customer's account that is in default is well-established under Federal 
securities and commodities laws. See, e.g., In re MF Global Inc., 531 
B.R. 424, 435-36 (Bankr. S.D.N.Y 2015); Moss v. J.C. Bradford and Co., 
337 N.C. 315, 326-27 (1994) (``In light of the fact that rules 
governing margin calls and account liquidation are for the protection 
of the merchant and commodities exchange itself, we interpret the 
Federal regulatory scheme in the area of futures trading, including CME 
Rule 827, to permit the liquidation of a customer's account without 
prior demand or notice.'').
---------------------------------------------------------------------------
A. DCOs are not required to mutualize risk among intermediaries
    While many DCOs mutualize losses among clearing members (typically 
FCMs), this practice is not required by the CEA. Under Section 1a(15) 
of the CEA, ``derivatives clearing organization'' is defined as ``a 
clearinghouse, clearing association, clearing corporation, or similar 
entity, facility, system, or organization that, with respect to an 
agreement, contract, or transaction'' that satisfies one of the 
following three disjunctive prongs:

          (i) enables each party to the agreement, contract, or 
        transaction to substitute, through novation or otherwise, the 
        credit of the derivatives clearing organization for the credit 
        of the parties;
          (ii) arranges or provides, on a multilateral basis, for the 
        settlement or netting of obligations resulting from such 
        agreements, contracts, or transactions executed by participants 
        in the derivatives clearing organization; or
          (iii) otherwise provides clearing services or arrangements 
        that mutualize or transfer among participants in the 
        derivatives clearing organization the credit risk arising from 
        such agreements, contracts, or transactions executed by the 
        participants.\11\
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    \11\ CEA  1a(15)(A) (emphasis added).

Significantly, only the third prong refers to the mutualization of 
credit risk among clearing members. Because a clearinghouse only needs 
to satisfy one of the above three disjunctive prongs of the DCO 
definition, a DCO is not required to adopt a business model that 
mutualizes default risks among clearing members. This is supported by 
the CFTC's own statements: ``The Commission is of the view that each 
DCO should be afforded an appropriate level of discretion in 
determining how to operate its business within the legal framework 
established by the CEA, as amended by the Dodd-Frank Act.'' \12\
---------------------------------------------------------------------------
    \12\ Derivatives Clearing Organization General Provisions and Core 
Principles (``DCO Final Rule''), 76 Fed. Reg. 69334, 69,335 (Nov. 8, 
2011).
---------------------------------------------------------------------------
B. The FTX direct-access model offers an innovative means to monitor 
        and manage risks more effectively
    Section 5b(c)(2)(D) of the CEA, implemented through CFTC Regulation 
39.13, requires each DCO to ensure that it possesses the ability to 
manage the risks associated with discharging the responsibilities of 
the DCO through the use of appropriate tools and procedures, including 
written policies, procedures, and controls that establish an 
appropriate risk management framework, and is approved by the DCO's 
board of directors. At a minimum, the framework must clearly identify 
and document the range of risks to which the DCO is exposed, address 
the monitoring and management of the entirety of those risks, and 
provide a mechanism for internal audits.
    CFTC Regulation 39.13 gives DCOs discretion, within specified 
limits, in setting, modeling, validating, reviewing and back-testing 
margin requirements.\13\ In implementing the risk management framework, 
a DCO must appoint a chief risk officer to make appropriate 
recommendations to the DCO's risk management committee or board of 
directors regarding the DCO's risk management functions. Accordingly, 
``a DCO should adopt a comprehensive and documented risk management 
framework that addresses all of the various types of risks to which it 
is exposed and the manner in which they may relate to each other.'' 
\14\ A sufficient risk management framework should include a daily 
assessment of the DCO's adequacy of its initial margin requirements, 
valuation of the initial margin assets, back-testing of products that 
are experiencing significant market volatility, and conducting of 
stress tests with respect to each large trader who poses significant 
risk.
---------------------------------------------------------------------------
    \13\ Id. at 69365-76.
    \14\ DCO Final Rule, 76 Fed. Reg. at 69363.
---------------------------------------------------------------------------
    Additionally, FCM risk management requirements are very similar to 
those imposed on DCOs. CFTC Regulation 1.11 requires each FCM to 
establish, maintain, and enforce a system of risk management policies 
and procedures designed to monitor and manage the risks associated with 
the activities of the FCM. The FCM's risk management unit must give 
quarterly risk exposure reports to senior management and the CFTC. For 
FCMs that act as clearing members of a DCO, the CFTC adopted Regulation 
1.73. Under CFTC Regulation 1.73, a clearing FCM is required to: (i) 
evaluate its ability to meet initial and variation margin requirements 
at least once per week; (ii) evaluate its ability to liquidate 
positions in an orderly manner at least once per quarter; and (iii) 
test lines of credit once per year.
    When comparing the risk management standards imposed on DCOs and 
FCMs, FTX believes that a direct clearing participant of a DCO will 
receive comparable protections to an FCM's customers. Notwithstanding 
the comparability of DCO and clearing FCM risk management requirements, 
in practice, FTX proposes to monitor and manage customer risk in a more 
stringent fashion than is required by either regime, as described in 
the proposed default rules and Exhibit G.
    In addition to the traditional risk management functions that FTX 
will be performing, the following are some noteworthy examples of 
improvements on traditional risk management practices that FTX will 
implement:

   FTX will rely only on collateral deposited with FTX when 
        evaluating its risk exposure, as opposed to holistic credit 
        checks that rely on information, such as a person's worth, 
        occupation, credit score, and other information that may be 
        stale at any particular point in time.

   FTX will measure all participant account values in real-
        time, as opposed to periodic snapshots.

   Settlement variation margin will be exchanged on a near 
        real-time basis to avoid the accumulation of large losses over 
        time.

   FTX will factor concentration and liquidity risks into 
        initial margin requirements.

   FTX will stress test liquidity needs daily to ensure 
        adequacy of resources.

   When participant positions fall below the maintenance margin 
        threshold, FTX will liquidate positions rapidly, intra-day on 
        the CLOB.

   If FTX is unable to liquidate a position on the CLOB, FTX 
        will resort immediately to agreements with backstop liquidity 
        providers who agree to accept a pre-negotiated volume of 
        liquidation orders over a specified timeframe.

   If the backstop liquidity providers cannot cure a 
        participant's shortfall, FTX will draw from its $250 million 
        reserve fund capitalized by unencumbered cash to cover any 
        remaining risk to the clearinghouse or its customers.
C. To reserve against defaults by participants, FTX will utilize 
        backstop liquidity providers and $250 million of its own 
        capital
    As FTX intends not to rely on clearing FCMs or otherwise require 
that its participants mutualize the risk to the clearinghouse, FTX does 
have resources beyond liquidating positions on its CLOB to manage 
margin risk.
    Following reasonable efforts to liquidate positions on the CLOB, 
FTX proposes a ``backstop liquidity provider program,'' which will 
effectively mutualize a portion of the clearing risk among a select 
group of professional traders who can absorb and lay-off risk that may 
be temporarily difficult to resolve in the open market. To serve as a 
backstop liquidity provider, a trader will need to meet certain 
criteria. For example, the trader must agree to provide a certain 
minimum amount of backstop liquidity to be available on a 24/7 basis, 
and to provide initial and variation margin payments within a short 
period of time. In addition to these providers, other holders of large 
positions will be able to serve as secondary backstop liquidity 
providers. In the event clearing member defaults result in account 
deficits, however, FTX will then rely primarily on $250 million of its 
own unencumbered capital to manage margin risks.
II. Having Successfully Operated A Direct-Access Exchange and DCO for 
        Several Years, FTX Has Already Proven Its Ability To Perform 
        Many Functions Traditionally Undertaken by FCMs
A. FTX maintains considerable financial resources and reports to the 
        CFTC routinely
    The financial stability of a DCO, or an FCM, is based upon the 
premise that the entity has and maintains adequate financial resources 
to remain operational, and to meet its obligations to customers, 
clearing members, and operational costs. Pursuant to Section 4f(b) of 
the CEA, an FCM must meet certain minimum financial requirements 
prescribed by the CFTC. Furthermore, CFTC Regulation 1.17 sets forth 
adjusted net capital requirements for FCMs. For an FCM that is not a 
broker-dealer, a security-based swap dealer, or a security-based major 
swap participant, the FCM must maintain adjusted net capital equal to, 
or exceeding the greater of: (i) $1 million or (ii) the FCM's risk-
based capital requirement (i.e., 8% of the total risk margin 
requirement for positions carried by the FCM in customer accounts and 
non-customer accounts).
    Similarly, for a DCO to meet Section 5b(c)(2)(B) of the CEA and 
CFTC Regulation 39.11, the DCO must have adequate financial, 
operational, and managerial resources ``as determined by the 
Commission'' to discharge each responsibility of the DCO. A more 
quantitative metric of this requirement is that the DCO must possess 
financial resources that exceed the total amount that would enable the 
DCO to meet its financial obligations to its clearing members 
notwithstanding a default by its largest member, based on the value of 
the DCO's own capital, guaranty fund deposits, default insurance, and 
certain assessments of additional guaranty fund contributions. The DCO 
must also possess financial resources, limited to its own capital, that 
exceed the total amount that would enable the DCO to cover operating 
costs for one year. Notably, the Commission declined to adopt a minimum 
capital requirement for DCOs. Instead, the Commission emphasized that 
it is appropriate ``to provide flexibility to DCOs in designing their 
financial resources structure so long as the aggregate amount is 
sufficient.'' \16\ *
---------------------------------------------------------------------------
    \16\ Id. at 69347.
    * Editor's note: there is no footnote 15 in this submission. It has 
been reproduced herein as submitted.
---------------------------------------------------------------------------
    To this point, as described above, FTX has committed $250 million 
of its own unencumbered capital to meet its obligations as a DCO in the 
event of a participant's default. Although some clearinghouses rely 
upon guaranty fund deposits and assessments from clearing members to 
meet their financial resources obligations, the Commission has provided 
DCOs flexibility with meeting the financial resources requirement, so 
long as the resources are permissible. For example, ICE NGX, which 
operates a direct clearing model, relies upon participant collateral, a 
guarantee fund in the form of a letter of credit, cash, and default 
insurance to meet its financial obligations under DCO Core Principle 
B.\17\
---------------------------------------------------------------------------
    \17\ See https://www.theice.com/ngx/clearing-settlement.
---------------------------------------------------------------------------
    Furthermore, as a registered Designated Contract Market (``DCM'') 
and DCO, FTX is also subject to robust systems safeguard 
requirements.\18\ To satisfy these requirements, FTX has adopted a 
comprehensive system safeguard program designed to identify and 
minimize operationalize risk. FTX has also implemented controls 
relating to information security, including controls related to: access 
to systems and data; user and device identification and authentication; 
vulnerability management; penetration testing; business continuity and 
disaster recovery processes; and security incident response and 
management, among others.
---------------------------------------------------------------------------
    \18\ CFTC Regulations 38.1050-51; Regulation 39.18.
---------------------------------------------------------------------------
B. FTX has a track record demonstrating protection of customer 
        money,securities, and property
    One of the CEA's fundamental components is the protection of 
customers, and the safeguarding of customer money, securities or other 
property pledged to margin, guarantee, or secure trades or contracts. 
Section 4d of the CEA directs FCMs to segregate customer money, 
securities, and other property from its own assets. Section 4d(a)(2) of 
the CEA requires an FCM to treat and deal with futures customer funds 
as belonging to the futures customer, and prohibits an FCM from using 
customer funds to margin or extend credit to any other person. Further, 
CFTC Regulation 1.20 requires that an FCM must separately account for 
all futures customer funds and segregate such funds as belonging to its 
futures customers. Account names must clearly identify customer funds 
as the futures customer funds and show that such funds are segregated 
as required by sections 4d(a) and 4d(b) of the CEA and by CFTC 
regulations. An FCM may deposit futures customer funds, subject to the 
risk management policies and procedures of the futures commission 
merchant required by CFTC Regulation 1.11 with: (1) a bank or trust 
company; (2) a DCO; or (3) another FCM.
    DCOs are subject to other comparable obligations to those set forth 
in Section 4d of the CEA; namely, CFTC Regulation 39.15 requires the 
DCO file rules for CFTC approval related to the commingling of DCO and 
clearing member customer positions, as well as rules on money, 
securities, or property received by the DCO to margin, guarantee, or 
secure such positions. The DCO's rules must, for example, identify the 
products that would be commingled, analyze the risk characteristics of 
the eligible products, and analyze the liquidity of the respective 
markets for eligible products.
    Under FTX Rule 7.3, FTX separately accounts for and segregates all 
participant funds used to purchase, margin, guarantee, secure, or 
settle Company Contracts from FTX's proprietary funds. In doing so, FTX 
maintains a proprietary account that will be credited with fees or 
other payments owed to a participant that are debited as a result of 
trades and settlements of Company Contracts. FTX maintains a record of 
each participant's account balances and Company Contracts, and is 
prohibited from holding, using, or disposing of except as belonging to 
participants.
C. FTX has implemented eligibility criteria that promote free and open 
        access and protect against undue risk
    Section 5b(c)(2)(C) of the CEA requires a DCO to have appropriate 
admission and continuing eligibility standards (including sufficient 
financial resources and operational capacity) for members of, and 
participants in, the DCO. CFTC Regulation 1.3 defines ``clearing 
member'' as ``any person that has clearing privileges such that it can 
process, clear and settle trades through a derivatives clearing 
organization on behalf of itself or others. The derivatives clearing 
organization need not be organized as a membership organization.'' \19\ 
Under this definition, all of FTX's participants will qualify as 
``clearing members.''
---------------------------------------------------------------------------
    \19\ 17 CFR  1.3.
---------------------------------------------------------------------------
    CFTC Regulation 39.12 requires these participant eligibility 
criteria to be objective, publicly disclosed, and risk-based. 
Specifically, CFTC Regulation 39.12(a)(2) requires that clearing 
members have access to sufficient financial resources to meet 
obligations arising from participation in the DCO in extreme but 
plausible market conditions. The DCO must also maintain appropriate 
standards for determining the eligibility of agreements, contracts, or 
transactions submitted to the DCO for clearing. Furthermore, the DCO 
must have procedures to verify, on an ongoing basis, the compliance of 
each participation and membership requirement of the DCO.
    The CFTC explained that the participant eligibility requirements in 
CFTC Regulation 39.12(a)(1) satisfy ``the dual Congressional mandate to 
provide for fair and open access while ensuring that such increased 
access does not materially increase risk.'' \20\ The CFTC emphasized 
that the rule provides a DCO with discretion to balance restrictions on 
participation with legitimate risk management concerns.\21\ In this 
regard, the CFTC found that the DCOs are ``in the best position in the 
first instance to determine the optimal balance.'' \22\
---------------------------------------------------------------------------
    \20\ DCO Final Rule, 76 Fed. Reg. at 69353.
    \21\ Id.
    \22\ Id.
---------------------------------------------------------------------------
    FTX's membership criteria for participants are fully aligned with 
the Congressional mandate to provide for fair and open access to 
clearing services in a manner that is consistent with prudent risk 
management. FTX's real-time monitoring of participant positions enables 
it to determine, at all times, whether a participant's account has 
sufficient cash and collateral to meet its margin obligations to the 
DCO. In the event an account does not have sufficient financial 
resources, FTX will immediately begin to liquidate the participant's 
position until the amount of funds in the participant account is equal 
to its margin obligations to the DCO. Because FTX monitors participant 
accounts 24/7 and liquidates underfunded positions in realtime, there 
is no need to establish minimum capital requirements for each 
participant. Instead, FTX's risk management framework enables it to 
ensure at all times that each participant has sufficient financial 
resources to meet its current obligations arising from participation in 
the DCO.
    In addition, FTX's membership requirements will advance many of the 
policy considerations underlying CFTC Regulation 39.12, including 
promoting competition and liquidity. FTX anticipates that its 
participants will be diverse, encompassing traders and investors with 
varying investment objectives, risk tolerances, and portfolio sizes. 
Diffusing the risk of defaults across numerous participants also 
greatly reduces the likelihood that the default of any one or two large 
members will seriously jeopardize the clearinghouse, thereby 
strengthening the DCO's financial stability.
III. FCMs Also Perform Certain Trading-Related Functions That Are 
        Independent of Clearing Functions
    FCMs are subject to certain obligations related to trading on an 
exchange that are unrelated to clearing positions, such as: (i) 
providing disclosures to customers regarding, inter alia, the risks of 
trading; \23\ (ii) order and transaction recordkeeping obligations; 
\24\ (iii) minimum trading standards; \25\ (iv) trading authorization 
requirements; \26\ (v) requirements to produce monthly statements and 
confirmations; \27\ and (vi) conflict of interest and trading 
standards.\28\ These FCM requirements primarily focus on the FCM 
customer's execution of transactions on the exchange. As these 
functions are trading-related, rather than clearing-related, FTX 
believes they are outside the scope of FTX's request to amend its 
clearing order. It should be noted, however, that FTX acting in its 
capacity as a DCM (which is a category of self-regulatory organization) 
would handle many of these requirements in accordance with Part 38 of 
the CFTC's rules, and has already been providing direct-access to its 
exchange for years now, as have others.
---------------------------------------------------------------------------
    \23\ CFTC Regulations 33.7 and 1.55; NFA Interpretive Notice 9073--
Disclosure Requirements for NFA Members Engaging in Virtual Currency 
Activities. FTX is also subject to exchange trading related public 
disclosure requirements as set forth in DCM Core Principle 7, and CFTC 
regulations 38.1400 and 38.1401.
    \24\ CFTC Regulation 1.35. FTX is also subject to exchange trading 
related recordkeeping requirements as set forth in DCM Core Principle 
18, and CFTC regulations 38.950 and 38.951.
    \25\ CFTC Regulation 155.3. FTX is also subject to exchange trading 
related requirements to protect its markets and market participants as 
set forth in DCM Core Principle 12, and CFTC regulations 38.650 
and38.651.
    \26\ CFTC Regulation 166.2.
    \27\ CFTC Regulation 1.33. FTX provides IRS Form 1099s to 
customers, trade history is available to each customer.
    \28\ See CFTC Regulations 1.56, 1.71, and 155.3. FTX is also 
subject to exchange trading conflicts of interest requirements as set 
forth in DCM Core Principle 16, and CFTC regulations 38.850 and 38.851.
---------------------------------------------------------------------------
          * * * * *
    FTX appreciates the opportunity to present its views on these 
important issues andwould value the opportunity to discuss these 
matters further, at your convenience.
            Sincerely,
            
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
            
Brian G. Mulherin,
General Counsel, FTX US Derivatives.

cc: Eileen Donovan.
Item 05_LedgerX LLC d/b/a FTX US Derivatives Participant Agreement
I. Services.
    LedgerX is registered with the U.S. Commodity Futures Trading 
Commission (``CFTC'') as the operator of a designated contract market 
(``DCM''), a swap execution facility (``SEF'') and a derivatives 
clearing organization (``DCO''). Participant wishes to receive access 
to certain services pursuant to this Agreement (``Services''). LedgerX 
is willing to provide such Services to Participant pursuant to the 
terms of this Agreement. Participant agrees to be bound by the terms of 
this Agreement, and the LedgerX Rulebook (defined below). LedgerX will 
provide Participant with access to a system or a platform for execution 
of Transactions as provided in the LedgerX Rulebook and as required by 
the U.S. Commodity Exchange Act, as amended (the ``Act'').
II. Definitions.
    Capitalized terms used but not defined herein have the respective 
meanings given to them in the LedgerX Rulebook.
III. Participant Eligibility.
    By executing this application and whenever using the Services, the 
undersigned hereby represents and warrants that Participant meets the 
eligibility requirements as set forth in Rule 3.2 of the LedgerX 
Rulebook, as amended from time to time, and if trading through the SEF 
is an Eligible Contract Participant (``ECP''). Further, each time such 
Participant or any of its Authorized Representatives enters an order, 
effects a transaction or otherwise uses the Services, Participant 
represents, warrants and reaffirms that Participant meets the 
eligibility requirements as set forth in Rule 3.2 of the LedgerX 
Rulebook, and if trading through the SEF is an ECP.
IV. Participant Obligations and Consent to Jurisdiction of LedgerX.
    Participant shall pay the fees and charges for the Services as 
specified and revised from time to time on the LedgerX website 
(``Website''), located at www.ledgerx.com. The fees and charges for the 
Services are enumerated on the Website. LedgerX will notify Participant 
of any change to such fees and charges by means of a Website post, and 
any such changes will be effective 10 days after LedgerX posts such 
amended fees on the Website. Following the expiration of such 10 day 
period, the fees schedule on the Website will be deemed amended 
accordingly. Participant's continued use of Services after the 
expiration of the 10 day period will constitute Participant's agreement 
to pay the amended fees and charges for the Services.
    Participant hereby acknowledges and agrees that it has received and 
read the rules and regulations established by LedgerX applicable to the 
Services contained in the LedgerX rules (as supplemented or amended 
from time to time, the ``LedgerX Rulebook''). Further, Participant 
agrees to be and will be bound by, and will comply with, the LedgerX 
Rulebook as amended from time to time. In the event of any conflict 
between this Agreement and the LedgerX Rulebook, the Rulebook will 
govern.*
---------------------------------------------------------------------------
    * Editor's note: Page 1 of the LedgerX Participant Agreement is 
dated June 2021 (Items I-IV to paragraph ending `` . . . Rulebook will 
govern.''). All subsequent pages are dated December 2021.
---------------------------------------------------------------------------
    Participant hereby consents to the jurisdiction of LedgerX. Upon 
the prior written request of LedgerX, Participant will promptly (but in 
any event, within 5 Business Days) provide to LedgerX such information 
about itself and its Authorized Representatives as LedgerX requests.
    Participant hereby agrees that it will only allow itself or its 
duly authorized employees and representatives, in each case previously 
identified to LedgerX, to access or use the Services. Participant 
agrees to accept full responsibility for any transactions effected on 
the Platform and for any use of the LedgerX DCM made by it or made 
pursuant to the login information of Participant or its Authorized 
Representatives. Participant will be financially responsible for such 
trades even if the orders received via the LedgerX DCM were (1) entered 
as a result of a failure in security controls and/or credit controls, 
other than due to the gross negligence of LedgerX, or (2) entered by an 
unknown or unauthorized user using the login credentials of Participant 
or its Authorized Representatives.
V. Participant's Representations and Warranties.
    Participant hereby represents, warrants and covenants to LedgerX, 
and each time such Participant or any of its Authorized Representatives 
enters an order, effects a transaction or otherwise uses the Services, 
that Participant will be deemed by such act to represent, warrant and 
covenant to LedgerX the following:

  A.  if such Participant is not a natural person, Participant is duly 
            organized, validly existing and in good standing under the 
            laws of its jurisdiction of organization and each other 
            jurisdiction in which the nature or conduct of its business 
            requires such qualification;

  B.  if such Participant is an individual, Participant is of the age 
            of majority in the individual's place of residence;

  C.  such Participant has all requisite legal authority and capacity 
            to enter into this Agreement and to use the Services on its 
            own behalf and to perform its obligations as a Participant;

  D.  such Participant will maintain during the term of this Agreement 
            all required and necessary regulatory approvals and/or 
            licenses to operate as a Participant;

  E.  such Participant and its Authorized Representatives are and will 
            be in compliance with all material respects of the Act, 
            CFTC Regulations and all other applicable laws, rules, 
            regulations, judgments, orders and rulings of any 
            governmental authority or self-regulatory organization, 
            authority, agency, court or body, including the laws of any 
            jurisdiction applicable to an Order or Transaction 
            (collectively, ``Applicable Law'') (including data 
            protection and privacy laws and laws with respect to 
            recording messages of Participant employees, including 
            providing and obtaining required notices or consents); and

  F.  Participant is not statutorily disqualified from acting as a 
            Participant and that there is, to the best of its 
            knowledge, no pending or threatened action, suit or 
            proceeding before or by any court or other governmental, 
            regulatory or self-regulatory body, to which Participant is 
            a party, that seeks to affect the enforceability of this 
            Agreement or its ability to act as a Participant.
VI. Participant Acknowledgments.
    Participant further acknowledges and agrees that:

  A.  it is fully aware of the speculative nature and high risk 
            associated with the Services referred to in this Agreement 
            and of derivatives, futures, swaps, and options trading 
            generally (including the risk that Participant or its 
            Authorized Representatives may incur trading losses);

  B.  it is fully aware that if Participant transfers digital currency 
            away from LedgerX, that transfer is immediately 
            irreversible once effectuated, that Participant is solely 
            responsible for designating the correct destination and 
            maintaining the ability to access and control the 
            transferred digital currency, and that LedgerX accepts no 
            responsibility for Participant's ability to access or 
            control any digital currency transferred away from LedgerX 
            by Participant;

  C.  it is fully aware of, acknowledges, and agrees to LedgerX's 
            Digital Currency Fork policy set forth in Rule 11.14 of the 
            LedgerX Rulebook;

  D.  it will abide by and be subject to the LedgerX Rulebook, as now 
            existing and as hereafter duly amended from time to time, 
            including the obligation to submit to arbitration or the 
            jurisdiction of the State or Federal courts located within 
            the City of New York in accordance with Rules 10.1-10.5, 
            11.5 and 11.6 of the LedgerX Rulebook;

  E.  Participant agrees to be bound by, and comply with, this 
            Agreement, and amendments to this Agreement, solely by 
            Participant's or its Authorized Representatives' access or 
            use of the Services;

  F.  notwithstanding the above, amendments to this Agreement are 
            automatically effective unless, within 10 days of the 
            change, Participant: (1) ceases using the Services, (2) 
            does not enter into any further trades of any kind on the 
            Platform, and (3) gives notice to LedgerX to arrange for 
            the closing of its Accounts;

  G.  this Agreement is enforceable against Participant, and against 
            each of its Authorized Representatives directly, through 
            the dispute resolution procedures in this Agreement and the 
            LedgerX Rulebook;

  H.  its status as a Participant may be limited, conditioned, 
            restricted or terminated by the Board in accordance with 
            the LedgerX Rulebook;

  I.  it will provide such other information as may be reasonably 
            requested by LedgerX from time to time as may be necessary 
            or desirable to verify its qualifications as a Participant;

  J.  it authorizes LedgerX to verify, on an initial and a periodic 
            basis, by investigation, the statements in the application 
            materials provided to LedgerX, which may include a criminal 
            background check, a review of Participant's credit report, 
            and such other action reasonably deemed necessary by 
            LedgerX;

  K.  it authorizes any governmental, regulatory or self-regulatory 
            body, futures exchange, swap execution facility, securities 
            exchange, national securities association, national futures 
            association, bank or other entity to furnish to LedgerX, 
            upon its request, any information such entity may have 
            concerning Participant, and Participant hereby releases 
            such entity from any and all liability of whatsoever nature 
            by reason of furnishing any such information to LedgerX;

  L.  it hereby authorizes LedgerX to make available to any 
            governmental, regulatory or self-regulatory body, futures 
            exchange, swap execution facility, securities exchange, 
            national securities association, national futures 
            association, bank or other entity (upon such entity's 
            showing of proper authority and need) any information 
            LedgerX may have concerning Participant, and it hereby 
            releases LedgerX from any and all liability of whatsoever 
            nature by reason of furnishing any such information;

  M.  it will not fraudulently deposit funds into its Participant 
            Account, Collateral Account, Cleared Swaps Customer 
            Account, Proprietary Account or any other account 
            associated with this Agreement or the use of LedgerX's 
            services (individually, an ``Account'' and collectively, 
            the ``Accounts'');

  N.  it hereby authorizes LedgerX to deduct from its Accounts 
            maintained on the books and records of LedgerX all fees or 
            other charges accruing to Participant, including legal fees 
            and costs;

  O.  it hereby authorizes LedgerX to cancel, reverse, liquidate, close 
            out or transfer Participant's position or terminate its 
            Account(s) at LedgerX's sole discretion, and without prior 
            reference to the Participant or its Authorized 
            Representatives, in the event that the position is not 
            sufficiently collateralized, as determined and set by 
            LedgerX in its sole and absolute discretion;

  P.  it hereby authorizes LedgerX in the event of a cancellation, 
            reversal, liquidation, close out or transfer of 
            Participant's position or a termination of its Account to 
            sell or liquidate any and all cash and other assets in the 
            Account that is needed to satisfy any financial obligation 
            of Participant arising as a result of such actions;

  Q.  it will be responsible to LedgerX for payment of any deficiency 
            remaining in Participant's Account should an Account be 
            liquidated or terminated;

  R.  it will keep confidential all information related to the 
            Settlement Bank, including but not limited to the name of 
            such Settlement Bank, account numbers, and bank personnel, 
            except as necessary to perform LedgerX-related transfers;

  S.  upon each transfer of Underlying to LedgerX, it will pledge to 
            LedgerX a first-priority security interest in such 
            Underlying, and it authorizes LedgerX to make transfers of 
            such Underlying in accordance with the LedgerX Rulebook;

  T.  it hereby declares that the statements in this Agreement and in 
            any application materials provided to LedgerX are true, 
            complete and accurate, and that it will promptly notify 
            LedgerX in writing if any representation, warranty or 
            covenant made herein changes or ceases to be true;

  U.  it will be solely responsible, at its own risk and expense, for 
            (1) acquiring, installing and maintaining all equipment, 
            hardware and software (other than any applications, 
            algorithms, software, interfaces or code that LedgerX may 
            provide to such Participant pursuant to the terms of this 
            Agreement for purposes of accessing and utilizing the 
            Platform (collectively, ``Trading Tools'') and the 
            Platform), internet access, telecommunications, and network 
            systems necessary and compatible for it to access and use 
            the Platform and Trading Tools and (2) ensuring that any 
            systems, facilities, servers, routers, and other equipment 
            and software it uses to access and use the Platform and 
            Trading Tools are at all times protected by, and at all 
            times comply with, all applicable information security and 
            firewall precautions, at a level of security not less than 
            that prevailing in the industry;

  V.  LedgerX cannot guarantee electronic access to the Platform if 
            Participant's internet service is down or disconnected, and 
            that LedgerX is not responsible for any losses due to 
            Participant's inability to connect to the Platform when 
            Participant's internet service is down or disconnected;

  W.  it will comply with any security polices applicable to 
            Participant set forth on the Website;

  X.  it consents to the electronic delivery of all tax forms, 
            including, without limitation, IRS Form 1099-B, or such 
            other tax forms as LedgerX may determine are required; and

  Y.  it is obligated to update any and all information contained in 
            any part of this Agreement for so long as Participant 
            receives access to Services pursuant to this Agreement.
VII. Third-Party Exchange Participants: Representations, Warranties and 
        Acknowledgments.
    Participants and their Authorized Representatives who trade through 
third-party exchanges and clear those trades through LedgerX 
(hereinafter collectively, ``Third-Party Exchange Participants''), 
hereby agree to be bound, and to comply with, all provisions in this 
Agreement to the same extent as other Participants and Authorized 
Representatives. Third-Party Exchange Participants and their Authorized 
Representatives hereby affirm all representations, warranties, 
covenants and acknowledgments in this Agreement, including but not 
limited to the acknowledgment that this Agreement is enforceable by 
LedgerX against Third-Party Exchange Participants and their Authorized 
Representatives directly, through the dispute resolution procedures in 
this Agreement and the LedgerX Rulebook. Additionally, each Third-Party 
Exchange Participant and each of their Authorized Representatives 
agrees to be bound by and to comply with the LedgerX Rulebook.
    LedgerX may seek any legal, regulatory or similar claims against a 
Third-Party Exchange Participant and each of its Authorized 
Representatives in the same manner it would pursue such an action 
against other Participants and their Authorized Representatives. For 
the avoidance of doubt, unless expressly stated herein, nothing in this 
Agreement shall prevent LedgerX or its agents from pursuing any claims, 
liabilities and expenses arising from the conduct of a Third-Party 
Exchange Participant or its Authorized Representatives (including 
attorneys' fees, out of pocket expenses, costs and disbursements). For 
purposes of this Agreement, each Third-Party Exchange Participant shall 
be deemed to be a ``Participant,'' unless otherwise noted herein, and 
all terms of this Agreement pertaining to Participants also pertain 
equally to Third-Party Exchange Participants. All terms of this 
Agreement pertaining to Authorized Representatives also pertain equally 
to any agent or representative of a Third-Party Exchange Participant.
VIII. Indemnity.
    Participant hereby agrees to indemnify and hold harmless LedgerX 
and its directors, officers, employees, members, affiliates and agents 
(each, a ``Related Party'') from and against all expenses and costs and 
damages (including any legal fees and customary expenses), directly and 
actually incurred by LedgerX (including consequential damages awarded 
to the third party) as a result of third-party claims resulting from, 
in connection with, or arising out of Participant's use of the Services 
or activities of Participant or arising out of or relating to this 
Agreement, including any failure by Participant, for any reason, 
fraudulent, negligent, or otherwise, to comply with its obligations and 
requirements set forth in this Agreement, or any failure of Participant 
to comply with the agreements, representations or covenants contained 
in this Agreement.
    Within 10 Business Days after LedgerX receives written notice of a 
claim that LedgerX reasonably believes falls within the scope of this 
paragraph, LedgerX will provide Participant with written notice of that 
claim, provided, however, that failure to provide such notice will not 
relieve Participant of its indemnity obligations hereunder except to 
the extent Participant is materially prejudiced thereby and Participant 
will not be responsible for those expenses, costs and damages that 
LedgerX incurs solely as a result of any such delay. Participant's 
indemnity obligation will not apply to the extent there has been a 
final determination (including exhaustion of any appeals) by a court or 
arbitrator of competent jurisdiction that the expense, cost or damage 
arose from LedgerX's gross negligence, fraud or willful misconduct.
IX. Limited Warranty and Limitation of Liability.
    The LedgerX rules concerning liability and warranties (including 
without limitation Rule 11.7 of the LedgerX Rulebook, and any successor 
Rules thereto) are incorporated herein by reference and apply with the 
same force and effect as if they were reproduced in their entirety in 
this Agreement. Those LedgerX rules set out the entire liability of 
LedgerX to Participant. All other liability of LedgerX under or in 
connection with this Agreement is excluded, except to the extent that 
it is not permitted to be excluded by Applicable Law.
X. Data Use Consent.
    Participant hereby grants LedgerX a worldwide, perpetual, 
irrevocable, royalty-free, full sublicensable and freely assignable 
license to store, use, copy, display, disseminate and create derivative 
works from: (1) the price and quantity data for each Transaction 
entered into by Participant that is executed via the Services and (2) 
each bid, offer and/or Order provided via the Services by Participant. 
Participant acknowledges and agrees that LedgerX may use such 
information for business, marketing and other purposes.
XI. Market Information; No Warranty.
    LedgerX may make available to Participant a broad range of 
financial information that LedgerX obtains from third-party service 
providers, including financial market data, spot market data, quotes, 
news, analyst opinions, links to other third-party sites and research 
reports (hereinafter, ``Market Information''). LedgerX does not endorse 
or approve Market Information, and we make it available to Participant 
and its Authorized Representatives only as a service and convenience. 
LedgerX and its third-party service providers do not (1) guarantee the 
accuracy, timeliness, completeness or correct sequencing of Market 
Information, or (2) warrant any results from the use or reliance on 
Market Information. LedgerX expressly disclaims and makes no warranty 
of merchantability, fitness for a particular purpose or use, or non-
infringement. There is no other warranty of any kind, express or 
implied, regarding the Market Information.
    Market Information may quickly become unreliable for various 
reasons including, for example, changes in market conditions or 
economic circumstances. Neither LedgerX nor the third-party service 
providers are obligated to update any information or opinions contained 
in any Market Information, and LedgerX may discontinue offering Market 
Information at any time without notice. Participant and its Authorized 
Representatives agree that neither LedgerX nor the third-party service 
providers will be liable in any way for the termination, interruption, 
delay or inaccuracy of any Market Information. Participant and its 
Authorized Representatives agree not to redistribute or facilitate the 
redistribution of Market Information, and agree not to provide access 
to Market Information to anyone who is not authorized by LedgerX to 
receive Market Information.
XII. No Investment Advice or Recommendations.
    Participant hereby acknowledges and agrees that LedgerX provides no 
legal, tax, investment, financial or other advice, and nothing 
contained in the Services constitutes a solicitation, recommendation, 
endorsement or offer by LedgerX to buy or sell any commodity 
derivative, future, option or swap. Participant assumes the sole 
responsibility of evaluating the merits and risks associated with the 
use of the Services before making any investment decisions, and 
Participant agrees not to hold LedgerX liable for any possible claim 
for damages arising from any decision made based on the Services, 
information or Market Information made available to Participant or its 
Authorized Representatives by or through LedgerX.
XIII. Netting Program.
    Participant hereby acknowledges that LedgerX provides a netting 
program (the ``Netting Program'') as described on the Website, which 
may be amended or revised by LedgerX from time to time in its sole and 
absolute discretion. Participant hereby agrees that the Netting Program 
(and any subsequent amendment or revision to it) is made a part of, and 
incorporated by reference into, this Agreement. Participant hereby 
chooses to opt in or opt out of such Netting Program as elected on the 
signature page hereto.
XIV. Margin.
    Participant agrees that when it establishes in its Account a 
margined position, Participant will deposit and maintain in its Account 
sufficient qualifying assets to serve as collateral to meet the Margin 
Requirement, which will be set by LedgerX in its sole and absolute 
discretion. The assets that will qualify as good collateral to support 
a margined position will be limited to cash and the specific types of 
assets that LedgerX has determined it will accept and credit as good 
collateral. Participant acknowledges and agrees that the Margin 
Requirement for any open position may vary over time based on, among 
other things, (a) the number, the size of, and the specific instruments 
traded in, the open positions in the Participant's Account; (b) the 
unrealized profits or losses on such open positions at any given time; 
(c) market conditions; and (d) LedgerX policies in place from time to 
time, as further described on the LedgerX website.
    As acknowledged by Participant in Section VI.O. above, Participant 
acknowledges that not having sufficient qualifying assets to meet the 
Margin Requirement could result in a Margin Closeout, which is defined 
as the automatic closing of some or all of Participant's open 
positions. Participant agrees to monitor the qualifying assets in 
Participant's Account and ensure there are sufficient assets to meet 
the Margin Requirement. Nothing in this Agreement shall be taken to 
mean that LedgerX is required to provide Participant with time to 
respond prior to a Margin Closeout when LedgerX, in its sole 
discretion, deems it necessary to take immediate action. For the 
avoidance of doubt, Participant agrees that their open positions could 
be liquidated in a Margin Closeout if the market moves significantly 
and/or quickly such that the Participant no longer meets the Margin 
Requirement. In the event of a Margin Closeout, LedgerX may close all 
of Participant's open positions.
    Provided that the value of assets in Participant's Account that 
qualify as good collateral is greater than the Margin Requirement, 
Participant may withdraw from Participant's Account any amount of 
assets in excess of the Margin Requirement.
    If the value of assets in Participant's Account that qualify as 
good collateral does not meet the Margin Requirement, LedgerX will not 
have any obligation to execute any order that Participant submits to 
LedgerX. Furthermore, LedgerX will have no obligation to execute any 
order which would cause Participant's Account to fail to meet the 
Margin Requirement.
    LedgerX may, without notice to Participant, unilaterally initiate 
and execute one or more close out orders for some or all of 
Participant's open positions, in the event that the value of the assets 
in Participant's Account that qualify as good collateral is determined 
by LedgerX to be less than the Margin Requirement, or for any other 
reason which in LedgerX's sole discretion LedgerX considers to create 
unacceptable risk of financial loss relative to the value of 
Participant's Account.
    Any and all trading relating to margined positions shall be in in 
accordance with Chapter 7 of the LedgerX Rulebook.
XV. Amendments to the Agreement.
    LedgerX may modify any of the terms and conditions that are set 
forth in this Agreement by providing not less than 10 days prior 
written notice to Participant. Participant acknowledges and agrees that 
such notice is sufficient if posted to the LedgerX website as a 
regulatory notice under ``Regulatory Notices'' and that no other or 
additional form of notice, actual or constructive, is required. If 
Participant does not consent to the modification, Participant may 
terminate this Agreement by sending a written notice of termination of 
its Accounts to LedgerX at [email protected] within 10 days of receiving 
notification of the modification from LedgerX. Any such termination 
will be effective as of the date on which the modification would have 
taken effect. In the event a Participant does not consent to the 
modification of this Agreement, and objects to the modification in a 
timely fashion as set forth above, then Participant (1) agrees to stop 
using the Services immediately, (2) agrees that neither it nor its 
Authorized Representatives will enter into any further trades of any 
kind on LedgerX, (3) grants LedgerX the authority to close any open 
positions immediately, and (4) agrees it will be responsible to LedgerX 
for payment of any deficiency remaining in Participant's Accounts after 
the closing of such positions.
XVI. Termination.
    Subject to Applicable Law and the LedgerX Rulebook, LedgerX or 
Participant may terminate this Agreement by giving the other prior 
written notice. Termination of this Agreement will not affect liability 
accrued as of termination. Sections V through XII, XIV, XVIII, and XXI 
will survive termination of this Agreement and continue in full force 
and effect.
    In the event Participant elects to terminate this Agreement, then 
Participant (1) agrees to stop using the Services immediately, (2) 
agrees that neither it nor its Authorized Representatives will enter 
into any further trades of any kind on LedgerX, (3) grants LedgerX the 
authority to close any open positions immediately, and (4) agrees it 
will be responsible to LedgerX for payment of any deficiency remaining 
in Participant's Account after the closing of such positions.
XVII. Complete Agreement.
    This Agreement constitutes the entire contract between the parties 
relative to the subject matter hereof. Any other previous agreement 
among the parties with respect to the subject matter hereof is 
superseded by this Agreement. Nothing in this Agreement, expressed or 
implied, is intended to confer upon any person (other than the parties 
hereto, their respective successors and assigns permitted hereunder) 
any rights, remedies, obligations or liabilities under or by reason of 
this Agreement.
XVIII. Severability.
    In the event that any one or more of the provisions contained in 
this Agreement should be held invalid, illegal or unenforceable in any 
respect, the validity, legality and enforceability of the remaining 
provisions contained herein and therein shall not in any way be 
affected or impaired thereby (it being understood that the invalidity 
of a particular provision in a particular jurisdiction shall not in and 
of itself affect the validity of such provision in any other 
jurisdiction). The parties shall endeavor in good-faith negotiations to 
replace the invalid, illegal or unenforceable provisions with valid 
provisions the economic effect of which comes as close as possible to 
that of the invalid, illegal or unenforceable provisions.
XIX. Counterparts.
    This Agreement may be executed in counterparts (and by different 
parties hereto on different counterparts), each of which shall 
constitute an original but all of which when taken together shall 
constitute a single contract.
    Each party agrees that electronic signatures of the parties 
included in this Agreement are intended to authenticate this writing 
and to have the same force and effect as manual signatures. Electronic 
signature means any electronic sound, symbol or process attached to or 
logically associated with a record and executed and adopted by a party 
with the intent to sign such record pursuant to the New York Electronic 
Signatures and Records Act (N.Y. State Tech.  301-309) as amended 
from time to time. Delivery of an electronic signature to this 
Agreement shall be as effective as delivery of an original signed 
counterpart of this Agreement.
XX. Assignment.
    Participant may not assign this Agreement, in whole or in part, 
without the prior written consent of LedgerX.
XXI. USA PATRIOT Act Notice.
    LedgerX hereby notifies Participant that pursuant to the 
requirements of the USA PATRIOT Act, it is required to obtain, verify 
and record information that identifies Participant, which information 
includes the name and address of Participant and other information that 
will allow LedgerX to identify Participant in accordance with the USA 
PATRIOT Act.
XXII. Governing Law.
    This Agreement will be governed by and construed in accordance with 
the laws of the State of New York. Any dispute between LedgerX and 
Participant or its Authorized Representatives arising from or in 
connection with this Agreement will be settled through arbitration or 
the state or Federal courts located within the City of New York in 
accordance with Rules 10.1-10.5, 11.5 and 11.6 of the LedgerX Rulebook. 
Any arbitration must be brought in Cook County, Illinois.
XXIII. Click ``I agree'' for Your Signature.
    As noted above in Section XVIII, Participant will be signing this 
Agreement with a valid and binding electronic signature by clicking ``I 
agree,'' and Participant acknowledges that it has read and understood 
this Agreement's terms and conditions.
Item 06_LedgerX LLC d/b/a FTX US Derivatives DCO Exhibit G
    Attach as Exhibit G, documents that demonstrate compliance with the 
default rules and procedures requirements set forth in  39.16 of the 
Commission's regulations, including but not limited to:
    a. Default Management Plan--Applicant must provide a copy of its 
written default management plan which must contain all of the 
information required by  39.16(b), along with Applicant's most 
recently documented results of a test of its default management plan.

    See attached Default Management Plan.

    b. Definition of default--Applicant must describe or otherwise 
document:

  (1)  The events (activities, lapses, or situations) that will 
            constitute a clearing member default;

        LedgerX LLC, doing business as FTX US Derivatives (``FTX''), is 
            a derivatives clearing organization (the 
            ``Clearinghouse''). The Clearinghouse defines default as 
            the event when the participant account collateral is below 
            the maintenance margin requirement, and liquidating an 
            account on the Central Limit Order Book has not 
            successfully resulted in the account being above its 
            maintenance margin requirement.

  (2)  What action Applicant can take upon a default and how Applicant 
            will otherwise enforce the rules applicable in the event of 
            default, including the steps and the sequence of the steps 
            that will be followed. Identify whether a Default 
            Management Committee exists and, if so, its role in the 
            default process; and

        The clearing house initiates an entirely automated sequence of 
            actions designed with the specific purpose of restoring the 
            clearing house's balanced book.
        Such sequence of events include the sequence described in c(1).
        The Chief Risk Officer is responsible for the default 
            management procedures for the clearing house. Significant 
            changes to these procedures (as defined in the Default 
            Management Plan) require approval from the Board of 
            Directors and the Risk Management Committee.
        The clearing house does not have a Default Management committee 
            because the process is highly automated. The Chief Risk 
            Officer will escalate to the Risk Management Committee as 
            appropriate.

  (3)  An example of a hypothetical default scenario and the results of 
            the default management process used in the scenario.

        1.  Alice wants to trade a BTC derivative contract with a small 
            notional 
                  size. She decides to trade the micro contract with 
            notional size of 
                  0.0001 BTC. The micro futures contract is trading on 
            the limit order 
                  book at $60,002/BTC, with best bid at $60,001/BTC for 
            20,000 con-
                  tracts, and best ask at $60,003/BTC for 35,000 
            contracts.

            a.  The micro contract's value is thus $6.0002 ($60,002/BTC 
            *0.0001 
                      BTC).

        2.  According to the clearing house's proprietary real time 
            margin system, 
                  the initial margin per contract is currently $1.20004 
            (20% of the con-
                  tract value) and maintenance margin is $0.90003 (15% 
            of the contract 
                  value).

        3.  Participant Alice wishes to establish a long position of 
            20,000 micro 
                  contracts at a price of $60,000/BTC. Alice deposits 
            in USD and has 
                  $30,000 worth of free collateral in her account.

            a.  She places a limit order on the bid side at $60,000/BTC 
            for 20,000 
                      lots.

            b.  At a market price of $60,000/BTC initial margin per 
            contract would 
                      be $1.20 and maintenance margin per contract 
            would be $0.90.

            c.  As soon as this limit order is submitted, $24,000 
            ($1.20* 20,000 con-
                      tracts) worth of collateral is locked. Alice has 
            $6,000 worth of re-
                      maining free collateral. The limit order rests on 
            the book because 
                      it was not immediately filled.

        4.  5 minutes later, the prevailing market price moves down. 
            Alice's limit 
                  order for 20,000 lots is filled in full.

            a.  Once Alice's position is established, the collateral 
            lock drops from 
                      the initial margin level to the maintenance 
            margin level. Alice has 
                      $18,000 worth of collateral locked as maintenance 
            margin, and 
                      $12,000 worth of free collateral.

        5.  The BTC futures contract price continues to fluctuate. 20 
            hours later, 
                  the price drops to $55,000/BTC.

            a.  The collateral lock is now $16,500 for maintenance 
            margin. How-
                      ever, Alice's free collateral has dropped from 
            $12,000 to $3,500 due 
                      to the price decline of $5,000/BTC per each 
            contract Alice holds in 
                      the long position along with the decrease in 
            maintenance margin 
                      as the position notional decreases.

            b.  As the futures contract price fluctuates, Alice 
            continues to receive 
                      informational alerts automatically generated by 
            the clearing 
                      house's margin system. It is Alice's 
            responsibility to deposit addi-
                      tional collateral as the account moves towards 
            the maintenance 
                      margin level and free collateral amount continues 
            to decline.

        6.  Hypothetically, Alice fails to deposit additional 
            collateral to her account. 
                  2 hours later, BTC futures contract price declined 
            further to drop below 
                  $52,940/BTC.

            a.  Alice now has less collateral than that is required by 
            the mainte-
                      nance margin threshold, and the liquidation 
            engine begins to re-
                      duce Alice's position size.

            b.  Note that if Alice had funded her account with 
            additional collateral 
                      just before the contract price moved below 
            $52,942/BTC then the 
                      liquidation engine would not have been triggered 
            because the 
                      newly deposited collateral would have increased 
            Alice's total collat-
                      eral to exceed the maintenance margin 
            requirement.

            c.  The liquidation engine will first cancel all pending 
            orders, which 
                      Alice does not have in this scenario.

            d.  The liquidation engine will partially liquidate Alice's 
            position using 
                      marketable limit orders, in a manner that does 
            not cause meaning-
                      ful price disruption, until the account's 
            collateral is greater than 
                      the maintenance margin level.

            e.  Within 6 seconds, a sell order to liquidate 10% of 
            Alice's position 
                      (2,000 micro contracts) is successfully filled at 
            $52,940/BTC. Alice's 
                      long position is now 18,000 contracts with a 
            corresponding mainte-
                      nance margin level of $14,294. Alice's account 
            now has free collat-
                      eral of $1,586 and at a market price of $52,940/
            BTC the liquidation 
                      engine does not have to sell any more contracts. 
            Alice's account lost 
                      $14,120 in the decrease in BTC price from $60,000 
            to $52,940.

        7.  No loss is sustained by the clearing house. Alice's risk 
            position is suc-
                  cessfully managed by the fully automated liquidation 
            engine.

    c. Remedial action--Applicant must describe or otherwise document:

  (1)  The authority and methods by which Applicant may take 
            appropriate action in the event of the default of a 
            clearing member which may include, among other things, 
            liquidating positions, hedging, auctioning, allocating 
            (including any obligations of clearing members to 
            participate in auctions or to accept allocations), and 
            transferring of customer accounts to another clearing 
            member (including an explanation of the movement of 
            positions and collateral on deposit); and

        Pursuant to authority in the Participant Agreement and 
            Rulebook, FTX's automated systems perform the following 
            actions sequentially in near-real-time, at a frequency 
            determined by the Chief Risk Officer.

------------------------------------------------------------------------
                           Sub-Paths through
    Waterfall Layer              Layer                 Methodology
------------------------------------------------------------------------
Liquidation Orders       N/A                        The first step is to
                                                 carefully close
                                                 positions with rate-
                                                 limited liquidation
                                                 orders in the market.
                                                 An account begins to be
                                                 liquidated if the total
                                                 account value divided
                                                 by the total position
                                                 notional, which is the
                                                 position size
                                                 multiplied by its
                                                 market price (``Margin
                                                 Fraction''), is less
                                                 than its maintenance
                                                 margin.
                                                    During the
                                                 liquidation process,
                                                 users may not send
                                                 orders using their
                                                 account.
                                                    To close positions
                                                 in the market while
                                                 minimizing impact, the
                                                 liquidation engine will
                                                 periodically send
                                                 standard limit orders
                                                 on behalf of the
                                                 liquidated account.
                                                 Approximately every
                                                 Liquidation Delay
                                                 Period seconds
                                                 (currently 6 seconds),
                                                 the liquidation engine
                                                 sends the Liquidation
                                                 Percentage (currently
                                                 10 percent) of the
                                                 position size as an
                                                 order on the market.
                                                    The speed of the
                                                 liquidation process
                                                 depends on the size of
                                                 the position. For small
                                                 positions, the
                                                 Clearinghouse will aim
                                                 to fully close the
                                                 position in about a
                                                 minute.
                                                    If partially
                                                 liquidating the account
                                                 causes its Margin
                                                 Fraction to rise above
                                                 the maintenance margin
                                                 threshold, the
                                                 liquidation process
                                                 terminates. Otherwise,
                                                 the process continues.
Match-Up of Defaulting   N/A                        Defaulting open
 Open Interest                                   interest is matched to
                                                 counterparties using
                                                 one or both of the
                                                 following methods.
                                                 Typically, a
                                                 liquidation will
                                                 proceed directly
                                                 through the Primary BLP
                                                 path, skip the
                                                 secondary BLP path, and
                                                 if necessary, proceed
                                                 to the Guaranty fund.
                                                    The backstop
                                                 liquidity provider
                                                 system is activated
                                                 when an account's
                                                 margin drops below the
                                                 minimum Margin Fraction
                                                 needed to avoid being
                                                 closed against the
                                                 backstop liquidity
                                                 provider (``Auto-Close
                                                 Margin Fraction'' or
                                                 ``ACMF''), and
                                                 therefore closer to
                                                 bankruptcy.
                                                    In this step, the
                                                 account will have its
                                                 defaulting positions
                                                 closed down at the
                                                 bankruptcy price (the
                                                 market price that would
                                                 set an account value at
                                                 zero, or ``Zero
                                                 Price''), and the
                                                 positions will be
                                                 transferred to the
                                                 backstop liquidity
                                                 provider.
                                                    If the account's
                                                 value is at or above
                                                 the Zero Price, the
                                                 liquidation terminates
                                                 here. If account's
                                                 value is below the Zero
                                                 Price, the waterfall
                                                 will continue to the
                                                 next step, in which the
                                                 Guaranty fund steps in
                                                 to bring the account's
                                                 value back to the Zero
                                                 Price.
                         Primary Backstop           The Primary BLPs
                          Liquidity Providers    sign up to the Backstop
                          (BLPs)                 Liquidity Provider
                                                 Program voluntarily and
                                                 should ordinarily be
                                                 able to absorb all
                                                 assignment of open
                                                 interest from
                                                 defaulting positions,
                                                 without resorting to
                                                 Secondary BLPs.
                                                    Primary Backstop
                                                 Liquidity Providers
                                                 (``BLPs'') have a
                                                 maximum capacity per
                                                 minute and per hour and
                                                 the position is closed
                                                 against BLPs in
                                                 proportion to the
                                                 remaining capacity.
                         Secondary BLPs             Secondary BLPs will
                          (subpath, not          only have their
                          sublayer)              positions auto-closed
                                                 if an account hits the
                                                 Auto-Close Margin
                                                 Fraction and the
                                                 Primary BLPs are out of
                                                 capacity.
                                                    The Secondary BLP is
                                                 an alternate route to
                                                 the Guaranty Fund. As
                                                 long as BLP capacity
                                                 remains, the Secondary
                                                 BLP path will be
                                                 skipped entirely, and
                                                 the waterfall will
                                                 proceed downwards to
                                                 the Guaranty Fund and
                                                 beyond without hitting
                                                 the Secondary BLPs.
                                                    Any remaining open
                                                 interest not assigned
                                                 to a takeover
                                                 counterparty is
                                                 assigned to
                                                 participants with large
                                                 opposing positions
                                                 (starting with the top
                                                 10 opposing positions,
                                                 more if their total is
                                                 insufficient), in
                                                 proportion to their
                                                 position sizes.
Guaranty Fund            N/A                        If an account's
                                                 value hits the Zero
                                                 Price, the Guaranty
                                                 fund will pay out to
                                                 bring the account's
                                                 balance back to 0.
                                                    In other words, the
                                                 Guaranty Fund pays out
                                                 the difference between
                                                 the current account
                                                 value and the
                                                 bankruptcy price.
Settlement Variation                                If the account is
 Margin Gain                                     bankrupt and the
 Haircutting                                     Guaranty Fund is empty,
                                                 the remaining losses
                                                 are taken from
                                                 positions with positive
                                                 unrealized Profit and
                                                 Loss (proportionally to
                                                 Profit and Loss).
Full Tear-Up/Bankruptcy                             The Clearinghouse is
                                                 bankrupt. Positions are
                                                 torn up after
                                                 consultations with the
                                                 Risk Management
                                                 Committee, the Board of
                                                 Directors, and
                                                 regulators as
                                                 appropriate.
------------------------------------------------------------------------

      Actions taken by a clearing member or other events that would put 
            a clearing member on Applicant's ``watch list'' or similar 
            device.

        FTX operates an entirely collateral-based margin system. 
            However, the clearing house develops and maintains a 
            sophisticated review and internal assessment and monitoring 
            process for each participant.
        Additionally, the clearing house maintains a watch list for 
            existing participants that engage in suspicious market 
            activity, repeated or excessive liquidation in excess of 
            the risk monitoring program, where the clearing house has 
            the discretion to increase margin requirements, impose risk 
            reducing transactions, and suspense trading and clearing.

    d. Process to address shortfalls--Applicant must describe or 
otherwise document:

  (1)  Procedures for the prompt application of Applicant and/or 
            clearing member financial resources to address monetary 
            shortfalls resulting from a default;

        FTX's automated systems immediately apply guaranty fund 
            resources via internal ledger transactions whenever there 
            is a need to address monetary shortfalls resulting from a 
            default.

  (2)  How Applicant will make publicly available its default rules 
            including a description of the priority of application of 
            financial resources in the event of default (i.e., the 
            ``waterfall''); and

        FTX will make publicly available its default rules available 
            via its Rulebook, which is posted on its website. FTX will 
            make publicly available a description of the default 
            waterfall on its website.

  (3)  How Applicant will take timely action to contain losses and 
            liquidity pressures and to continue to meet each obligation 
            of Applicant.

        FTX's automated systems act upon underwater positions in real-
            time, without the need for human intervention. This 
            approach significantly reduces the risk of runaway losses 
            versus credit-based systems, where losses can accumulate 
            for much longer periods of time, and where action to 
            contain losses is manual and therefore not timely.

    e. Use of cross-margin programs--Describe or otherwise document, as 
applicable, how cross-margining programs will provide for fair and 
efficient means of covering losses in the event of a default of any 
clearing member participating in the program.

    While FTX would like to offer cross-margining programs in the 
future, FTX does not currently offer cross-margining programs.

    f. Customer priority rule--Describe or otherwise document rules and 
procedures regarding priority of customer accounts over proprietary 
accounts of defaulting clearing members and, where applicable, 
specifically in the context of specialized margin reduction programs 
such as cross-margining or common banking arrangements with other 
derivatives clearing organizations, clearing agencies, financial market 
utilities or foreign entities that perform similar functions.

    FTX does not currently deal with clearing members who carry 
customer accounts, only direct clearing members. FTX does not currently 
offer cross-margining or other banking arrangements with other 
derivatives clearing organizations, clearing agencies, financial market 
utilities or foreign entities that perform similar functions.
    The Clearinghouse holds clearing member funds separate from the 
operating funds of the Clearinghouse.
Item 07_LedgerX LLC d/b/a FTX US Derivatives Rules
version 21.[__]

Draft--December 6, 2021

Chapter 1  Definitions

    Rule 1.1  Definitions
    Rule 1.2  Rules of Construction

Chapter 2 Company Governance

    Rule 2.1  Ownership
    Rule 2.2  Board
    Rule 2.3  Officers
    Rule 2.4  Eligibility and Fitness
    Rule 2.5  LedgerPrime
    Rule 2.6  Committees and Subcommittees
    Rule 2.7  Regulatory Oversight Committee
    Rule 2.8  Risk Management Committee
    Rule 2.9  Participant Committee
    Rule 2.10  Nominating Committee
    Rule 2.11  Disciplinary Panel and Appeals Committee
    Rule 2.12  Emergency Rules
    Rule 2.13  Conflicts of Interest
    Rule 2.14  Recordkeeping
    Rule 2.15  Information-Sharing Agreements
    Rule 2.16  Recordkeeping and Reporting Requirements
    Rule 2.17  Public Information

Chapter 3  Participants

    Rule 3.1  Jurisdiction, Applicability of Rules
    Rule 3.2  Participants--Applications, Agreements, Eligibility 
Criteria, Classifications and Privileges
    Rule 3.3  Participant Obligations
    Rule 3.4  Customer Account Requirements for FCM Participants
    Rule 3.5  Customer Funds Maintained With the Company
    Rule 3.6  Dues, Fees and Expenses Payable by Participants
    Rule 3.7  Recording of Communications
    Rule 3.8  Independent Software Vendors
    Rule 3.9  Participant Accounts and Customer Accounts
    Rule 3.10  Withdrawal of Participant

Chapter 4  Liquidity Providers

    Rule 4.1  Application and Agreement
    Rule 4.2  Appointment
    Rule 4.3  Benefits
    Rule 4.4  Obligations

Chapter 5  Method for Trading Company Contracts

    Rule 5.1  User IDs
    Rule 5.2  Order Entry and Audit Trail
    Rule 5.3  Order Type
    Rule 5.4  Trading Contracts on Behalf of Customers
    Rule 5.5  Execution Methods
    Rule 5.6  Trading Hours
    Rule 5.7  Block Trades
    Rule 5.8  Exchange for Physical Transactions

Chapter 6  Clearing and Delivery

    Rule 6.1  Clearance and Substitution
    Rule 6.2  Settlement of Company Contracts
    Rule 6.3  Deposit Procedures
    Rule 6.4  Withdrawal Procedures
    Rule 6.5  Deliveries
    Rule 6.6  Reconciliation
    Rule 6.7  Swap Data Reporting

Chapter 7  Margin

    Rule 7.1  Initial Margin, Variation Margin, and Maintenance Margin 
Requirements
    Rule 7.2  Collateral
    Rule 7.3  Segregation of Participant Funds
    Rule 7.4  Concentration Limits

Chapter 8  Business Conduct and Trading Practices

    Rule 8.1  Scope
    Rule 8.2  Procedures
    Rule 8.3  Prohibited Trading Activity; Prohibitions on Fictitious 
Transactions, Fraudulent Activity and Manipulation
    Rule 8.4  Prohibition on Money Passing, Pre-Arranged, Pre-
Negotiated and Non-Competitive Trades
    Rule 8.5  Acts Detrimental to the Welfare or Reputation of the 
Company Prohibited
    Rule 8.6  Misuse of the Platform
    Rule 8.7  Supervision; Information Sharing
    Rule 8.8  Business Conduct
    Rule 8.9  Trading Practices
    Rule 8.10  Customer Order Priority
    Rule 8.11  Trading Against Customer Orders
    Rule 8.12  Prohibition on Withholding of Customer Orders
    Rule 8.13  Execution Priority
    Rule 8.14  Crossing Orders
    Rule 8.15  Position Limits
    Rule 8.16  Position Accountability Levels
    Rule 8.17  Aggregation of Positions
    Rule 8.18  Large Trader Reporting
    Rule 8.19  Compliance

Chapter 9  Discipline and Enforcement

    Rule 9.1  General
    Rule 9.2  Investigations
    Rule 9.3  Disciplinary Panel
    Rule 9.4  Notice of Charges
    Rule 9.5  Contesting and Appeals
    Rule 9.6  Settlements
    Rule 9.7  Notice of Decision
    Rule 9.8  Penalties
    Rule 9.9  Summary Suspension
    Rule 9.10  Reporting Violations to the Commission

Chapter 10  Arbitration

    Rule 10.1  In General
    Rule 10.2  Fair and Equitable Arbitration Procedures
    Rule 10.3  Withdrawal of Arbitration Claim
    Rule 10.4  Penalties
    Rule 10.5  Arbitration Panel

Chapter 11  Miscellaneous

    Rule 11.1  Adjustments Necessitated by Material Changes in the 
Underlying
    Rule 11.2  Prohibition on Trading by Company Personnel; Misuse of 
Material, Non-Public Information
    Rule 11.3  Property Rights
    Rule 11.4  Signatures
    Rule 11.5  Governing Law
    Rule 11.6  Legal Proceedings
    Rule 11.7  Limitation of Liability; No Warranties
    Rule 11.8  Error Trade Policy
    Rule 11.9  Company Contacts
    Rule 11.10  Reasonability Levels
    Rule 11.11  No Cancellation Ranges
    Rule 11.12  Amendments to the Rules
    Rule 11.13  Transfer of Trades
    Rule 11.14  Digital Currency Fork Policy

Chapter 12  Company Contract Specifications

    Rule 12.1  USD/BTC Options
    Rule 12.2  Day-Ahead USD/BTC Swaps
    Rule 12.3  USD/BTC Weekly Options
    Rule 12.4  Day-Ahead USD/BTC Options
    Rule 12.5  BTC Block Height Options
    Rule 12.6  Monthly USD/BTC Mini Options
    Rule 12.7  Day-Ahead USD/BTC Mini Swaps
    Rule 12.8  Weekly USD/BTC Mini Options
    Rule 12.9  Day-Ahead USD/BTC Futures
    Rule 12.10  Weekly USD/BTC Futures
    Rule 12.11  Monthly USD/BTC Futures
    Rule 12.12  Day-Ahead USD/BTC Mini Futures
    Rule 12.13  Weekly USD/BTC Mini Futures
    Rule 12.14  Monthly USD/BTC Mini Futures
    Rule 12.15  USD/ETH Deci Options
    Rule 12.16  USD/ETH Deci Futures
    Rule 12.17  Day-Ahead USD/ETH Deci Swaps

Chapter 13  Clearing Services for Kalshi

    Rule 13.1  Clearing Services for Kalshi
    Rule 13.2  Clearance and Substitution of Kalshi Binary Contracts

          Rule 13.2.1  Clearance and Substitution
          Rule 13.2.2  Settlement of Kalshi Binary Contracts
          Rule 13.2.3  Deposit Procedures

    Rule 13.3  Margin for Kalshi Binary Contracts
    Rule 13.4  Clearing House Systems and Collateral
    Rule 13.5  LedgerX API
    Rule 13.6  Other Rules That Are Applicable To Kalshi Participants
    Rule 13.7  Other Rules That Are Not Applicable To Kalshi 
Participants
    Rule 13.8  Liability
    Rule 13.9  Limitation of Liability; No Warranties for Clearing 
Services
    Rule 13.10  Approved Kalshi Binary Contract Specifications

Chapter 14  Default

    Rule 14.1  Defaults
    Rule 14.2  Liquidation or Termination or Suspension of Participant
    Rule 14.3  Method of Closing Out Open Company Contracts
    Rule 14.4  Amounts Payable to the Company
    Rule 14.5  Insolvency of the Company
    Rule 14.6  Default of the Company
    Rule 14.7  Wind-Up of Company Contracts
    Rule 14.8  Netting; Offset
    Rule 14.9  Valuation
Rules of LedgerX LLC
Introduction
    The Commodity Exchange Act requires that LedgerX LLC comply with 
the core principles set forth in the Commodity Exchange Act, as 
amended, and the regulations, rules and orders of the Commodity Futures 
Trading Commission, and establish, monitor and enforce its Rules 
relating to its business as a Swap Execution Facility (``SEF''), 
Designated Contract Market (``DCM''), and Derivatives Clearing 
Organization (``DCO''). The following Rules of LedgerX LLC pertain to 
the trading of Company Contracts on the Company DCM and the Company 
SEF, the clearing of Company Contracts on the Company DCO, the clearing 
of other Contracts as a provider of Clearing Services, and the rights 
and Obligations of Participants in connection with such activities.
Chapter 1  Definitions
Rule 1.1  Definitions
    As used in these Rules, the following terms have the following 
respective meanings:

          Affiliate: A Person who, directly or indirectly, controls, is 
        controlled by, or is under common control with another Person.
          Appeals Committee: A committee of the Board composed of 
        Directors pursuant to Rule 2.11, and that acts in an 
        adjudicative role and fulfills various adjudicative 
        responsibilities and duties as described in Chapter 9.
          Applicable Law: With respect to any Person, any statute, law, 
        regulation, rule or ordinance of any government, governmental 
        or self-regulatory authority applicable to such Person, 
        including without limitation the CEA and CFTC Regulations and 
        any laws and regulations relating to economic or trade 
        sanctions.
          As soon as technologically practicable: As soon as possible, 
        taking into consideration the prevalence, implementation and 
        use of technology by comparable market participants.
          Authorized Representative: With respect to any Participant 
        that is an entity, an officer of such entity who is responsible 
        for supervising all activities of the Participant, its 
        Authorized User(s) and its employees relating to Transactions, 
        and for providing information regarding the Participant to the 
        Company upon request of the Company.
          Authorized User: A natural person who is either employed by 
        or is an agent of a Participant and who is authorized by the 
        Participant to trade on the Company DCM and/or the Company SEF 
        on behalf of the Participant, and in the case of FCM 
        Participants, intermediate Orders and clear Transactions on 
        behalf of Customers, provided that the Participant maintains 
        supervisory authority over such individual's trading 
        activities, but Authorized Users shall not include (i) 
        employees or agents of Customers or (ii) Customers that are 
        natural persons.
          Binary Contract means an options contract with two positions 
        which settle to an outcome of ``YES'' or ``NO,'' rather than 
        settling to a price or value.
          Block Trade: A privately negotiated transaction effected away 
        from the Platform in accordance with Rule 5.7.
          Board: The Board of Directors of the Company.
          Bitcoin: A Digital Currency.
          Business Day: Any day on which the Company DCM, the Company 
        SEF, or another DCM or SEF that clears trades through the 
        Company DCO is open for trading, as the context requires.
          CEA: The Commodity Exchange Act, as amended.
          CFTC Regulations: The regulations of the CFTC, as in effect 
        from time to time, including any Commission-issued orders or 
        interpretive or no-action letters.
          Chief Compliance Officer: The individual appointed by the 
        Board to serve as the Company's chief compliance officer.
          Chief Executive Officer: The individual appointed by the 
        Board to serve as the Company's chief executive officer.
          Chief Risk Officer: The individual appointed by the Board to 
        serve as the Company's chief risk officer.
          Cleared Swaps Customer: As defined in  22.1 of CFTC 
        Regulations.
          Cleared Swaps Customer Account: As defined in  22.1 of CFTC 
        Regulations and, for purposes of these Rules, shall include an 
        account established and maintained for a Cleared Swaps Customer 
        by the Company on the Company's books and records to which a 
        financial asset is or may be credited in accordance with these 
        Rules and such other procedures as the Company may implement 
        from time to time.
          Collateral Account: With respect to: (1) Participants, 
        including an FCM Participant's Proprietary Accounts, each 
        Participant's and FCM Participant's Participant Account and an 
        account opened and maintained by the Company at a Settlement 
        Bank (a) to which a Participant or FCM Participant transfers 
        funds and (b) from which the Company is authorized to debit 
        fees and margin or option premium, and debit or credit 
        settlement payments, as applicable; and (2) FCM Participants, 
        each FCM Participant's Customer Account and an account opened 
        and maintained by the Company at a Settlement Bank (a) to which 
        an FCM Participant transfers Customer Funds and (b) from which 
        the Company is authorized to debit fees and margin or option 
        premium, and debit or credit settlement payments, as 
        applicable.
          Cleared Swaps Customer Collateral: As defined in  22.1 of 
        CFTC Regulations.
          Cleared Swaps Proprietary Account: As defined in  22.1 of 
        CFTC Regulations.
          Clearing House means the Company, in its capacity as a DCO.
          Clearing Services means the provision by the Clearing House 
        to another registered DCM that is unaffiliated with the Company 
        of fully collateralized clearing, settlement and ancillary 
        services as set forth in Chapter 13.
          Clearing Privileges: Any right granted by the Company to a 
        Participant to clear Company Contracts or Kalshi Binary 
        Contracts.
          Commission or CFTC: The U.S. Commodity Futures Trading 
        Commission.
          Company: LedgerX LLC. For the avoidance of doubt, references 
        to the ``Company'' generally shall refer to the Company in its 
        capacity as a DCM, SEF, and/or DCO, as the context requires.
          Company Contract: Any derivative contract, including a 
        futures contract, option contract or swap agreement, based on 
        one or more Underlying and listed for trading on the Company 
        DCM or the Company SEF or subject to the Rules.
          Company Contract Specifications: The terms and conditions of 
        a Company Contract as initially published in the Rules and 
        posted on the Website and thereafter as published in the Rules, 
        posted on the Website and sent in Participant Notices.
          Company DCM: The Designated Contract Market of the Company.
          Company DCO: The Derivatives Clearing Organization of the 
        Company.
          Company Official: A Director, Officer, committee member, or 
        such other individual as the Board may designate from time to 
        time.
          Company Personnel: A Company employee, consultant of the 
        Company, contractor of the Company or agent of the Company.
          Company Representative: Any Company Official, Company 
        employee, consultant of the Company, contractor of the Company 
        or agent of the Company.
          Company SEF: The Swap Execution Facility of the Company.
          Company Telecommunication Systems: The Company's designated 
        telecommunications systems (e.g., telephone and instant 
        messaging) used for pre-trade communications and noncompetitive 
        executions permitted in accordance with these Rules, access to 
        which is provided to Participants by the Company.
          Compliance Department: The department, reporting to the Chief 
        Compliance Officer, that is responsible for compliance, 
        investigations and disciplinary proceedings.
          Contract means any derivative contract, including a futures 
        contract, Binary Contract, option contract or swap agreement, 
        based on one or more Underlying and for which the Clearing 
        House provides Clearing Services subject to the Rules.
          Critical Security Parameters or CSPs: Company-assigned 
        private authentication tokens such as automated passwords and 
        cryptographic keys used to access the Platform together with 
        the User ID for security purposes.
          Customer: (i) A Participant that has authorized an Executing 
        Participant to execute Orders on behalf of such Participant on 
        or subject to the Rules of the Company, provided that such 
        Participant shall not be deemed to be a Customer with respect 
        to the clearing or settlement of its Transactions or its margin 
        or option premium associated with such Transaction; (ii) a 
        Cleared Swaps Customer; (iii) a Futures Customer; or (iv) both 
        an Executing Participant's Customer and a Cleared Swaps 
        Customer or a Futures Customer, in each case as the context 
        requires.
          Customer Account: A Cleared Swaps Customer Account or a 
        Customer Segregated Account, as the context requires.
          Customer Funds: As defined in CFTC Regulation 1.3.
          Customer ID: The identifying code an FCM Participant assigns 
        to a Customer and includes in each Customer Order to identify 
        the individual customer on whose behalf the FCM Participant is 
        exercising Trading Privileges and/or Clearing Privileges.
          Customer Segregated Account: A ``futures account,'' as 
        defined in CFTC Regulation 1.3, and, for purposes of these 
        Rules, shall include an account established and maintained for 
        a Futures Customer by the Company on the Company's books and 
        records to which a financial asset is or may be credited in 
        accordance with these Rules and such other procedures as the 
        Company may implement from time to time.
          Customer Type Indicator Code or CTI: A symbol that indicates 
        the buying and selling customer types, as required by CFTC 
        Regulation 1.35(g).
          Defaulted Obligation: For any Participant, all amounts owing 
        by the Defaulting Participant, as well as any amounts owing by 
        the Company arising out of or in any way relating to the 
        Defaulting Participant's default.
          Defaulting Participant: A Participant to whom a default 
        occurs pursuant to Rule 7.1 or 14.1.
          Derivatives Clearing Organization or DCO: As set forth in 
        Section 1a(15) of the CEA and registered with the Commission 
        pursuant to Section 5b of the CEA and in accordance with the 
        provisions of Part 39 of CFTC Regulations.
          Designated Contract Market or DCM: A board of trade 
        designated by the CFTC as a contract market under Section 5 of 
        the CEA and in accordance with the provisions of Part 38 of 
        CFTC Regulations.
          Digital Currency: A medium of exchange stored and transferred 
        electronically, including, but not limited to, Bitcoin and 
        Ether.
          Director: A member of the Board.
          Disciplinary Action: Any inquiry, investigation, disciplinary 
        proceeding, appeal from a disciplinary proceeding, summary 
        imposition of fines, summary suspension or other summary 
        action.
          Disciplinary Panel: A panel appointed by the Regulatory 
        Oversight Committee pursuant to Rule 2.11 to act in an 
        adjudicative role and fulfill various adjudicative 
        responsibilities and duties as described in Chapter 9.
          Discretionary Order: As defined in Rule 8.10.
          EFP transaction: An exchange for physical transaction 
        effected away from the Platform in accordance with Rule 5.8.
          Eligible Contract Participant or ECP: As set forth in Section 
        1a(18) of the CEA and as further defined in CFTC Regulation 
        1.3(m).
          Emergency: Any occurrence or circumstance which, in the 
        opinion of the Board, the Chief Executive Officer, the Chief 
        Compliance Officer, or a designee duly authorized to issue such 
        an opinion, requires immediate action, and which threatens, or 
        may threaten, such things as the fair and orderly trading in, 
        the liquidation, settlement, delivery, or the integrity of, any 
        Company Contract, or the timely collection and payment of funds 
        in connection with clearing and settlement by the Company, 
        including without limitation:

                  a. any circumstance that may materially affect the 
                performance of any Company Contract, including without 
                limitation failure of the payment system, the 
                bankruptcy or insolvency of any Participant, or any 
                actual, attempted or threatened theft or forgery of, or 
                other interference with, the Underlying or delivery or 
                transfer thereof;
                  b. any action taken by any United States or foreign 
                regulatory, self-regulatory, judicial, arbitral, or 
                governmental (whether national, state or municipal) or 
                quasi-governmental authority, or any agency, 
                department, instrumentality, or subdivision thereof; or 
                other Person exercising, or entitled to exercise any 
                administrative, executive, judicial, legislative, 
                police, regulatory or taxing authority or power; or any 
                other entity registered with the Commission, board of 
                trade, market or facility which may have a direct 
                impact on trading on the Company or clearing and 
                settlement of any Company Contract;
                  c. any actual, attempted or threatened corner, 
                squeeze, congestion, or undue concentration of 
                positions in any Company Contract;
                  d. any other circumstance that may have a severe, 
                adverse effect upon the functioning of the Company DCM, 
                the Company SEF, or the Company DCO; or
                  e. any manipulative or attempted manipulative 
                activity.

          Emergency Action: An action deemed to be necessary or 
        appropriate to respond to an Emergency and taken pursuant to 
        Rule 2.12.
          Emergency Rules: Procedures or rules adopted in response to 
        an Emergency pursuant to Rule 2.12.
          Executing Participant: A Participant that has executed a 
        Participant Application and Agreement and is authorized to 
        enter into Orders and Transactions for its own account and is 
        authorized to execute Orders as agent for other Participants 
        and is registered with the Commission as a futures commission 
        merchant, introducing broker, commodity pool operator or 
        commodity trading advisor, or is exempt from registration as 
        such.
          FCM Participant: A Participant that is registered with the 
        Commission as a Futures Commission Merchant and as a swap firm 
        and to whom the Company has granted Trading Privileges and 
        Clearing Privileges with respect to its Customer and 
        Proprietary Account, as applicable.
          Futures Commission Merchant or FCM: As defined in Section 
        1a(28) of the CEA and in CFTC Regulation 1.3(p).
          Futures Customer: As defined in CFTC Regulation 1.3.
          Futures Proprietary Account: A ``proprietary account,'' as 
        defined in CFTC Regulation 1.3.
          Independent Software Vendor or ISV: A Person that makes 
        available to Participants a system or platform offering smart 
        order routing, front-end trading applications, aggregation, or 
        a combination of the foregoing, but that does not provide 
        Participants the ability to effect Swaps on such system or 
        platform.
          Initial Margin is the amount the Company estimates it 
        requires from a Participant to protect the Company from 
        exposures to future price fluctuations in the Participant's 
        Company Contract during the interval between the time the 
        Participant enters into the position and the time within which 
        the Company estimates it would be able to liquidate the 
        Participant's Company Contract with at least 99 percent 
        confidence.
          Kalshi Binary Contract means a Binary Contract that is: 
        approved by the Clearing House for Clearing Services pursuant 
        to the Clearing House Rules; listed by Kalshi for trading by 
        Kalshi Participants; entered into between two Kalshi 
        Participants; and fully collateralized when entered into on 
        Kalshi.
          Kalshi Binary Contract Specifications means the Kalshi Binary 
        Contracts specifications set forth in Chapter [13].
          Kalshi Participant means a member of Kalshi that has 
        submitted the applicable Participant Application and Agreement 
        and has been approved by the Clearing House to submit Kalshi 
        Binary Contracts to Clearing House for Clearing Services, which 
        approval has not been revoked or withdrawn, and maintains a 
        Collateral Account and Participant Account with the Clearing 
        House.
          KalshiEX, LLC or Kalshi shall mean KalshiEX, LLC, which is a 
        DCM registered with the CFTC for which the Clearing House 
        provides Clearing Services as specified in Chapter 13 of these 
        Rules.
          LedgerPrime: As defined in Rule 2.5.
          Legal Entity Identifier or LEI: The identifying code that is 
        required of each counterparty to any swap subject to the CFTC's 
        jurisdiction and that is used in all recordkeeping and all swap 
        data reporting pursuant to Part 45 of CFTC Regulations, 
        including any predecessor identifiers and including the Global 
        Markets Entity Identifier or GMEI, which is the current 
        identifier required by the CFTC until the establishment of a 
        global Legal Entity Identifier system. LEIs must be renewed on 
        an annual basis.
          Life Cycle Event: Any event that would result in either a 
        change to a primary economic term of a Swap or to any primary 
        economic terms data previously reported to a Swap Data 
        Repository in connection with a Swap. Examples of such events 
        include, without limitation, a counterparty change resulting 
        from an assignment or novation; a partial or full termination 
        of the Swap; a change to the end date for the Swap; a change in 
        the cash flows or rates originally reported; availability of a 
        LEI for a Swap counterparty previously identified by name or by 
        some other identifier; or a corporate action affecting a 
        security or securities on which the swap is based (e.g., a 
        merger, dividend, stock split, or bankruptcy). Life Cycle Event 
        data means all of the data elements necessary to fully report 
        any Life Cycle Event.
          Liquidity Provider: As defined in Chapter 4.
          Liquidity Provider Agreement: An agreement between the 
        Company and a Liquidity Provider that must be executed for a 
        Participant to act as a Liquidity Provider.
          Maintenance Margin is the minimum positive amount that must 
        be maintained in the Participant's Company account to protect 
        the Company from exposures to risk from the Participant's 
        Company Contract(s).
          Market Participant Director: A Director who has been found by 
        the Board to be an authorized representative of a Participant 
        and suitable to be a Director pursuant to Section 5b(c)(2)(Q) 
        of the CEA.
          Matching Engine: The set of algorithms through which Orders 
        are matched.
          Material Relationship: As set forth in Rule 2.2F.
          NFA: The National Futures Association.
          Nominating Committee: The committee of the Board constituted 
        in accordance with Rule 2.10.
          Notice of Charges: As set forth in Rule 9.4.
          Novation: The process by which a party to a Contract entered 
        into on the Company SEF, Company DCM, or another SEF or DCM 
        that clears through the Company DCO transfers all of its 
        rights, liabilities, duties and obligations under the Contract 
        to a new legal party other than the counterparty to the 
        original Contract. The transferee accepts all of the 
        transferor's rights, liabilities, duties and obligations under 
        the original Contract. A Novation is valid as long as the 
        transferor and the remaining party to the original Contract are 
        given notice, and the transferor, transferee and remaining 
        party to the original Contract consent to the transfer.
          Obligation: Any Rule, order or procedure issued by the 
        Company, including a Participant Notice or other requirement 
        implemented by the Company under the Rules (including each term 
        and condition of a Company Contract), as well as any 
        contractual obligations between, on the one hand, a Person, and 
        on the other hand, the Company, and any Order or Transaction 
        entered into by a Participant or its Authorized User.
          OFAC: The Office of Foreign Assets Control of the U.S. 
        Department of the Treasury.
          Officer: An individual as set forth in Rule 2.3.
          Operating Agreement: The Limited Liability Company Operating 
        Agreement of the Company, as it may be modified from time to 
        time.
          Order: Either a bid or an offer for a Company Contract 
        entered on the Platform or subject to the Rules.
          Order for Relief: The filing of a petition in bankruptcy in a 
        voluntary case and the adjudication of bankruptcy in an 
        involuntary case.
          Oversight Panel: As defined in CFTC Regulation 1.69,
          Participant: A Person that has executed the Participant 
        Application and Agreement and is authorized to enter into 
        Orders and Transactions for its own account. As used in the 
        Rules, the term Participant includes an FCM Participant, an 
        Executing Participant and a Liquidity Provider unless the 
        context requires otherwise. A Participant must be an ECP to be 
        eligible to enter into Transactions on the Company SEF or 
        another SEF that clears through the Company DCO, or Block 
        Trades on the Company DCM or on another DCM. A Participant is 
        not required to be an ECP to be eligible to enter into EFP and 
        central limit order book transactions on the Company DCM or on 
        another DCM. References to the term Participant in the Rules 
        includes a Kalshi Participant, but only with respect to the 
        provision of Clearing Services by the Clearing House.
          Participant Account: An account established and maintained 
        for a Participant by the Company on its books and records to 
        which a financial asset is or may be credited in accordance 
        with these Rules and such other procedures as the Company may 
        implement from time to time.
          Participant Application and Agreement: An application 
        submitted by an applicant for Participant status and an 
        agreement between the Company and a Participant that must be 
        executed for a Participant to gain access to the Company SEF, 
        Company DCM and/or the Company DCO for the entry and execution 
        of Orders and/or clearance of Transactions.
          Participant Committee: The committee of the Board constituted 
        in accordance with Rule 2.9.
          Participant Notice: A communication sent by or on behalf of 
        the Company to all Participants in accordance with Rule 2.17.
          Participant Portal: The vehicle through which Participants 
        send and receive messages to or from the Company and other 
        Participants, update account and contact information, and 
        submit deposit and withdrawal notifications.
          Permitted Transaction: Any transaction involving a Swap that 
        is not subject to the trade execution requirement in Section 
        2(h)(8) of the CEA.
          Person: As defined in Section 1a(38) of the CEA and in CFTC 
        Regulation 1.3(u).
          Platform: The electronic trading facility operated by the 
        Company to provide Participants with the ability to execute 
        Orders and Transactions from the interaction of multiple bids 
        and multiple offers within a pre-determined, non-discretionary 
        automated trade matching and execution algorithm.
          Position Limit: The maximum number of positions, either net 
        long or net short, in one Series or a combination of various 
        Series with the same Underlying that may be held or controlled 
        by a Participant as prescribed by the Company or the 
        Commission.
          Proprietary Account: A Cleared Swaps Proprietary Account or a 
        Futures Proprietary Account, as the context requires.
          Proprietary Data and Personal Information: Information 
        identifying a natural person (e.g., name, e-mail address) or 
        other data proprietary to any Person that discloses such 
        Person's trade secrets, market positions and/or other business 
        transactions, excluding Transaction Data.
          Proprietary Information: As set forth in Rule 11.3A.
          Public Director: A Director who has been found by the Board 
        to have no Material Relationship with the Company in accordance 
        with Rule 2.2F.
          Public dissemination and publicly disseminate: To publish and 
        make available Swap transaction and pricing data in a non-
        discriminatory manner, through the Internet or other electronic 
        data feed that is widely published (in a manner that is freely 
        available and readily accessible to the public) and in machine-
        readable electronic format.
          Regulatory Agency: Any government body, including the 
        Commission, and any organization, whether domestic or foreign, 
        granted authority under statutory or regulatory provisions to 
        regulate its own activities and the activities of its members, 
        and includes LedgerX LLC, any other clearing organization or 
        contract market, and the NFA.
          Regulatory Oversight Committee: The committee of the Board 
        constituted in accordance with Rule 2.7.
          Required Swap Continuation Data: As set forth in CFTC 
        Regulation 45.1.
          Required Swap Creation Data: As set forth in CFTC Regulation 
        45.1.
          Required Transaction: Any transaction involving a Swap that 
        is subject to the trade execution requirement in Section 
        2(h)(8) of the CEA.
          Regulatory Swap Data: Includes (i) Swap Transaction and 
        Pricing Data, (ii) Required Swap Creation Data and (iii) 
        Required Swap Continuation Data.
          Reporting Counterparty: As set forth in Part 45 of CFTC 
        Regulations and means the Participant that is designated as the 
        Reporting Counterparty pursuant to Rule 5.1.
          Respondent: Any Person subject to a Disciplinary Action and 
        such Person's legal counsel or representative.
          Risk Management Committee: The committee appointed by the 
        Board and constituted in accordance with Rule 2.8.
          Rules: These rules of the Company, as in effect and as may be 
        amended from time to time.
          Self-Regulatory Organization: As set forth in CFTC Regulation 
        1.3(ee) and includes a DCO.
          Series: All Company Contracts having identical terms, 
        including Settlement Date and the value or range of values of 
        an Underlying or category of asset class.
          Settlement Bank: A depository approved by the Company as an 
        acceptable location for depositing Participant funds or 
        Customer Funds, as applicable.
          Settlement Bank Business Day: A day a Settlement Bank is open 
        for business.
          Settlement Date: A Business Day on which: (1) a Participant 
        properly tenders to the Company an exercise notice on an option 
        contract, resulting in the delivery of the Underlying and 
        payment on the next Settlement Bank Business Day following the 
        exercise; (2) an open futures contract expires; or (3) the 
        Company automatically closes out and settles a Participant's 
        Company Contracts that offset one another. A Company Contract 
        that is an option and that has not been exercised on or before 
        the last trading day will expire with no value.
          Swap: A Company Contract that is a swap as defined in Section 
        1a(47) of the CEA and as further defined by CFTC Regulation 
        1.3(xxx), and shall include Company Contracts that are options 
        as set forth in the Company Contract Specifications.
          Swap Data Repository or SDR: As set forth in Section 1a(48) 
        of the CEA and registered with the Commission pursuant to 
        Section 21 of the CEA and in accordance with Part 49 of CFTC 
        Regulations.
          Swap Execution Facility or SEF: As set forth in Section 
        1a(50) of the CEA and registered with the Commission pursuant 
        to Section 5h of the CEA and in accordance with the provisions 
        of Part 37 of CFTC Regulations.
          Swap Transaction and Pricing Data: Any data required to be 
        reported under Part 43 of CFTC Regulations.
          Trading Hours: The hours during which Orders may be entered 
        on the Company DCM or the Company SEF or subject to the Rules, 
        as set forth in Rule 5.6, and as may be revised from time to 
        time, by the Company as disclosed on the Website and through 
        Participant Notices.
          Trading Privilege: Any right granted by the Company to a 
        Participant to transmit Orders for a Company Contract; 
        provided, however, that Trading Privileges for the Kalshi 
        Binary Contracts are not provided through the Company in its 
        capacity as a DCM.
          Transaction: Any purchase or sale of any Company Contract 
        made on the Company or pursuant to the Rules.
          Transaction Data: Orders, bids, offers and related 
        information concerning Company Contracts executed subject to 
        the Rules, together with all information and other content 
        contained in, displayed on, generated by or derived from the 
        Platform.
          UCC: The Uniform Commercial Code as in effect in the State of 
        New York.
          Underlying: The index, rate, risk, measure, instrument, 
        differential, indicator, value, contingency, commodity, 
        occurrence, or extent of an occurrence that shall determine the 
        amount payable or deliverable under a Company Contract.
          Unique Swap Identifier or USI: The unique swap identifier, 
        which shall be created, transmitted, and used for each swap 
        executed on LedgerX as provided in CFTC Regulation 45.5.
          User ID: The unique identifier registered with the Company 
        that the Company assigns to an Authorized User, and which is 
        included on each Order to enable the Company to identify the 
        Person entering such Orders, and, with respect to an Order 
        entered by an Executing Participant on behalf of a Customer, 
        the Customer.
          Variation Margin is the amount of additional margin the 
        Company may require from a Participant to cover new or 
        increased exposures arising from the Participant's use of 
        margin.
          Website: The Company home page or a website to which the 
        Company home page has a link.
          Withdrawing Participant: A Participant that, pursuant to 
        these Rules, has notified the Company of its intention to 
        terminate its status as a Participant or who has been notified 
        by the Company of termination of its status as a Participant.
Rule 1.2  Rules of Construction
    For purposes of these Rules, the following rules of construction 
shall apply:

          1. Words conveying a singular number include the plural 
        number, where the context permits, and vice versa.
          2. References to any Regulatory Agency include any successor 
        Regulatory Agency.
          3. If, for any reason, a Rule is found or determined to be 
        invalid or unenforceable by a court of law, the Commission or 
        another governmental or quasi-governmental agency with 
        supervisory authority, such Rule shall be considered severed 
        from the Rules and all other Rules shall remain in full force 
        and effect.
          4. All references to time are to the local time in New York, 
        New York unless expressly provided otherwise.
          5. All terms defined in the UCC and not otherwise defined 
        herein shall have the respective meanings accorded to them 
        therein.
          6. In the event of a conflict between these Rules and a non-
        disclosure agreement between the Company or an Affiliate of the 
        Company and a Participant or Customer, these Rules shall 
        govern.
          7. In the event of a conflict between these Rules and the CEA 
        or CFTC Regulations, the applicable provision of the CEA and/or 
        CFTC Regulation shall govern.
Chapter 2  Company Governance
Rule 2.1  Ownership
    The Company is a Delaware limited liability company. The management 
and operation of the Company is governed by the Operating Agreement and 
the Rules. Participant status does not confer any equity interest or 
voting right in the Company.
Rule 2.2  Board
    A. The Board shall, subject to applicable provisions in the 
Operating Agreement:

          1. Be the governing body of the Company;
          2. Be constituted, and shall constitute its committees or 
        subcommittees, to permit consideration of the views of market 
        participants;
          3. Have charge and control of all property of the Company;
          4. Provide, acquire and maintain adequate Company offices and 
        facilities;
          5. Fix, determine and levy all Participant or other fees when 
        necessary;
          6. Determine the Company Contracts and the Company Contract 
        Specifications;
          7. Adopt, amend or repeal any Rules, with the input of 
        Officers and committees or subcommittees;
          8. Have the power to act in Emergencies as detailed in Rule 
        2.12; and
          9. Have the power to call for review, and to affirm, modify, 
        suspend or overrule, any and all decisions and actions of the 
        Officers, committees or subcommittees related to the day-to-day 
        business operations of the Company.

    B. Any authority or discretion by the Rules vested in any Officer 
or delegated to any committee or subcommittee shall not be construed to 
deprive the Board of such authority or discretion and, in the event of 
a conflict, the determination of the matter by the Board shall prevail.
    C. A majority of the Directors serving on the Board, including at 
least one Public Director, shall constitute a quorum for the 
transaction of business of the Board. At all times when the Board is 
conducting business at a meeting of the Board, a quorum of the Board 
must be present at such meeting, and the Board may act only by the 
decision of a majority of the Directors constituting a quorum of the 
Board by vote at a meeting, by unanimous written consent without a 
meeting, or as otherwise set forth in the Operating Agreement.
    D. The Board shall comprise the number of Directors set forth in 
the Operating Agreement, which shall include Public Directors and 
Market Participant Directors in at least the number or percentage 
required under the CEA or CFTC Regulations, but in any event, (i) no 
less than two Directors shall be Public Directors and (ii) no less than 
two Directors shall be Market Participant Directors. Each Director 
(including Public Directors and Market Participant Directors) shall be 
appointed in accordance with the Operating Agreement, and shall serve 
until his or her successor is duly appointed, or until his or her 
earlier resignation or removal, with or without cause.
    E. Each Director is entitled to indemnification pursuant to the 
Operating Agreement with respect to matters relating to the Company.
    F. To qualify as a Public Director, an individual must be found, by 
the Board and on the record, to have no Material Relationship, as 
defined below, with the Company. The Board must make such finding at 
the time the Public Director is elected and as often as necessary in 
light of all circumstances relevant to such Public Director, but in no 
case less than annually. A Material Relationship is one that reasonably 
could affect the independent judgment or decision-making of the 
Director. The Board need not consider previous service as a Director of 
the Company to constitute a Material Relationship. A Director shall be 
considered to have a Material Relationship with the Company if any of 
the following circumstances exist or have existed within the past year:

          1. such Director is or was an Officer or an employee of the 
        Company, or an officer or an employee of an Affiliate of the 
        Company;
          2. such Director is or was a Participant; or
          3. such Director is or was a director, an officer, or an 
        employee of a Participant.

    G. If any of the immediate family of a Director, i.e., spouse, 
parents, children, and siblings, in each case, whether by blood, 
marriage, or adoption, or any person residing in the home of the 
Director or that of his or her immediate family have a Material 
Relationship as defined above, then that Material Relationship is 
deemed to apply to such Director.
    H. The Board shall have procedures, as may be adopted by the Board 
from time to time, to remove a Director where the conduct of such 
Director is likely to be prejudicial to the sound and prudent 
management of the Company.
    I. The Board shall review its performance and that of its 
individual Directors annually and shall consider periodically using 
external facilitators for such review.
Rule 2.3  Officers
    A. The Board shall appoint a Chief Executive Officer, Chief 
Compliance Officer, Chief Risk Officer and such other officers of the 
Company as it may deem necessary or appropriate from time to time.
    B. The Chief Compliance Officer must:

          1. have the background and skills appropriate for fulfilling 
        the responsibilities of the position;
          2. be an individual who would not be disqualified from 
        registration under Section 8a(2) or 8a(3) of the CEA;
          3. report to the Board or, in the event that the Board 
        delegates its authority to the Chief Executive Officer, to the 
        Chief Executive Officer; and
          4. fulfill his or her duties as required pursuant to CFTC 
        Regulations, including, but not limited to, the preparation and 
        submission of an annual compliance report as described in CFTC 
        Regulation 39.10(c)(3), and assist the Regulatory Oversight 
        Committee in its preparation of an annual report.

    C. Any Officer may also be a director, officer, partner or employee 
of the Company or of any of its Affiliates, subject to disclosure and 
resolution of conflicts of interest. Notwithstanding the foregoing, the 
Chief Compliance Officer and the Chief Risk Officer must be two 
different individuals.
    D. The Officers shall have such powers and duties in the management 
of the Company as the Board may prescribe from time to time, subject to 
any limitations set forth in the Operating Agreement.
    E. Each Officer is entitled to indemnification pursuant to the 
Operating Agreement with respect to matters relating to the Company.
Rule 2.4  Eligibility and Fitness
    A. An individual may not serve as a Director or Officer, or serve 
on a committee or subcommittee established by the Board or hold a 10 
percent or more ownership interest in the Company, if the individual:

          1. within the prior 3 years has been found, by a final 
        decision of a court of competent jurisdiction, an 
        administrative law judge, the CFTC, or any Self-Regulatory 
        Organization, to have committed a disciplinary offense;
          2. within the prior 3 years has entered into a settlement 
        agreement in which any of the findings or, in the absence of 
        such findings, any of the acts charged included a disciplinary 
        offense;
          3. is currently suspended from trading on a Designated 
        Contract Market or a Swap Execution Facility, is suspended or 
        expelled from membership in a Self-Regulatory Organization, is 
        serving any sentence of probation, or owes any portion of a 
        fine or penalty imposed pursuant to either:

                  a. a finding by final decision of a court of 
                competent jurisdiction, an administrative law judge, 
                the CFTC or any Self-Regulatory Organization that such 
                person committed a disciplinary offense; or
                  b. a settlement agreement in which any of the 
                findings or, in the absence of such findings, any of 
                the acts charged included a disciplinary offense;

          4. is currently subject to an agreement with the CFTC or 
        Self-Regulatory Organization not to apply for registration with 
        the CFTC or for membership in the Self-Regulatory Organization;
          5. is currently, or within the past 3 years has been, subject 
        to a revocation or suspension of registration by the CFTC, or 
        has been convicted within the past 3 years of any of the 
        felonies listed in Section 8a(2)(D)(ii) through (iv) of the 
        CEA;
          6. is currently subject to a denial, suspension or 
        disqualification from serving on a disciplinary panel, 
        arbitration panel or governing board of any self-regulatory 
        organization as that term is defined in Section 3(a)(26) of the 
        Securities Exchange Act of 1934; or
          7. is subject to a statutory disqualification pursuant to 
        Section 8a(2) of the CEA.

For purposes of this Rule 2.4A, the terms ``disciplinary offense,'' 
``final decision'' and ``settlement agreement'' have the meaning given 
those terms in CFTC Regulation 1.63(a).
    B. Any Director, Officer, member of a committee established by the 
Board and any individual nominated to serve in any such role, shall 
immediately notify the Chief Executive Officer if such individual is 
subject to one or more of the criteria in Rule 2.4A. Prior to 
nomination to the Board, each individual shall certify he or she is not 
disqualified pursuant to Rule 2.4A. Upon appointment, each Director, 
Officer, and member of a committee shall provide to the Company, where 
applicable, changes in registration information within 30 days and 
certification of compliance accordingly. The Company shall verify 
information supporting Board compliance with eligibility criteria.
    C. To serve as a Director, an individual must possess the ability 
to contribute to the effective oversight and management of the Company, 
taking into account the needs of the Company and such factors as the 
individual's experience, perspective, skills and knowledge of the 
industry in which the Company operates.
    D. A Director or Officer must meet any qualifications set forth 
from time to time in the Operating Agreement.
    E. An individual may not serve on any Disciplinary Panel, 
arbitration panel, or the Appeals Committee during any proceeding 
affecting or concerning such individual, to be determined in a 
reasonable manner by the Company's General Counsel.
    F. If the Company determines that an individual subject to this 
Rule 2.4 no longer meets the criteria set forth in Rule 2.4.A., the 
Company shall inform the CFTC of such determination. The Company shall 
provide to the CFTC, upon request, an individual's certification of 
compliance with the criteria set forth in Rule 2.4.A.
Rule 2.5  LedgerPrime
    A. The Company's parent company has established LedgerPrime LLC 
(``LedgerPrime''), a wholly-owned subsidiary of the Company's parent 
company, to make markets in Company products (collectively, the 
``LedgerPrime Contracts'') cleared by the Company and to engage in 
hedging activities through various offsetting transactions. Position 
and counterparty limits, as well as parameters on LedgerPrime hedging, 
will be established by the Company.
    B. LedgerPrime does not receive any preferential pricing from the 
Company and does not have an inherent advantage over any other 
Participant with respect to latency or Order execution speed.
    C. LedgerPrime traders are subject to the same access criteria and 
must abide by the same rules as all other Participants.
Rule 2.6  Committees and Subcommittees
    A. The Board may create, appoint Directors to serve on, and 
delegate powers to, committees and subcommittees. There shall be a 
Regulatory Oversight Committee, a Risk Management Committee, a 
Participant Committee, a Nominating Committee, a Disciplinary Panel, 
and an Appeals Committee. The Board shall designate the chairperson of 
each such committee, except that the chairperson of the Board shall 
designate the chairperson of the Appeals Committee and the Regulatory 
Oversight Committee shall designate the chairperson of the Disciplinary 
Panel.
    B. Each committee and subcommittee shall assist in the supervision, 
management and control of the affairs of the Company within its 
particular area of responsibility, subject to the Operating Agreement 
and the authority of the Board.
    C. Subject to the authority of the Board, each committee and 
subcommittee shall determine the manner and form in which its 
proceedings shall be conducted. A majority of the members serving on a 
committee or subcommittee, including at least one Public Director, 
shall constitute a quorum for the transaction of business of a 
committee or subcommittee. Each committee and subcommittee may act only 
by the decision of a quorum, by vote at a meeting or by unanimous 
written consent without a meeting. The Board has the authority to 
overrule the decisions of any committee or subcommittee.
Rule 2.7  Regulatory Oversight Committee
    A. The Regulatory Oversight Committee shall be a standing committee 
of the Board consisting of only Public Directors, as appointed from 
time to time. No less than two Public Directors shall serve on the 
Regulatory Oversight Committee.
    B. Each member of the Regulatory Oversight Committee shall serve 
for a term of one calendar year from the date of his or her appointment 
or for the remainder of his or her term as a Public Director, and until 
the due appointment of his or her successor, or until his or her 
earlier resignation or removal, with or without cause, as a member of 
the Regulatory Oversight Committee or as a Public Director. A member of 
the Regulatory Oversight Committee may serve for multiple terms.
    C. The Regulatory Oversight Committee shall oversee the Company's 
regulatory program on behalf of the Board. The Board shall delegate 
sufficient authority, dedicate sufficient resources, and allow 
sufficient time for the Regulatory Oversight Committee to fulfill its 
mandate. The Regulatory Oversight Committee shall make such 
recommendations to the Board that will, in its judgment, best promote 
the interests of the Company. The Regulatory Oversight Committee shall 
also have such other powers and perform such other duties as set forth 
in the Rules and as the Board may delegate to it from time to time.
    D. The Regulatory Oversight Committee shall appoint individuals to 
the Disciplinary Panel in accordance with these Rules, Applicable Law 
and the composition requirements of the Disciplinary Panel. The 
Committee shall appoint at least one person who would not be 
disqualified from serving as a Public Director, and who shall serve as 
the Chairperson of the Disciplinary Panel.
    E. The Regulatory Oversight Committee shall prepare an annual 
report that assesses the Company's self-regulatory program for the 
Board and the CFTC. The annual report sets forth the regulatory 
program's expenses, describes its staffing and structure, catalogues 
disciplinary actions taken during the year, and reviews the performance 
of the Disciplinary Panel. Such report may be prepared in conjunction 
with the Chief Compliance Officer's annual compliance report as 
required pursuant to CFTC Regulation 39.10(c)(3).
    F. Without limiting the generality of the foregoing, the Regulatory 
Oversight Committee shall have the authority to:

          1. monitor the regulatory program of the Company for 
        sufficiency, effectiveness, and independence;
          2. oversee all facets of the regulatory program, including 
        trade practice and market surveillance; audits, examinations, 
        and other regulatory responsibilities with respect to 
        Participants (including ensuring compliance with financial 
        integrity, financial reporting, sales practice, recordkeeping, 
        and other requirements); and the conduct of investigations;
          3. review the size and allocation of the regulatory budget 
        and resources; and the number, hiring, termination, and 
        compensation of regulatory personnel;
          4. supervise the Chief Compliance Officer of the Company, who 
        will report directly to the Regulatory Oversight Committee and 
        to the Board or, if the Board delegates such authority, to the 
        Chief Executive Officer;
          5. recommend changes that would ensure fair, vigorous, and 
        effective regulation; and
          6. review all regulatory proposals prior to implementation 
        and advise the Board as to whether and how such changes may 
        impact regulation.
Rule 2.8  Risk Management Committee
    A. The Risk Management Committee shall be a standing committee 
consisting of no fewer than one Public Director, one Market Participant 
Director, and one Company Officer. The Risk Management Committee also 
may allow the participation of other market participants.
    B. Each member of the Risk Management Committee shall serve for a 
term of one calendar year from the date of his or her appointment or 
for the remainder of his or her term as a Public Director, as 
applicable, and until the due appointment of his or her successor, or 
until his or her earlier resignation or removal, with or without cause, 
as a member of the Risk Management Committee or as a Public Director. A 
member of the Risk Management Committee may serve for multiple terms.
    C. The Risk Management Committee shall oversee the Company's risk 
management program. The Board shall delegate sufficient authority, 
dedicate sufficient resources, and allow sufficient time for the Risk 
Management Committee to fulfill its mandate. The Risk Management 
Committee shall make such recommendations to the Board that will, in 
its judgment, best promote the interests of the Company. The Risk 
Management Committee shall also have such other powers and perform such 
other duties as set forth in the Rules and as the Board may delegate to 
it from time to time.
Rule 2.9  Participant Committee
    A. The Participant Committee shall be a standing committee of the 
Board consisting of at least 35 percent Public Directors, as appointed 
from time to time. No less than two Public Directors shall serve on the 
Participant Committee.
    B. Each member of the Participant Committee shall serve for a term 
of one calendar year from the date of his or her appointment or for the 
remainder of his or her term as a Public Director, as applicable, and 
until the due appointment of his or her successor, or until his or her 
earlier resignation or removal, with or without cause, as a member of 
the Participant Committee or as a Public Director. A member of the 
Participant Committee may serve for multiple terms.
    C. The Participant Committee shall determine the standards and 
requirements for initial and continuing membership or participation 
eligibility; review appeals of Company staff denials of Participant, 
Executing Participant and Liquidity Provider applications; and approve 
measures that would result in different categories or classes of 
Company membership. In reviewing staff denials, the Participant 
Committee shall not uphold any such Company staff denial if the 
relevant application satisfies the standards and requirements that the 
Participant Committee sets forth. The Participant Committee shall not, 
and shall not permit the Company to, restrict access or impose burdens 
on access in a discriminatory manner, within each category or class of 
Participants or between similarly situated categories or classes of 
Participants.
Rule 2.10  Nominating Committee
    A. The Nominating Committee shall be a standing committee of the 
Board consisting of at least 51 percent Public Directors, as appointed 
from time to time. No less than two Public Directors shall serve on the 
Nominating Committee.
    B. Each member of the Nominating Committee shall serve for a term 
of one calendar year from the date of his or her appointment or for the 
remainder of his or her term as a Public Director, as applicable, and 
until the due appointment of his or her successor, or until his or her 
earlier resignation or removal, with or without cause, as a member of 
the Nominating Committee or as a Public Director. A member of the 
Nominating Committee may serve for multiple terms.
    C. The Nominating Committee shall identify individuals qualified to 
serve on the Board, consistent with criteria approved by the Board, and 
with the composition requirements set forth in the Rules or Operating 
Agreement. The Nominating Committee shall administer a process for the 
nomination of individuals to the Board. The Board shall delegate 
sufficient authority, dedicate sufficient resources, and allow 
sufficient time for the Nominating Committee to fulfill its mandate. 
The Nominating Committee shall make such recommendations to the Board 
that will, in its judgment, best promote the interests of the Company. 
The Nominating Committee shall also have such other powers and perform 
such other duties as set forth in the Rules and as the Board may 
delegate to it from time to time.
Rule 2.11  Disciplinary Panel and Appeals Committee
    A. The Disciplinary Panel shall be:

          1. a standing committee consisting of at least three members, 
        including at least one person who would not be disqualified 
        from serving as a Public Director who will serve as the 
        chairperson, as appointed from time to time. At least one 
        member of the Disciplinary Panel must be a Participant or an 
        employee of a Participant. The Board may establish more than 
        one Disciplinary Panel. The Regulatory Oversight Committee will 
        appoint individuals for membership on the Disciplinary Panel. 
        Each Disciplinary Panel shall include members with sufficient 
        differing experience and Participant interests so as to ensure 
        fairness and to prevent special treatment or preference for any 
        Person.
          2. responsible for conducting hearings, rendering decisions, 
        and imposing sanctions with respect to any Disciplinary Action. 
        The Disciplinary Panel shall also have such other powers and 
        perform such other duties as set forth in the Rules and as the 
        Board may determine from time to time.

    B. Each member of the Disciplinary Panel shall serve for a term of 
two calendar years from the date of his or her appointment, and until 
the due appointment of his or her successor, or until his or her 
earlier resignation or removal, with or without cause, as a member of 
the Disciplinary Panel. A member of the Disciplinary Panel may serve 
for multiple terms.
    C. The Appeals Committee shall be:

          1. a standing committee consisting of at least three members 
        of the Board. The members of the Appeals Committee and its 
        Chairperson shall be appointed by the Chairperson of the Board, 
        provided that, at all times the Appeals Committee shall include 
        at least one Public Director who shall serve as the Chairperson 
        of the Appeals Committee.
          2. responsible for conducting hearings of appeals of 
        decisions of the Disciplinary Panel, rendering decisions of 
        such appeals, and imposing sanctions with respect to such 
        appeals. The Appeals Committee shall also have such other 
        powers and perform such other duties as set forth in these 
        Rules and as the Board may determine from time to time.

    D. Each member of the Appeals Committee shall serve for a term of 
one calendar year from the date of his or her appointment or for the 
remainder of his or her term as a Public Director, as applicable, and 
until the due appointment of his or her successor, or until his or her 
earlier resignation or removal, with or without cause, as a member of 
the Appeals Committee or as a Public Director. A member of the Appeals 
Committee may serve for multiple terms.
Rule 2.12  Emergency Rules
    A. During an Emergency, the Company may implement temporary 
emergency procedures and rules pursuant to Rule 2.12D, subject to the 
applicable provisions of the CEA and CFTC Regulations.
    B. The Chief Executive Officer or his or her designee and the Chief 
Compliance Officer or his or her designee, acting in conjunction or, if 
it is not possible to act in conjunction, acting alone, are authorized 
to determine whether an Emergency exists and whether Emergency Rules or 
Emergency Actions are warranted. Emergency Rules may require or 
authorize the Company, the Board, any committee of the Board or any 
Officer to take Emergency Actions, including, but not limited to, the 
following actions:

          1. suspend or curtail trading in, or limit trading to 
        liquidation, for any Company Contract;
          2. extend or shorten the last trading date for any Company 
        Contract;
          3. provide alternative settlement mechanisms for any Company 
        Contract (including by altering the settlement terms or 
        conditions or fixing the settlement price) or suspend the 
        transfer of the Underlying;
          4. order the transfer or liquidation of open positions in any 
        Company Contract; provided that if a Company Contract is 
        fungible with a contract on another platform in addition to the 
        Company, the liquidation or transfer of open interest in such 
        Company Contract will be ordered only as directed, or agreed 
        to, by CFTC staff or the CFTC;
          5. extend, shorten or change the Trading Hours or the 
        expiration date of any Company Contract;
          6. require Participants to meet special margin requirements;
          7. order the transfer of Company Contracts and the associated 
        margin or alter any Company Contract's settlement terms or 
        conditions;
          8. impose or modify position limits, price limits, and 
        intraday market restrictions; or
          9. any other action, if so directed by the CFTC.

    C. Before taking an Emergency Action, the effects of such Emergency 
Action on markets underlying the Company Contract(s) affected by such 
Emergency Action, on markets that are linked or referenced to such 
Company Contracts and similar markets on other trading venues, or any 
potential conflicts of interest shall be considered and documented as 
required under Rule 2.12F.
    D. Before any Emergency Rule may be adopted and enforced, the 
Regulatory Oversight Committee shall approve the implementation of such 
Emergency Rule at a duly convened meeting. If the Chief Executive 
Officer, or his or her designee, or if the Chief Executive Officer or 
his or her designee is unavailable, the Chief Compliance Officer, or 
his or her designee, determines that Emergency Rules must be 
implemented with respect to an Emergency before a meeting of the 
Regulatory Oversight Committee can reasonably be convened, then the 
Chief Executive Officer, or his or her designee, or if the Chief 
Executive Officer or his or her designee is unavailable, the Chief 
Compliance Officer, or his or her designee, shall have the authority, 
without Board or committee action, to implement any Emergency Rules 
with respect to such Emergency that he or she deems necessary or 
appropriate to respond to such Emergency. In such circumstances, the 
Chief Executive Officer, or his or her designee, or if the Chief 
Executive Officer or his or her designee is unavailable, the Chief 
Compliance Officer, or his or her designee, must convene a meeting of 
the Regulatory Oversight Committee to ratify the actions taken by the 
Chief Executive Officer, or his or her designee, or the Chief 
Compliance Officer, or his or her designee, as soon as practicable. 
Whenever the Company implements an Emergency Rule or takes an Emergency 
Action, a duly authorized representative of the Company, where 
possible, will inform Participants through a Participant Notice.
    E. The Company will use reasonable efforts to notify the CFTC and 
the Board prior to implementing, modifying or terminating an Emergency 
Rule. If such prior notification is not possible or practicable, the 
Company will notify the CFTC and the Board as soon as possible or 
reasonably practicable, but in any event no longer than 24 hours after 
implementing, modifying or terminating an Emergency Rule.
    F. Upon taking any Emergency Action, the Company will document the 
decision-making process related to such Emergency Action, including the 
process for minimizing conflicts of interest, the extent to which the 
Company considered the effect of its Emergency Action on the Underlying 
markets and on markets that are linked or referenced to the contract 
market and similar markets on other trading venues, and reasons for 
using emergency authority under this Rule 2.12. Such documentation will 
be maintained in accordance with Rule 2.14.
    G. The Chief Executive Officer, or his or her designee, or if the 
Chief Executive Officer or his or her designee is unavailable, the 
Chief Compliance Officer, or his or her designee, may determine that an 
Emergency has been reduced sufficiently to allow the Company to resume 
normal functioning, in which case any Emergency Actions responding to 
such Emergency will be terminated and a duly authorized representative 
of the Company will inform Participants through a Participant Notice.
    H. Participants must promptly notify the Company of any 
circumstance that may give rise to a declaration of an Emergency.
Rule 2.13  Conflicts of Interest
    A. Named Party in Interest Conflict

          1. No member of the Board, Oversight Panel or Disciplinary 
        Panel shall participate in such body's deliberations or voting 
        in any matter involving a named party in interest where such 
        member:

                  a. is the named party in interest in the matter;
                  b. is an employer, employee or fellow employee of a 
                named party in interest;
                  c. is associated with a named party in interest 
                through a ``broker association'' as defined in CFTC 
                Regulation 156.1;
                  d. has any other significant, ongoing business 
                relationship with a named party in interest, excluding 
                relationships limited to Company Contracts; or
                  e. has a family relationship (i.e., the member's 
                spouse, parents, children, and siblings, in each case, 
                whether by blood, marriage, or adoption, or any person 
                residing in the home of the member or that of his or 
                her immediate family) with a named party in interest.

          2. Prior to consideration of any matter involving a named 
        party in interest, each member of the deliberating body shall 
        disclose to the Chief Compliance Officer whether such member 
        has one of the relationships listed above with a named party in 
        interest.
          3. The Chief Compliance Officer shall determine whether any 
        member of the relevant deliberating body is subject to a 
        conflicts restriction under this Rule 2.13A. Such determination 
        shall be based upon a review of the following information:

                  a. information provided by such member pursuant to 
                clause (2) above; and
                  b. any other source of information that is held by 
                and reasonably available to the Company.

    B. Financial Interest in a Significant Action Conflict

          1. No member of the Board, Oversight Panel or Disciplinary 
        Panel shall participate in the body's deliberations or voting 
        on any significant action if such member knowingly has a direct 
        and substantial financial interest in the result of the vote 
        based upon either Company or non-Company positions that could 
        reasonably be expected to be affected by the action.
          2. Prior to consideration of any significant action, each 
        member of the deliberating body who does not choose to abstain 
        from deliberations and voting shall disclose to the Chief 
        Compliance Officer any information that may be relevant to a 
        determination of whether such member has a direct and 
        substantial financial interest in the result of the vote.
          3. The Chief Compliance Officer shall determine whether any 
        member of the relevant deliberating body who does not choose to 
        abstain from deliberations and voting is subject to a conflicts 
        restriction under this Rule 2.13B. Such determination shall be 
        based upon a review of the following information:

                  a. the most recent large trader reports and clearing 
                records available to the Company;
                  b. gross positions held at the Company in the 
                member's personal accounts or ``controlled accounts,'' 
                as defined in CFTC Regulation 1.3(j);
                  c. gross positions held at the Company in proprietary 
                accounts, as defined in CFTC Regulation 1.17(b)(3), at 
                the member's affiliated firm;
                  d. gross positions held at the Company in accounts in 
                which the member is a principal, as defined in CFTC 
                Regulation 3.1(a);
                  e. net positions held at the Company in ``customer'' 
                accounts, as defined in CFTC Regulation 1.17(b)(2), at 
                the member's affiliated firm;
                  f. any other types of positions, whether maintained 
                at the Company or elsewhere, held in the member's 
                personal accounts or the proprietary accounts of the 
                member's affiliated firm that the Chief Compliance 
                Officer reasonably expects could be affected by the 
                significant action;
                  g. information provided by such member pursuant to 
                clause (2) above; and
                  h. any other information reasonably available to the 
                Company, taking into consideration the exigency of the 
                significant action being contemplated.

          4. Any member who would otherwise be required to abstain from 
        deliberations and voting pursuant to clause (1) above may 
        participate in deliberations, but not in voting, if the 
        deliberating body, after considering the factors specified 
        below, determines that such participation would be consistent 
        with the public interest; provided, however, that before 
        reaching any such determination, the deliberating body will 
        fully consider the information specified in clause (3) above 
        which is the basis for such member's direct and substantial 
        financial interest in the significant action that is being 
        contemplated. In making its determination, the deliberating 
        body shall consider:

                  a. whether such member's participation in the 
                deliberations is necessary to achieve a quorum; and
                  b. whether such member has unique or special 
                expertise, knowledge or experience in the matter being 
                considered.

    C. The minutes of any meeting to which the conflicts determination 
procedures set forth in this Rule apply shall reflect the following 
information:

          1. the names of all members who participated in such meeting;
          2. the name of any member who voluntarily recused himself or 
        herself or was required to abstain from deliberations or voting 
        on a matter and the reason for the recusal or abstention, if 
        stated;
          3. the information that was reviewed for each member of the 
        relevant deliberating body; and
          4. any determination made in accordance with Rule 2.13A.3 or 
        Rule 2.13B.4 above.
Rule 2.14  Recordkeeping
    A. The Company shall keep, or cause to be kept, complete and 
accurate books and records of accounts and activities of the Company, 
including all books, records and other documentation required to be 
maintained pursuant to the CEA and CFTC Regulations.
    B. The Company shall retain all such books and records in 
accordance with the CEA and CFTC Regulations.
    C. The Company will provide information required to be maintained 
or provided pursuant to the CEA and CFTC Regulations to the Commission, 
the U.S. Securities and Exchange Commission, the U.S. Department of 
Justice or any representative of a prudential regulator as authorized 
by the Commission, upon request, in each case in the form and manner 
required under these Rules, and/or the CEA and CFTC Regulations.
Rule 2.15  Information-Sharing Agreements
    A. The Company may enter into information-sharing agreements or 
other arrangements or procedures to coordinate surveillance with other 
markets on which financial instruments related to the Company Contracts 
trade. As part of any information-sharing agreements or other 
arrangements or procedures adopted pursuant to this Rule, the Company 
may:

          1. provide market surveillance reports to other markets;
          2. share information and documents concerning current and 
        former Participants or Authorized Users with other markets;
          3. share information and documents concerning ongoing and 
        completed investigations with other markets; or
          4. require its current or former Participants or Authorized 
        Users to provide information and documents to the Company at 
        the request of other markets with which the Company has an 
        information-sharing agreement or other arrangements or 
        procedures.

    B. The Company may enter into any information-sharing agreements or 
other arrangements or procedures, including an information-sharing 
agreement or other arrangement or procedure similar to that described 
above in paragraph (A), with any Person or body (including but not 
limited to a Regulatory Agency or Swap Data Repository) if the Company 
considers such agreement, arrangement or procedures to be in 
furtherance of the Company's purpose or duties under these Rules or 
Applicable Law.
    C. The Company may provide information to a duly authorized foreign 
governmental authority, as directed by the CFTC, in accordance with an 
information-sharing agreement or other arrangements or procedures 
executed with such foreign governmental authority or the CFTC.
Rule 2.16  Recordkeeping and Reporting Requirements
    A. In the event the Board rejects a recommendation or supersedes an 
action of the Regulatory Oversight Committee, the Risk Management 
Committee or the Chief Compliance Officer, the Company shall maintain 
documentation detailing: (1) the recommendation or action of the 
Regulatory Oversight Committee, the Risk Management Committee or the 
Chief Compliance Officer, as the case may be; (2) the rationale for 
such recommendation or action; (3) the rationale of the Board for 
rejecting such recommendation or superseding such action; and (4) the 
course of action that the Board decided to take contrary to such 
recommendation or action.
    B. In the event that the Risk Management Committee rejects a 
recommendation or supersedes an action of any of its subcommittees, the 
Company shall maintain documentation detailing (1) the recommendation 
or action of the subcommittee; (2) the rationale for such 
recommendation or action; (3) the rationale of the Risk Management 
Committee for rejecting such recommendation or superseding such action; 
and (4) the course of action that the Risk Management Committee decided 
to take contrary to such recommendation or action.
    C. In accordance with Rule 6.7, the Company shall report all 
Transactions of Swaps subject to reporting by the Company pursuant to 
applicable CFTC Regulations to a Swap Data Repository selected by the 
Company for such purpose within the time limits set forth in CFTC 
Regulations. Parties to a Transaction where reporting is required shall 
be responsible for any of their own reporting obligations. Participants 
shall include with any Order sufficient information to enable the 
Company to report all Required Swap Creation Data pursuant to Part 45 
of CFTC Regulations, including but not limited to the information 
prescribed under Rule 5.2B.10 (to the extent such information is not 
pre-populated by the Platform). Participants may provide certain data 
to the Company in the Participant Application and Agreement, such as 
whether the Participant is a U.S. person, swap dealer, major swap 
participant, or financial entity as defined in the Participant 
Application and Agreement. Participants must inform the Company 
immediately of any change in status that would affect data to be 
reported to a Swap Data Repository in accordance with Rule 6.7.
    D. The Company shall record and report to the CFTC all data 
required to be reported to the CFTC under Part 16 of CFTC Regulations, 
in the form and manner required by CFTC Regulations.
    E. The Company shall keep and maintain books and records 
identifying each Order submitted to the Company and each Transaction 
effected pursuant to these Rules, including the identification of the 
execution method (e.g., central limit order book, Block Trade, EFP) 
with respect to each such Order and Transaction. These books and 
records shall be kept and maintained in accordance with the CEA and 
CFTC Regulations.
    F. The Company shall submit to the CFTC within thirty days after 
each Board election a list of the Board's Directors, the Participant 
interests they represent, and how the composition of the Board meets 
the requirements of CFTC Regulation 1.64(b) and the Company's Rules and 
procedures.
Rule 2.17  Public Information
    A. Accurate, complete and current copies of these Rules and Company 
Contract Specifications shall be published on the Website.
    B. The Company shall make public on a daily basis information on 
settlement prices, volume, open interest, and opening and closing 
ranges for actively traded Company Contracts.
    C. Except as provided herein, the Company shall publish on its 
Website a Participant Notice with respect to each addition to, 
modification of, or clarification of, the Rules, the Matching Engine, 
and any Company Contract Specification prior to the earlier of:

          1. the effective date thereof; and
          2. the filing of such change with the Commission.

    D. If confidential treatment is sought with respect to any 
information the Company submits to a Regulatory Agency, only the public 
version of such filing shall be disclosed pursuant to Rule 2.17C.
    E. Any Participant Notice shall be deemed to have been made to all 
Participants and any other such Person as may be required by sending 
such Participant Notice to the email address on file with the Company 
and by posting the Participant Notice on the Website.
    F. Any information published in accordance with this Rule 2.17 
shall specify whether it applies to the Company DCM, and/or the Company 
DCO, and/or the Company SEF.
Chapter 3  Participants
Rule 3.1  Jurisdiction, Applicability of Rules
    A. Any person, including a participant or an authorized user, 
directly or indirectly initiating, executing, and/or clearing a 
transaction on the company or subject to these rules, and any person 
for whose benefit such a transaction has been initiated or executed, or 
cleared, including customers, and an authorized representative and, for 
the avoidance of doubt, an FCM participant, executing participant and a 
liquidity provider, and any employee or agent of a participant, and any 
other person accessing the platform: (i) agrees to be bound by and 
comply with these rules, the obligations and applicable law, in each 
case to the extent applicable to such person; (ii) expressly consents 
and submits to the jurisdiction of the company with respect to any and 
all matters arising from, related to, or in connection with, the 
status, actions or omissions of such person; and (iii) agrees to assist 
the company in complying with the company's legal and regulatory 
obligations, cooperate with the company, the CFTC and any regulatory 
agency with jurisdiction over the company in any inquiry, 
investigation, audit, examination or proceeding. Any amendments to or 
the repeal of a rule, or the adoption of a new rule, shall, upon the 
effective date of such amendment, repeal or adoption, as applicable, be 
binding on all persons subject to the jurisdiction of the company, 
regardless of when such person became subject to the company's 
jurisdiction, and on all company contracts as applicable.
    B. All company participants are also subject to the jurisdiction of 
the CFTC regardless of location, nationality, citizenship, or place of 
incorporation.
Rule 3.2  Participants--Applications, Agreements, Eligibility Criteria, 
        Classifications and Privileges
    LedgerX LLC will provide access to the Platform (including but not 
limited to the central limit order book) and related services in an 
impartial, transparent, fair and non-discriminatory manner.

          A. Each Participant shall have the right to access 
        electronically the Platform, including the right to place 
        Orders for each of its Proprietary Accounts, provided that such 
        Participant is eligible for and has applied and received 
        Trading Privileges and Clearing Privileges. In order to become 
        a Participant, an applicant must:

                  1. complete and submit the Company Participant 
                Application and Agreement, User Agreement, and 
                application fee, as may be established by the Company 
                from time to time;
                  2. not be subject to any economic or trade sanctions 
                programs administered by OFAC or other relevant U.S. or 
                non-U.S. authority, and must not be listed on OFAC's 
                List of Specially-Designated Nationals and Blocked 
                Persons, or if applicant is an entity, not include any 
                such person among its beneficial owners;
                  3. (for U.S. applicants:) if an applicant is an 
                entity, be validly organized, and in good standing, in 
                the United States;
                  4. (for Singapore applicants:) if an applicant is an 
                entity, be validly organized, and in good standing, in 
                Singapore; and must not be listed as a designated 
                individual or entity as to terrorism or targeted 
                financial sanctions by the Money Authority of 
                Singapore;
                  5. (for Singapore applicants:) if an applicant is a 
                natural person, be a citizen of Singapore; and must not 
                be listed as a designated individual or entity as to 
                terrorism or targeted financial sanctions by the Money 
                Authority of Singapore;
                  6. (for non-U.S. applicants:) if an applicant is an 
                entity, be validly organized and in good standing in 
                its jurisdiction of organization, and
                  7. as applicable, be an Eligible Contract Participant 
                in order to gain impartial access to the Company SEF 
                and any SEF services, to clear trades executed on a SEF 
                through the Company DCO, or to enter into Block Trades 
                on the Company DCM, or to clear Block Trades executed 
                on a DCM through the Company DCO;
                  8. not be prohibited from using the services of the 
                Company for any reason whatsoever;
                  9. have a good reputation and business integrity and 
                maintain adequate financial resources and credit;
                  10. not have filed for bankruptcy and not be 
                insolvent;
                  11. designate at least one Authorized User (or in the 
                case of a natural person Participant, such Person shall 
                be deemed to be the Authorized User);
                  12. if an applicant is an entity, designate at least 
                two Authorized Representatives (or in the case of a 
                natural person Participant, such Person shall be deemed 
                to be the sole Authorized Representative) who are 
                responsible for supervising all activities of the 
                Participant, its Authorized User(s) and its employees 
                relating to Transactions, for making withdrawal 
                requests and for providing any information the Company 
                may request regarding such Participant; provided, that 
                upon request the Company may permit an entity applicant 
                to designate a single Authorized Representative in the 
                Chief Compliance Officer's sole discretion; and
                  13. meet any other criteria and provide the Company 
                with any other information the Company may request 
                regarding the Participant.

          B. Each FCM Participant shall have the right to access 
        electronically the Platform, including the right to place 
        Orders for each of its Proprietary Accounts or Customer 
        Accounts, provided that such FCM Participant is eligible for 
        and has applied and received Trading Privileges and Clearing 
        Privileges. The Company does not currently have any FCM 
        Participants or other Participants that may execute 
        intermediated trades. In order to become an FCM Participant, an 
        FCM applicant must:

                  1. satisfy the conditions in Rule 3.2A;
                  2. be validly organized and in good standing, in the 
                United States;
                  3. have sufficient operational capabilities and 
                resources to support the Platform and Underlying 
                transfer requirements, including sufficient: (a) 
                policies and procedures, (b) understanding of and 
                support for the Company Contracts and transfers of the 
                Underlying, (c) asset security and cyber security 
                procedures and (d) AML controls;
                  4. have sufficient ability, appropriate accounts and 
                technical support to clear the Underlying, including 
                maintenance of the requisite Collateral Accounts at all 
                times;
                  5. submit to the Company a letter confirming that the 
                applicant will maintain all Customer Funds deposited 
                with it in connection with trading any Company Contract 
                in appropriately labeled and segregated Customer 
                Accounts, as required by Commission regulations;
                  6. if the FCM applicant seeks to facilitate trading 
                on the Company SEF or another SEF that clears through 
                the Company DCO, agree to confirm that each Customer 
                trading through such SEF represents that it is an ECP;
                  7. if the FCM applicant seeks to facilitate Block 
                Trades for one or more Customers, agree to confirm that 
                each Customer executing a Block Trade represents that 
                it is an ECP; and
                  8. meet any other criteria or complete any additional 
                applications that the Company may request.

          C. Prior to becoming an FCM Participant, FCM applicants must 
        submit to the Company: (i) a guarantee agreement on a form 
        prescribed by the Company defining the FCM Participant's 
        obligation to financially guarantee the applicant's Orders and 
        Transactions and those of the applicant's Customers, signed by 
        the FCM Participant; and (ii) an agreement authorizing the 
        Company to unilaterally debit any Collateral Accounts in 
        accordance with these Rules, Company policies and procedures 
        and in amounts solely determined by the Company.
          D. The Company may in its sole discretion approve, deny, or 
        condition any FCM Participant application as the Company deems 
        necessary or appropriate.
          E. If an FCM Participant application is approved by the 
        Company, the applicant will be a FCM Participant of the Company 
        with Trading Privileges and Clearing Privileges with respect to 
        its Customers and its Proprietary Account, as applicable.
          F. To be eligible to become an Executing Participant, an 
        applicant must:

                  1. satisfy the conditions in Rule 3.2A;
                  2. complete the Executing Participant representation 
                of the Participant Application and Agreement;
                  3. with respect to trading on the Company SEF, or 
                trading through another SEF that clears through the 
                Company DCM, agree to confirm that each Customer 
                trading through such SEF represents that it is an ECP;
                  4. if the Executing Participant seeks to facilitate 
                Block Trades for one or more Customers, agree to 
                confirm that each Customer executing a Block Trade 
                represents that it is an ECP; and
                  5. be registered as a futures commission merchant, 
                introducing broker or commodity trading advisor, or be 
                exempt from registration as such.

          G. Submission of a Participant Application and Agreement to 
        the Company constitutes the applicant's agreement to be bound 
        by the Rules and the published policies of the Company.
          H. No person affiliated, within the meaning of Section 
        5b(c)(2)(O) of the CEA, with a director of the Company or a 
        Participant (for purposes of this Rule, an ``affiliate'') shall 
        meet criteria for refusal to register a person under Section 
        8a(2) of the CEA; unless the Risk Management Committee finds 
        that there are special circumstances warranting the waiver of 
        such disqualification with respect to the affiliate.

                  1. With respect to affiliates, the Board shall be 
                entitled to rely on a representation from the relevant 
                director or Participant that, to the best of such 
                person's knowledge, none of its affiliates is subject 
                to disqualification pursuant to the Company's fitness 
                standards and that such person will notify the Company 
                if at any time such director or Participant becomes 
                aware that any such affiliate fails to meet the fitness 
                standards.
                  2. Section 5b(c)(2)(O)(ii)(IV) of the CEA requires 
                each DCO to establish Fitness Standards for persons 
                with direct access to the settlement or clearing 
                activities of the DCO (``Access Persons''). The only 
                persons with such access are Participants.

          I. Applicants for Participant status of the Company may 
        withdraw their applications at any time without prejudice or 
        without losing their right to apply at a future time.
          J. Company staff may, in its sole discretion, approve, deny, 
        or condition any Participant application as Company staff deems 
        necessary or appropriate.

                  1. In the event that Company staff decides to decline 
                or condition an application for admission as a 
                Participant, or to terminate a Person's status as 
                Participant, Company staff shall notify such Person 
                thereof in a written notice sent to the address 
                provided by the Person in the Participant Application 
                and Agreement or maintained in the Company's registry 
                of Participants. The written notice will specify the 
                basis for the Company's decision. Such Person may, 
                within 28 Business Days, request in writing that the 
                Participant Committee reconsider the determination.
                  2. Within 28 Business Days of receiving a request for 
                reconsideration, the Participant Committee shall 
                confirm, reverse or modify the denial, condition or 
                terminate the Participant status of such Person, and 
                shall promptly notify such Person accordingly in 
                writing. The Participant Committee may, in its sole 
                discretion, schedule a hearing (in person or by 
                teleconference), request additional information from 
                such Person or establish any other process that it 
                believes is necessary or appropriate to consider the 
                request for reconsideration.
                  3. The Participant Committee's decision is the final 
                action of the Company and is not subject to appeal 
                within the Company.

          K. Upon approval by the Company of an applicant's Participant 
        Application and Agreement, the applicant will be deemed to be a 
        Participant, and shall continue to comply with all applicable 
        eligibility criteria in this Rule or as the Company may 
        require, and shall have the following privileges, which the 
        Company may revoke, amend, or expand in accordance with, or by 
        amending, these Rules:

                  1. Trading Privileges and Clearing Privileges;
                  2. To intermediate the execution of Customer 
                Transactions on the Company, if approved as an 
                Executing Participant;
                  3. To intermediate Orders and clear Transactions on 
                behalf of Customers, if approved as an FCM Participant; 
                and
                  4. To distribute Company data to its Customers 
                pursuant to any data distribution agreement with the 
                Company.

          L. The Company will apply Participant access criteria in a 
        fair and non-discriminatory manner that is not anti-
        competitive.
Rule 3.3  Participant Obligations
    A. Each Participant and any Authorized User(s) thereof, must comply 
with these Rules, applicable provisions of the CEA and relevant CFTC 
Regulations. Each Participant and any Authorized User(s) thereof also 
must cooperate promptly and fully with the Company, its agents, and the 
CFTC in any investigation, call for information, inquiry, audit, 
examination, or proceeding. Such cooperation shall include providing 
the Company with access to information on the activities of such 
Participant and/or its Authorized User(s) in any referenced market that 
provides the underlying prices for any Company market. If any 
Participant or Authorized User thereof fails to satisfy any Obligation, 
the Company may revoke or suspend the Participant's privileges in full 
or in part. Each Participant also may be subject to civil or criminal 
prosecution.
    B. Each Participant consents to allow the Company to provide all 
information the Company has about the Participant, including the 
Participant's and Customers' trading activity, to the CFTC or any other 
Regulatory Agency, law enforcement authority, or judicial tribunal, 
including (as may be required by information-sharing agreements or 
other arrangements or procedures or other contractual, regulatory, or 
legal provisions) foreign regulatory or self-regulatory bodies, law 
enforcement authorities, or judicial tribunals without notice to the 
Participant.
    C. Each Participant consents to the Company providing information 
related to Know Your Customer or Anti-Money Laundering to Settlement 
Banks or potential Settlement Banks.
    D. Each Participant must establish and maintain cyber security 
policies and procedures to protect each such Participant's systems, 
including, but not limited to, any API.
    E. Each Participant must represent to the Company that each such 
Participant has established and maintains an account to hold Underlying 
and will adhere to the Company's collateral transfer procedures. Each 
Participant agrees to provide and accept collateral when required to do 
so by the Company.
    F. Each Participant and Customer, upon a request of the Company or 
any Regulatory Agency, must promptly respond to any requests for 
information, including by providing any necessary information for the 
Company to perform any of the functions described in the CEA.
    G. Participant Recordkeeping:

          1. Swaps. With respect to each Company Contract that is a 
        Swap, each Participant and Customer must prepare, maintain, 
        keep current and retain those books and records for the life of 
        each Swap, including records of the instrument used as a 
        reference price, underlying commodities and related derivatives 
        market for 5 years following the termination of such Swap, and 
        any other books and records required by these Rules, the CEA 
        and the CFTC's Regulations for the time period required by 
        these Rules, the CEA and the CFTC's Regulations.
          2. Futures Contracts. With respect to each Company Contract 
        that is a futures contract (including any option on a futures 
        contract), each Participant and Customer must prepare, 
        maintain, keep current and retain those books and records of 
        the trading activity, including records of the instrument used 
        as a reference price, underlying commodities and related 
        derivatives market for 5 years following execution of the 
        Company Contract, and any other books and records required by 
        these Rules, the CEA and the CFTC's Regulations for the time 
        period required by these Rules, the CEA and the CFTC's 
        Regulations.
          3. The books and records required to be kept under 
        subparagraphs 1 and 2 above shall be readily accessible for 
        inspection and promptly provided to the Company, its designated 
        Self-Regulatory Organization, the CFTC, the U.S. Securities and 
        Exchange Commission or the U.S. Department of Justice, upon 
        request, in each case in the form and manner required under 
        these Rules, and/or the CEA and CFTC Regulations.

    H. Each Participant must immediately notify the Company in writing 
upon becoming aware:

          1. that the Participant, any of the Participant's officers or 
        any of the Participant's Authorized Users has had trading or 
        clearing privileges suspended, access to, or membership or 
        clearing membership in any Regulatory Agency denied;
          2. that the Participant, any of the Participant's officers or 
        any of the Participant's Authorized Users has been convicted 
        of, pled guilty or no contest to, or entered a plea agreement 
        to any felony in any domestic, foreign or military court, or 
        with the CFTC, as applicable;
          3. that the Participant, any of the Participant's officers or 
        any of the Participant's Authorized Users has been convicted 
        of, plead guilty or no contest to, or entered a plea agreement 
        to a misdemeanor in any domestic, foreign or military court, or 
        with the CFTC, as applicable, which involves:

                  a. embezzlement, theft, extortion, fraud, fraudulent 
                conversion, forgery, counterfeiting, false pretenses, 
                bribery, gambling, racketeering, or misappropriation of 
                funds, securities or properties; or
                  b. any Transaction in or advice concerning swaps, 
                futures, options on futures or securities;

          4. that the Participant, any of the Participant's officers or 
        any of the Participant's Authorized Users has been subject to, 
        or associated with a firm that was subject to, regulatory 
        proceedings before any Regulatory Agency;
          5. of any other material change in any information contained 
        in the Participant's application, including any failure to 
        continue to meet the requirements to be an Eligible Contract 
        Participant with respect to trading activity on the Company SEF 
        or any SEF that clears through the Company DCO, Block Trades or 
        any change in status as a swap dealer, major swap participant 
        or financial entity;
          6. of becoming the subject of a bankruptcy petition, 
        receivership proceeding, or the equivalent, or being unable to 
        meet any financial obligation as it becomes due;
          7. of information that concerns any financial or business 
        developments that may materially affect the Participant's 
        ability to continue to comply with applicable participation 
        requirements;
          8. as applicable to FCM Participants and Executing 
        Participants, of becoming subject to early warning reporting 
        under CFTC Regulation 1.12; or
          9. as applicable to FCM Participants, of any failure to 
        segregate or maintain adequate Customer Funds as required by 
        the CFTC and CFTC Regulations.

    I. Each Participant must diligently supervise all activities of the 
Participant's employees and/or agents, including all Authorized Users 
and Authorized Representatives, relating to Orders, Transactions and 
communications with the Company. Any violation of these Rules by any 
employee, Authorized Representative or Authorized User of a Participant 
may constitute a violation of the Rules by such Participant.
    J. Each Participant must inform the Company of: (i) its LEI, if 
applicable, (ii) any change to its email address within 24 hours after 
such change; (iii) any changes to the regulatory registration 
information of the Participant's Authorized Users within two Settlement 
Bank Business Days of such change; and (iv) other information provided 
in the Participant Application and Agreement within 5 days after any 
such change.
    K. Each FCM Participant also must:

          1. Comply with the financial and reporting requirements set 
        forth by the Commission and the NFA, including the requirements 
        contained in Commission Regulations 1.10 and 1.17.
          2. Require Customers to maintain and provide to the FCM 
        Participant or the Company upon request by the FCM Participant 
        or the Company information identifying any individual who has 
        entered orders on behalf of such Customer's Account, including, 
        but not limited to, the individual's name, taxpayer or other 
        identification number, affiliation to the Customer, address and 
        contact information.
          3. At all times maintain the financial resources at or in 
        excess of the amount prescribed by the Company from time to 
        time.
          4. Maintain a Customer Account that holds Customer Funds with 
        the Company and may maintain a Proprietary Account that holds 
        the FCM Participant's proprietary funds with the Company.
          5. Maintain a separately identifiable Customer ID for each 
        Customer and provide such Customer ID with every Order 
        submitted on the Platform on behalf of a Customer.
          6. Include in the FCM Participant's Customer Account separate 
        Customer IDs for each Customer based on the Customer ID that 
        the FCM Participant transmits with each Order.
          7. Make an initial deposit of funds in an amount determined 
        by the FCM Participant, subject to the Company requiring a 
        greater amount, constituting the FCM Participant's residual 
        interest therein, into a Customer Account for excess collateral 
        with the Company.
          8. Submit statements of financial condition at such times and 
        in such manner as shall be prescribed from time to time.
          9. Use due diligence in receiving and handling Orders from 
        Customers, submitting such Orders on the Platform on behalf of 
        such Customers, responding to inquiries from Customers about 
        their Orders and reporting back to Customers the execution of 
        such Orders.
          10. Maintain policies and procedures acceptable to the 
        Company that:

                  a. with respect to each Customer who is an 
                individual, restricts access to any system through 
                which such individual Customer submits Orders to the 
                FCM Participant for transmission to the Company to that 
                individual Customer; and
                  b. with respect to each Customer who is not an 
                individual: (1) restricts access to any system through 
                which the Customer's Orders may be submitted to the FCM 
                Participant for transmission to the Company to such 
                individuals authorized to enter Orders on behalf of 
                such Customer; (2) requires each Customer who is not an 
                individual, with respect to Swaps, to have and maintain 
                an LEI, which shall be provided to the Company with 
                each order message submitted by such Person; (3) 
                identifies each individual authorized to enter Orders 
                on behalf of such Customer by a distinct Customer ID, 
                which shall be provided to the FCM Participant and the 
                Company with each order message submitted by such 
                Person; and (4) requires the customer to maintain and 
                provide to the FCM Participant or the Company upon 
                request by the FCM Participant or the Company 
                information identifying any individual who has entered 
                Orders on behalf of such Customer's account, including 
                but not limited to the individual's name, taxpayer or 
                other identification number, affiliation to the 
                Customer, address and contact information.

          11. Prior to an FCM Participant accepting any Orders from a 
        Customer for submission to the Company:

                  a. an FCM Participant must first have provided such 
                Customer with the Company Risk Disclosure Statement;
                  b. the Company will require certification by the FCM 
                Participant to the Company that its system has the 
                capacity to block Customer Funds such that the relevant 
                Customer Account maintains sufficient funds to cover 
                the Customer's maximum loss under the Company Contract 
                before the FCM Participant enters the Order and that 
                the FCM Participant demonstrate that capacity to the 
                Company. In addition, on an annual basis or as 
                otherwise required by the Company, each FCM Participant 
                must represent to the Company that the portion of the 
                FCM Participant's system that blocks Customer Funds has 
                not been changed in any material respect or, if the 
                system has been changed, the FCM Participant must 
                identify any such changes and recertify the system's 
                capacity to block Customer Funds. Finally, each FCM 
                Participant agrees to submit to any compliance review 
                by the Company of its systems in this regard.

          12. With respect to the Associated Persons or employees of a 
        FCM Participant:

                  a. Each FCM Participant shall be responsible for 
                diligently supervising the FCM Participant's Associated 
                Persons' or employees' compliance with all Company 
                Rules.
                  b. Each FCM Participant must maintain a complete and 
                accurate list of all Associated Persons or employees of 
                the FCM Participant. Such list shall be promptly 
                provided to the Company upon request.
                  c. Associated Persons or employees must comply with 
                Company Rules.
                  d. Each Associated Person or employee shall be bound 
                by Company Rules to the same extent as if such person 
                were a Participant.
                  e. Each FCM Participant shall be responsible for the 
                acts or omissions of the FCM Participant's Associated 
                Persons or employees, and may be liable for any fines 
                imposed upon such Associated Persons or employees by 
                the Company. Any violation of a Company rule by any 
                such Associated Persons or employee may be considered a 
                violation by the FCM Participant.

          13. Make and file reports in accordance with CFTC Regulations 
        in a manner and form and at such times as may be prescribed by 
        the Commission.
          14. Make and file reports with the Company at such times, in 
        such manner and form, and containing such information as the 
        Company may prescribe from time to time.
          15. Invest Customer Funds only in accordance with CFTC 
        Regulations 22.2(e)(1) and 1.25, to the extent an FCM 
        Participant invests Customer Funds.
          16. Prepare, maintain and keep current those books and 
        records required by the rules of the Company, the CEA and CFTC 
        Regulations. Such books and records shall be open to inspection 
        and promptly provided to the Company, its Designated Self-
        Regulatory Organization (``DSRO''), the Commission and/or the 
        U.S. Department of Justice and/or the U.S. Securities and 
        Exchange Commission, upon request.

    L. An Executing Participant must also:

          1. Adhere to CFTC Regulations concerning applicable financial 
        resources and financial reporting requirements, including, but 
        not limited to, the requirements under CFTC Regulations 1.10 
        and 1.17, as applicable.
          2. Provide a Customer ID for every Order submitted to the 
        Company.
          3. Use due diligence in receiving and handling Orders from 
        Customers, submitting such Orders on the Platform on behalf of 
        such Customers, responding to inquiries from Customers about 
        their Orders and reporting back to Customers the execution of 
        such Orders.
          4. Maintain policies and procedures acceptable to the Company 
        that:

                  a. identify each Authorized User whom the Executing 
                Participant has authorized to transmit Customer Orders 
                by a unique User ID as provided pursuant to Rule 5.1, 
                which User ID shall be submitted to the Company with 
                each Order submitted by such Authorized User;
                  b. permit access only to Authorized Users with 
                permission to enter Customer Orders on behalf of the 
                Executing Participant;
                  c. require each Customer who is not an individual, 
                with respect to Swaps, to have and maintain a Legal 
                Entity Identifier deemed acceptable under CFTC 
                Regulations, which shall be provided to the Company 
                with each order message submitted by such Person, as 
                applicable; and
                  d. require the Customer to maintain and provide, upon 
                request, to the Executing Participant or the Company 
                information identifying any individual who has entered 
                Orders on behalf of such Customer's account, including, 
                but not limited to, the individual's name, taxpayer or 
                other identification number, affiliation to the 
                Customer, address and contact information.
Rule 3.4  Customer Account Requirements for FCM Participants
    A. FCM Participants must comply with the requirements set forth in 
Parts 1 and 22 of CFTC Regulations. This includes, but is not limited 
to, the following:

          1. Maintaining sufficient funds at all times in Customer 
        Accounts.
          2. Computing, recording and reporting completely and 
        accurately the balances in the Statement of Segregation 
        Requirements and Funds in Segregation and the Statement of 
        Segregation Requirements and Cleared Swaps Customer Collateral 
        Held in Cleared Swaps Customer Accounts.
          3. Obtaining satisfactory Customer Segregated Account and/or 
        Cleared Swaps Customer Account acknowledgment letters and 
        identifying Customer Segregated Account and/or Cleared Swaps 
        Customer Account as such.
          4. Preparing complete and materially accurate daily Customer 
        Segregated Account and Cleared Swaps Customer Account 
        computations, as applicable, in a timely manner.

    B. All FCM Participants must submit a daily Customer Segregated 
Account statement and a Cleared Swaps Customer Account statement, as 
applicable, through Company-approved electronic transmissions by 12:00 
noon on the following Settlement Bank Business Day.
    C. FCM Participants must provide the Company's Compliance 
Department with access to Customer Account information in a form and 
manner prescribed by the Compliance Department.
    D. All FCM Participants must provide written notice to the 
Compliance Department of a failure to maintain sufficient funds in 
Customer Accounts. The Compliance Department must receive immediate 
written notification when an FCM Participant knows or should have known 
of such failure.
    E. Company staff may prescribe additional Customer Account 
requirements.
Rule 3.5  Customer Funds Maintained With the Company
    All Customer Funds deposited with the Company on behalf of 
Customers shall be held in accordance with Parts 1 and 22 of the CFTC 
Regulations in an account identified as a Customer Segregated Account 
or a Cleared Swaps Customer Account, as applicable. Such Customer Funds 
shall be segregated by the Company and treated as belonging to such 
Customers of the FCM Participant. Pursuant to this rule, an FCM 
Participant shall satisfy the acknowledgment letter requirement of Rule 
3.4A.3 for Customer Funds held at the Company.
Rule 3.6  Dues, Fees and Expenses Payable by Participants
    A. Participants are not required to pay dues.
    B. Participants may be charged fees in connection with Trading 
Privileges and Clearing Privileges in such amounts as may be revised 
from time to time. Fees and any revisions to such fees will be provided 
on the Website and in Participant Notices.
    C. Participants may be charged fees for settlement of Company 
Contracts at expiration in an amount to be reflected from time to time 
on the Website and in Participant Notices.
    D. The Company or a Settlement Bank may also deduct from a 
Collateral Account fees or expenses incurred in connection with a 
Participant's trading or account activity, such as fees for wire 
transfers or check processing via electronic check, or storage or other 
fees or expenses related to Trading Privileges or Clearing Privileges. 
All such fees shall be charged in an amount to be reflected from time 
to time on the Website and in Participant Notices.
    E. If the Company determines in the future to impose dues or 
additional fees, the Company shall notify the Participant of any dues 
or additional fees that will be imposed at least 10 days before they 
take effect.
Rule 3.7  Recording of Communications
    The Company may record conversations and retain copies of 
electronic communications between Company Officials, on one hand, and 
Participants, their Authorized Users, Authorized Representatives or 
other agents, on the other hand. Any such recordings may be retained by 
the Company in such manner and for such periods of time as the Company 
may deem necessary or appropriate. The Company shall retain such 
records for the retention periods necessary to comply with CFTC 
Regulation 1.35 or such longer period as the Company deems appropriate.
Rule 3.8  Independent Software Vendors
    A. A person seeking to act as an Independent Software Vendor must 
satisfy the Company's technological integrity requirements, complete 
the necessary ISV application and access documentation, agree to abide 
by these Rules and Applicable Law, consent to the jurisdiction of the 
Company, and agree to not adversely affect the Company's ability to 
comply with Applicable Law. Access to the Company by an ISV shall be 
provided pursuant to criteria that are impartial, transparent and 
applied in a fair and non-discriminatory manner. Persons seeking access 
to the Company through an ISV must themselves be Participants to have 
such access. ISVs shall be subject to fees as reflected from time to 
time on the Website and in Participant Notices.
    B. Each ISV must immediately notify the Company in writing upon 
becoming aware:

          1. that the ISV or any of the ISV's officers has been 
        convicted of, pled guilty or no contest to, or entered a plea 
        agreement to any felony in any domestic, foreign or military 
        court, or with the CFTC, as applicable;
          2. that the ISV or any of the ISV's officers has been 
        convicted of, plead guilty or no contest to, or entered a plea 
        agreement to a misdemeanor in any domestic, foreign or military 
        court, or with the CFTC, as applicable, which involves:

                  a. embezzlement, theft, extortion, fraud, fraudulent 
                conversion, forgery, counterfeiting, false pretenses, 
                bribery, gambling, racketeering, or misappropriation of 
                funds, securities or properties; or
                  b. any Transaction in or advice concerning swaps, 
                futures, options on futures or securities;

          3. that the ISV or any of the ISV's officers has been subject 
        to, or associated with a firm that was subject to, regulatory 
        proceedings before any Regulatory Agency;
          4. of any other material change in any information contained 
        in the ISV's application;
          5. of becoming the subject of a bankruptcy petition, 
        receivership proceeding, or the equivalent, or being unable to 
        meet any financial obligation as it becomes due; and
          6. of information that concerns any financial or business 
        developments that may materially affect the ISV's ability to 
        continue to comply with applicable Company requirements.

    C. Each ISV must inform the Company of: (i) any change to its email 
address within 24 hours after such change; and (ii) other information 
provided in its application for ISV status within 5 days after any such 
change.
Rule 3.9  Participant Accounts and Customer Accounts
    A. The Company shall establish and maintain a Participant Account 
for each Participant and the Company undertakes to treat the 
Participant for whom such Participant Account is maintained as entitled 
to exercise the rights that comprise each financial asset which is 
credited to such Participant Account. However, the Company shall have 
complete and absolute discretion as to whether any particular financial 
asset is accepted by it for credit to any Participant Account.
    B. The Company shall establish and maintain a Customer Account for 
each FCM Participant's Customers and the Company undertakes to treat 
the FCM Participant for whom such Customer Account is maintained as 
entitled to exercise the rights that comprise each financial asset 
which is credited to such Customer Account. However, the Company shall 
have complete and absolute discretion as to whether any particular 
financial asset is accepted by it for credit to any Customer Account.
    C. With respect to any Digital Currency, including, but not limited 
to, Bitcoin, which is or may be credited to any Participant Account, 
the following terms and conditions shall apply:

          1. For purposes of creating a ``security entitlement'' as 
        such term is defined in Section 8-102(a)(17) of the UCC, the 
        Company and the Participant agree that: (1) the Digital 
        Currency and any Digital Currency wallet maintained by the 
        Company shall be treated as a ``financial asset'' as such term 
        is defined in Section 8-102(a)(9) of the UCC; and (2) each 
        Participant shall be treated as an ``entitlement holder'' as 
        such term is defined in Section 8-102(a)(7) of the UCC.
          2. Each Participant acknowledges that the Company is a 
        ``securities intermediary'' as such term is defined in Section 
        8-102(a)(14) of the UCC.
          3. Any Digital Currency which a Participant desires be 
        credited to such Participant's Participant Account shall be 
        transferred to a Digital Currency wallet designated by the 
        Company and upon such transfer the Company shall indicate by 
        book entry that such Digital Currency has been credited to such 
        Participant Account.

    D. With respect to any Digital Currency, including, but not limited 
to, Bitcoin, which is or may be credited to any Customer Account, the 
following terms and conditions shall apply:

          1. For purposes of creating a ``security entitlement'' as 
        such term is defined in Section 8-102(a)(17) of the UCC, the 
        Company and the Customer and the relevant FCM Participant all 
        agree that: (1) the Digital Currency shall be treated as a 
        ``financial asset'' as such term is defined in Section 8-
        102(a)(9) of the UCC; and (2) each FCM Participant shall be 
        treated as an ``entitlement holder'' as such term is defined in 
        Section 8-102(a)(7) of the UCC.
          2. Each Customer and each FCM Participant acknowledges that 
        the Company is a ``securities intermediary'' as such term is 
        defined in Section 8-102(a)(14) of the UCC.
          3. Any Digital Currency which an FCM Participant desires be 
        credited to any of such FCM Participant's Customer Accounts 
        shall be transferred to a Digital Currency wallet designated by 
        the Company and upon such transfer the Company shall indicate 
        by book entry that such Digital Currency has been credited to 
        any of such Customer Accounts.

    E. The Company shall have only such duties and obligations with 
respect to each Participant Account and Customer Account as are set 
forth in Article 8 of the UCC or otherwise mandated by Applicable Law. 
Each Participant, including each FCM Participant, and each Customer 
acknowledges and agrees that the Company is not a fiduciary for any 
Participant, including any FCM Participant, or Customer.
Rule 3.10  Withdrawal of Participant
    A. To withdraw from the Company, a Participant must notify the 
Company of its withdrawal. Such withdrawal shall be accepted 
immediately upon receipt of such notice by the Company and shall be 
effective upon such Participant's fulfillment of its obligations under 
paragraph (C) below, or at such other time as the Company may determine 
in its reasonable discretion is desirable for the efficient operation 
of the Company.
    B. When the Company accepts the withdrawal of a Participant, all 
rights and privileges of such Participant terminate (including, without 
limitation, the Trading Privileges and Clearing Privileges) except as 
set forth in paragraph (C) below. The accepted withdrawal of a 
Participant shall not affect the rights of the Company under these 
Rules or relieve the former Participant of such Participant's 
obligations under the Company Rules before such withdrawal. 
Notwithstanding the accepted withdrawal of a Participant, the withdrawn 
Participant remains subject to the LedgerX Rules, the Obligations and 
the jurisdiction of the Company for acts done and omissions made while 
a Participant, must comply with paragraphs (C) and (D) below, must 
cooperate in any Disciplinary Action under Chapter 9 as if the 
withdrawn Participant were still a Participant, and must comply with 
requests for information from the Company regarding activities and 
obligations while a Participant for at least 5 years following its 
withdrawal.
    C. A Participant that has delivered a withdrawal notice pursuant to 
paragraph (A) above shall be subject to the following requirements, 
obligations and provisions:

          1. it must use all reasonable endeavors to close out or 
        transfer all open positions in its Participant Account and each 
        of its Customer Accounts, as applicable, within 30 days after 
        the Participant has delivered a withdrawal notice pursuant to 
        paragraph (A) (the ``wind-down period'');
          2. after delivering a withdrawal notice pursuant to paragraph 
        (A), it shall only be entitled to submit transactions for 
        clearing which it can demonstrate have the overall effect of 
        reducing open positions;
          3. if it has any open positions with the Company (whether in 
        the Participant Account or any Customer Account) after the 
        wind-down period, the Participant shall be subject to the 
        Company exercising rights under Rule 7.2G to liquidate or 
        transfer the open positions of the Participant.

    D. Any withdrawal notice delivered by a Participant pursuant to 
paragraph (A) above shall be irrevocable by the Participant and 
membership may only be reinstated pursuant to a new application for 
membership following the close-out or transfer of all open Company 
Contracts in its Participant Account and each of its Customer Accounts, 
as applicable.
Chapter 4  Liquidity Providers
Rule 4.1  Application and Agreement
    A. Only Participants in good standing may become Liquidity 
Providers on the Company.
    B. To be considered for Liquidity Provider status, a Participant 
shall complete and execute a Liquidity Provider Agreement.
    C. The designation of any Liquidity Provider may be suspended, 
terminated or restricted by the Company at any time and for any reason.
Rule 4.2  Appointment
    A. The Company may appoint one or more Liquidity Providers for 
certain Company Contracts.
    B. In making such appointments, the Company shall consider:

          1. the financial resources available to the applicant;
          2. the applicant's trading activity in relevant swaps, 
        futures, options on futures or related cash markets; and
          3. the applicant's business reputation and experience in 
        market making in options and other derivative products.

    C. The Company, in its sole discretion, may appoint a Participant 
as a Liquidity Provider for certain Series and may appoint multiple 
Liquidity Providers for certain Series.
    D. No appointment of a Liquidity Provider shall be made without the 
Liquidity Provider's consent to such appointment.
    E. The Company shall periodically conduct an evaluation of all 
Liquidity Providers to determine whether they have fulfilled 
performance standards relating to, among other things, quality of the 
markets; trading activity; competitive market making; observance of 
ethical standards; business reputation; and administrative and 
financial soundness. If the Liquidity Provider fails to meet minimum 
performance standards, the Company may, among other actions, suspend, 
terminate or restrict the Liquidity Provider's appointment.
Rule 4.3  Benefits
    Liquidity Providers may receive reduced trading fees or other 
incentives in accordance with any Liquidity Provider program in place 
at the Company for fulfilling the Obligations of a Liquidity Provider 
as disclosed in the applicable Liquidity Provider Agreement.
Rule 4.4  Obligations
    Transactions of Liquidity Providers should constitute a course of 
dealing reasonably calculated to contribute to the maintenance of a 
fair and orderly market, and Liquidity Providers shall not enter Orders 
or enter into Transactions that are inconsistent with such a course of 
dealing. Ordinarily, Liquidity Providers shall be obligated to do the 
following:

          A. comply with all other terms of the applicable Liquidity 
        Provider Agreement; and

          B. make good-faith efforts to enter on the Platform current 
        binding bid and offer quotes, with a bid/offer spread as 
        specified in the applicable Liquidity Provider Agreement, as 
        necessary to ensure liquidity.
Chapter 5  Method for Trading Company Contracts
Rule 5.1  User IDs
    A. Each Authorized User must have a unique User ID and a CSP.
    B. Each Order entered must contain a User ID that identifies the 
Participant's Authorized User that entered the Order.
    C. Each Order entered by an FCM Participant or Executing 
Participant on behalf of a Customer must contain: (1) such Customer's 
User ID or Customer ID; and (2) the User ID of the FCM Participant's or 
Executing Participant's Authorized User that entered the Order.
    D. For Transactions in Swaps, (1) the Reporting Counterparty shall 
be established pursuant to CFTC Regulation 45.8, as may be amended from 
time to time; and (2) if each Participant has equal reporting status 
under CFTC Regulation 45.8, the Company shall designate the seller of a 
Swap as the Participant that is the Reporting Counterparty.
    E. No Person may use a User ID to place any Order except as 
permitted by these Rules, nor may any Person knowingly permit or assist 
with the unauthorized use of a User ID. Each Participant and Authorized 
User shall ensure that no User ID is used by any Person not authorized 
by these Rules. Each Participant shall establish and maintain policies 
and procedures to ensure the proper use and protection of User IDs. An 
Authorized User is prohibited from using another Person's User ID, 
unless the Authorized User is entering the Order of a Customer in 
accordance with the Rules.
    F. With respect to Customers of Executing Participants, each such 
Customer must provide the User ID of any of its Authorized Users to an 
Executing Participant to allow the Executing Participant to enter 
Orders on behalf of such Customer.
    G. Each Participant shall be solely responsible for controlling and 
monitoring the use of all User IDs and CSPs issued to its Authorized 
Users.
    H. Each Participant shall notify the Company of the need to 
terminate any User IDs or the status of any of its Authorized Users.
    I. Each Participant shall keep confidential and secure all User 
IDs, except as permitted pursuant to these Rules, as well as all CSPs 
and any account numbers and passwords related to the Platform and shall 
notify the Company promptly upon becoming aware of:

          1. any unauthorized disclosure or use of any User ID or CSP 
        and of any other compromise to a User ID or CSP that would 
        reasonably cause the Company to deactivate the User ID or CSP;
          2. any loss of any User ID or CSP; and
          3. any unauthorized access to the Company by any Person using 
        a User ID and/or CSP assigned to such Participant.

    J. Each trading system that automates the generation and routing of 
Orders to the Company must have a User ID.
Rule 5.2  Order Entry and Audit Trail
    A. Each Participant and Authorized User shall enter Orders on the 
Platform, and the Company shall maintain an electronic record of these 
entries. Each Participant shall be responsible for any and all Orders 
entered using User IDs assigned to the Participant or its Authorized 
User by the Company. Trading on the Company central limit order book is 
anonymous.
    B. Each Participant's Authorized User entering Orders on the 
Platform must input for each Order the following information (to the 
extent that such information is not provided at account creation or by 
the Platform):

          1. the Authorized User's User ID;
          2. for an Authorized User of an FCM Participant or Executing 
        Participant entering an order on behalf of a Customer, the User 
        ID of the Authorized User and the Customer ID, where 
        applicable, for whom such Authorized User enters an Order;
          3. the Series;
          4. Order type;
          5. Customer Type Indicator Code;
          6. buy or sell, and for options, put, call and strike;
          7. price;
          8. quantity;
          8. such additional information as may be prescribed from time 
        to time by the Company; and
          10. for each Order to buy or sell a Swap, the Authorized User 
        shall include with each such Order the following information 
        (to the extent that such information is not provided at account 
        creation or by the Platform):

                  a. the Legal Entity Identifier of the Participant on 
                whose behalf the Order is placed;
                  b. a yes/no indication of whether the Participant is 
                a swap dealer, as defined in Section 1a(49) of the CEA 
                and CFTC Regulations, with respect to the Swap for 
                which the Order is submitted;
                  c. a yes/no indication of whether the Participant or 
                Authorized User is a major swap participant, as defined 
                in Section 1a(33) of the CEA and CFTC Regulations, with 
                respect to the Swap for which the Order is submitted;
                  d. a yes/no indication of whether the Participant is 
                a financial entity, as defined in Section 2(h)(7)(C) of 
                the CEA;
                  e. a yes/no indication of whether the Participant or 
                Customer is a U.S. person, as defined in the CFTC's 
                July 26, 2013 Cross-Border Guidance, as may be amended 
                from time to time; and
                  f. if the Swap will be allocated: (i) an indication 
                that the Swap will be allocated; (ii) the LEI of the 
                agent; (iii) an indication of whether the Swap is a 
                post-allocation swap; and (iv) if the Swap is a post-
                allocation swap, the unique swap identifier of the 
                original transaction between the reporting counterparty 
                and the agent.

    C. In the event that an FCM Participant or Executing Participant or 
Authorized User of an FCM Participant or Executing Participant receives 
an Order from a Customer that cannot be immediately entered on the 
Platform, the Executing Participant or Authorized User of the Executing 
Participant must prepare a written Order ticket and include the account 
designation, date, an electronic timestamp reflecting the time of 
receipt and other information required pursuant to section (B) above. 
The FCM Participant or Executing Participant must enter the Order on 
the Platform when the Order becomes executable.
    D. Audit Trail Requirements

          1. Participants that provide connectivity to the Company are 
        responsible for maintaining, or causing to be maintained, an 
        Order routing or front-end audit trail for all electronic 
        Orders, including Order entry, modification, cancellation and 
        responses to such messages, entered on the Platform through any 
        gateway to the Platform. The audit trail must contain all Order 
        receipt, Order entry, Order modification, and response or 
        receipt times to the highest level of precision achievable by 
        the operating system, in accordance with CFTC requirements for 
        electronic Orders and no more than one second for non-
        electronic Orders. The times captured must not be able to be 
        modified by the Person entering the Order.
          2. Participants, including Authorized Users and any Person 
        having Trading Privileges, must maintain audit trail 
        information as required by the CEA and CFTC Regulations, 
        including, but not limited to, CFTC Regulations 1.31 and 1.35 
        if applicable, and must be able to produce this data in a 
        standard format upon request from the Regulatory Oversight 
        Committee, Compliance Department or other relevant department 
        of the Company.
          3. FCM Participants must maintain a complete record of all of 
        Customer Orders to trade Company Contracts received by the FCM 
        Participant, and any other Transaction records, communications 
        or data received by the FCM Participant regarding its Customer 
        Accounts.
          4. The audit trail must capture required fields, which 
        include but are not limited to the following: all fields 
        relating to Order entry, including the ID of a Company 
        Contract, quantity, Order type, buy/sell indicator, User ID(s), 
        Customer Type Indicator Code, timestamps, and, where 
        applicable, stop/trigger price, type of action and action 
        status code, and applicable information contained in paragraph 
        (B) of this Rule 5.2.
          5. For Orders that are executed, the audit trail must record 
        the execution time of the Company Contract and all fill 
        information.
          6. The Compliance Department staff shall require, at least on 
        an annual basis, its Participants to verify compliance with 
        these audit trail and record-keeping requirements. Participants 
        also may be subject to periodic audit trail spot checks, 
        depending upon any indicators that any Participant is failing 
        to adhere to Company Rules pertaining to audit trail 
        requirements, Participant obligations or any other failures to 
        provide information to the Company upon request. The findings 
        of such Company reviews will be documented and maintained as 
        part of the books and records of the Company. The reviews shall 
        include, but not be limited to, the following:

                  a. review of random samples of audit trail data;
                  b. review of the process by which identifications are 
                assigned to records and users and how the records are 
                maintained; and
                  c. review of account numbers and customer indicators 
                in trade records to test for accuracy and improper use.

    E. CTI Codes. Each Participant must identify each Transaction on 
the record of transactions submitted to the Company with the correct 
CTI Code. The CTI Codes are as follows:

          CTI 1: Electronic Trading and Privately Negotiated--Applies 
        to Transactions initiated and executed by a Participant for its 
        Proprietary Account, for an account controlled by a 
        Participant, or for an account in which the Participant has an 
        ownership or financial interest.
          CTI 2: Electronic Trading and Privately Negotiated--Applies 
        to Transactions initiated and executed by a Participant trading 
        for a clearing member's house account.
          CTI 3: Electronic Trading and Privately Negotiated--Applies 
        to Orders entered by a Participant or Authorized User for 
        another Participant or an account controlled by such other 
        Participant.
          CTI 4: Electronic Trading and Privately Negotiated--Applies 
        to Transactions initiated and executed by a Participant trading 
        for any other type of Customer.

    F. A Company Contract will not be void or voidable due to: (1) a 
violation by the Company of the provisions of sections 5 or 5h of the 
CEA or Parts 37 or 38 of CFTC Regulations; (2) any CFTC proceeding to 
alter or supplement a rule, term or condition under section 8a(7) of 
the CEA or to declare an emergency under section 8a(9) of the CEA; or 
(3) any other proceeding the effect of which is to: (i) alter or 
supplement a specific term or condition or trading rule or procedures, 
or (ii) require the Company to adopt a specific term or condition, 
trading rule or procedure, or to take or refrain from taking a specific 
action.
Rule 5.3  Order Type
    A. The following types of Orders may be entered on the Platform 
with respect to any Company Contract.

          1. Limit Order. An Order to buy or sell a Company Contract at 
        a specified price or better. A Limit Order must be entered on 
        the Platform with a defined limit price. A Limit Order will be 
        executed when it is entered, to the extent that there are 
        resting contra-Orders, with any balance of such Limit Order to 
        remain as a resting Order until such Limit Order is executed or 
        canceled. Unless canceled by the Participant or upon a market 
        close, an exchange restart, or other disruption to normal 
        operating conditions, all Limit Orders shall be normally 
        canceled by the Company 30 days after being placed.
          2. Negotiated Trade Order. An Order to cross a pre-negotiated 
        trade available only for Permitted Transactions on the Company 
        SEF. A Negotiated Trade Order must be entered on the Platform 
        with the Order size, limit price, buy or sell indication, and 
        committed counterparty. The entire balance of the Negotiated 
        Trade Order shall be executed against the committed 
        counterparty's side of the Negotiated Trade Order via the trade 
        matching system. The agreed-upon terms of any Negotiated Trade 
        Order must be submitted to the Platform via the Company 
        Telecommunications Systems by one Participant within 5 minutes 
        of the conclusion of any pre-negotiation. The counterparty to 
        the transaction must then approve the terms via the Company 
        Telecommunication Systems before the Negotiated Trade Order is 
        executed via the trade matching system.
          3. Quote. A Limit Order as defined in this Rule 5.3A that is 
        entered on the Platform by a Liquidity Provider.
          4. Stop Limit Order. Once a stop price specified by the 
        Participant is met or exceeded, a Limit Order is submitted 
        automatically. The stop price is the price of an executed Limit 
        Order that will activate the subsequent automatic submission of 
        the Participant's Limit Order without further instruction. The 
        price for the Limit Order must be specified by the Participant 
        at the time the Stop Limit Order is submitted. Prior to the 
        triggering of the stop price, a Stop Limit Order will remain 
        open until being canceled by the Participant. Once the stop 
        price is triggered, the resulting Limit Order is treated as a 
        normal Limit Order.

    B. The Company's central limit order book matches orders in an open 
and competitive manner on the basis of a price and time priority 
algorithm.
    C. The Company does not accept indications of interest or 
indicative quotes.
    D. Other types of Orders as may be approved by the Company from 
time to time as certified with the CFTC in accordance with Part 40 of 
CFTC Regulations and disclosed in a Participant Notice and on the 
Website.
Rule 5.4  Trading Contracts on Behalf of Customers
    A. Individuals or entities that have not been approved and 
authorized as Participants of the Company may trade Company Contracts 
only as Customers of an FCM Participant, and all Customer Orders must 
be transmitted to the Company by each Customer's FCM Participant. Each 
FCM Participant shall maintain a secure connection to the Company and 
comply with all technical and other requirements established by the 
Company for this purpose.
    B. Upon submission of a Customer Order, the Company will conduct a 
review of the FCM Participant's applicable Customer Account to ensure 
that the FCM Participant's Customer can fully collateralize the Order 
prior to entering into any Transaction. If the FCM Participant's 
Customer Account does not have the necessary funds for the Order, the 
Company will not accept the Customer's Order.
Rule 5.5  Execution Methods
    A. Swap Execution Facility:

          1. The Company facilitates the execution of Orders through a 
        central limit order book on the Platform, as set forth in Rule 
        5.3.
          2. Negotiated Trade Orders are facilitated and executed via 
        the Platform's trade matching system.
          3. The Company SEF does not facilitate the execution of Block 
        Trades or EFPs.

    B. Designated Contract Market:

          1. The Company facilitates the execution of Orders in an open 
        and competitive manner through a central limit order book on 
        the Platform, as set forth in Rule 5.3.
          2. The Company facilitates Block Trades and EFP transactions, 
        as set forth in Rule 5.7 and Rule 5.8, respectively.
          3. The Company DCM does not facilitate the execution of 
        Negotiated Trade Orders.

    C. A written record of all of the terms of each Transaction entered 
into on the Company or pursuant to the Rules will be available 
immediately upon execution through the Participant Portal. Such record 
shall legally supersede any previous agreement and serve as a 
confirmation of each such Transaction. The Company will send 
confirmation messages to Participants upon execution of a Transaction 
via the API and/or Portal, if such Participants are online at the time. 
However, please note that if any applicable Participant is not online 
at the time of execution, such Participant will see the confirmation(s) 
when it next logs on to the Platform.
    D. Except with respect to transfer trades, the product type, size, 
execution time (or submission time in the case of Block Trades and 
EFPs) and execution method for each Transaction will be made available 
on the Platform to all Participants immediately after execution (or 
immediately after submission to the Platform in the case of Block 
Trades and EFPs) of the relevant Transaction.
Rule 5.6  Trading Hours
    A. The Trading Hours of the Company are 24 hours a day, 7 days a 
week, 365 days per year.\1\ The Trading Hours applicable to any given 
type of Company Contract will be as specified in Chapter 12 of these 
Rules with any modifications posted on the Website and sent by 
Participant Notice.
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    \1\ Or, 366 days per year for leap years.
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Rule 5.7  Block Trades
    A. The Company may permit Block Trades in Company Contracts listed 
by the Company DCM. The relevant Company Contract Specifications shall 
specify whether a Company Contract is eligible to be traded as a Block 
Trade.
    B. Each Block Trade shall be effected away from the Platform but 
otherwise pursuant to the Rules. The parties to a Block Trade must be 
Eligible Contract Participants, and a Block Trade must be in a size 
that is equal to or in excess of the applicable minimum block size for 
such Company Contract as set forth in the Company Contract 
Specifications. The Company shall, from time to time, review and (as 
appropriate) revise its minimum block sizes.
    C. An FCM Participant or an Executing Participant must receive 
written instructions from a Customer or obtain the Customer's prior 
written or recorded consent before entering into a Block Trade with 
that Customer.
    D. Except as may otherwise be permitted by Applicable Law, 
Participants shall not aggregate Orders for different accounts to 
achieve the minimum block size.
    E. The price at which a Block Trade is executed must be fair and 
reasonable in light of (1) the size of the Block Trade, (2) the prices 
and sizes of other transactions in the same contract at the relevant 
time, (3) the prices and sizes of transactions in other relevant 
markets at the relevant time, and (4) the circumstances of the markets 
or the parties to the Block Trade.
    F. Block Trades between different accounts with common beneficial 
ownership are prohibited unless (1) each party's decision to enter into 
the block trade is made by an independent decision-maker and (2) each 
party has a legal and independent bona fide business purpose for 
engaging in the block trade.
    G. The material terms of a Block Trade must be agreed to on the 
Company Telecommunication Systems. Each Block Trade must be submitted 
to the Company via the Company Telecommunication Systems by one 
Participant within 5 minutes of the execution. The counterparty to the 
transaction must then approve the terms of the Block Trade via the 
Company Telecommunication Systems within 5 minutes of the execution. 
The Company shall promptly publish such information to the market with 
an indication that it was a Block Trade.
    H. Participants involved in the execution of Block Trades must 
maintain written or electronic records of all such Block Trades, 
including an electronic timestamp reflecting the date and time any such 
Order was received as well as an electronic timestamp reflecting the 
date and time such Order was executed or canceled.
    I. All Company Contracts effected as Block Trades shall be cleared 
in the usual manner.
Rule 5.8  Exchange for Physical Transactions
    A. The Company may permit EFP transactions involving Company 
Contracts listed by the Company DCM. The relevant Company Contract 
Specifications shall specify whether a Company Contract is eligible to 
be traded as a component of an EFP transaction.
    B. An EFP transaction shall consist of two discrete but related 
simultaneous transactions in which one party must be the buyer of the 
related position and seller of the corresponding Company Contract, and 
the other party to the EFP transaction must be the seller of the 
related position and the buyer of the corresponding Company Contract. 
The related position must involve the commodity underlying the Company 
Contract in a quantity that is approximately equivalent to the quantity 
covered by the Company Contract.
    C. Each EFP transaction requires a bona fide transfer of ownership 
of the cash commodity between the parties. The facilitation of an EFP 
transaction by any party that knows such EFP transaction is non bona 
fide shall constitute a violation of this Rule.
    D. The execution of an EFP transaction may not be contingent upon 
the execution of another EFP or related position transaction between 
the parties where the transactions result in the offset of the related 
position without the incurrence of market risk that is material in the 
context of the related position transactions.
    E. The accounts involved in the execution of an EFP transaction 
must be (1) independently controlled with different beneficial 
ownership, (2) independently controlled accounts of separate legal 
entities with the same beneficial ownership, or (3) independently 
controlled accounts within the same legal entity, provided that the 
account controllers operate in separate business units.
    F. EFP transactions may be effected at such commercially reasonable 
prices as are mutually agreed upon by the parties to the transaction. 
EFP transactions may not be priced to facilitate the transfer of funds 
between parties for any purpose other than as the consequence of 
legitimate commercial activity.
    G. The parties to an EFP transaction shall maintain all documents 
relevant to the Company Contract and the related position including all 
documents customarily generated in accordance with the relevant market 
practices, including, as applicable, copies of the documents evidencing 
title to, or the contract or contracts to buy or sell, the cash 
commodity involved in such EFP transaction. Any such documents and 
information shall be furnished to the Company upon request.
    H. The material terms of an EFP transaction must be agreed to on 
the Company Telecommunication Systems. Each EFP transaction must be 
submitted to the Company via the Company Telecommunication Systems by 
one Participant within 5 minutes of the execution. The counterparty to 
the transaction must then approve the terms of the EFP transaction 
within 5 minutes of the execution via the Company Telecommunication 
Systems.
    I. All Company Contracts effected as part of EFP transactions shall 
be cleared in the usual manner.
Chapter 6  Clearing and Delivery
Rule 6.1  Clearance and Substitution
    A. Upon submission of an Order, the Company will conduct a review 
of the Participant's Collateral Account to ensure that the Participant 
can fully collateralize the Order prior to entering into any 
Transaction. If the Participant's Collateral Account does not have the 
necessary funds and/or collateral for the Order, the Company will not 
accept the Order.
    B. Upon the successful matching of Orders, the Company's 
Derivatives Clearing Organization shall immediately, through the 
process of Novation, be substituted as and assume the position of 
seller to the Participant buying and buyer to the Participant selling 
the relevant Company Contract. Upon such substitution, the buying and 
selling Participants shall be released from their Obligations to each 
other, and such Participants shall be deemed to have bought the Company 
Contract from or sold the Company Contract to the Company's DCO, as the 
case may be, and the Company's DCO shall have all the rights and be 
subject to all the liabilities of such Participants with respect to 
such Transactions. Such substitution shall be effective in law for all 
purposes. The Participants of the Company Contract are deemed to 
consent to the Novation by entering the applicable Orders on the 
Company Platform and the Company DCO consents to the Novation by 
accepting the Orders on the Company Platform.
    C. Company Contracts with the same terms and conditions, as defined 
by the Company Contract Specifications, submitted to the Company's 
Derivatives Clearing Organization for clearing, are economically 
equivalent within the Company's Derivatives Clearing Organization and 
may be offset with each other within the Company's Derivatives Clearing 
Organization.
    D. Upon acceptance of a Company Contract by the Company's 
Derivatives Clearing Organization for clearing:

          1. The original Company Contract is extinguished;
          2. The original Company Contract is replaced by an equal and 
        opposite Company Contract between the Company's DCO and each 
        Participant; and
          3. All terms of a cleared Company Contract must conform to 
        the Company Contract Specifications.

    E. If a Company Contract is rejected for clearing by the Company's 
Derivatives Clearing Organization for any reason, such Company Contract 
is void ab initio.
Rule 6.2  Settlement of Company Contracts
    A. The Company shall maintain, on its system, a record of each 
Participant's account balances and Company Contracts.
    B. On the Settlement Date, the Company will notify all Participants 
of the final amount payable.
    C. With respect to a Company Contract that is physically settled, 
the Company shall record the following transfers in Participant 
Accounts in the Company's books and records by no later than the next 
Business Day after the Settlement Date (except as otherwise specified 
in the Company Contract specifications); provided, however, that where 
the same Participant has offsetting positions in the same Company 
Contract with the same terms, the following operations shall be netted 
for that Participant:

          1. With respect to a futures contract: (i) to the extent a 
        buyer has not already prepaid the U.S. dollar (``USD'') 
        purchase price of the future in accordance with the Company 
        Contract specifications, the buyer of the future shall be 
        debited the total USD purchase price, and shall be credited 
        with the total Underlying due under the Company Contract; and 
        (ii) the seller of the future shall be debited the total 
        Underlying due under the Company Contract, and shall be 
        credited with the total USD purchase price.
          2. With respect to a call option contract: (i) the call 
        option buyer shall be debited the total USD strike price, and 
        shall be credited with the total Underlying due under the 
        Company Contract; and (ii) the call option seller shall be 
        debited the total Underlying due under the Company Contract, 
        and shall be credited with the total USD strike price.
          3. With respect to a put option contract: (i) the put option 
        buyer shall be debited the total Underlying set forth in the 
        Company Contract, and shall be credited with the total USD 
        strike price; and (ii) the put option seller shall be debited 
        the total USD strike price due under the Company Contract, and 
        shall be credited with the total Underlying set forth in the 
        Company Contract.
          4. With respect to a swap contract that is not an option: (i) 
        to the extent a buyer has not already prepaid the USD purchase 
        price of the swap in accordance with the Company Contract 
        specifications, the buyer of the swap shall be debited the 
        total USD purchase price, and shall be credited with the total 
        Underlying due under the Company Contract; and (ii) the seller 
        of the swap shall be debited the total Underlying due under the 
        Company Contract, and shall be credited with the total USD 
        purchase price.

    D. For an expired Company Contract that is an option, the Company 
will transfer the Underlying to the Participant Account on the 
Company's books and records of the Participant that initially posted 
the Underlying in its capacity as the option call writer.
    E. After the notice period on the last trading day of an expiring 
Series of Company Contracts that are options, the Company will delete 
all such Company Contracts that have not been exercised from each 
Participant's Participant Account. A Company Contract that is an option 
and that has not been exercised on or before the last trading day will 
expire with no value in accordance with the Contract Specifications. 
Company Contracts that are physically settled options shall not be 
exercised by the Company for a Participant automatically.
Rule 6.3  Deposit Procedures
    A. A Participant must submit a deposit notification through the 
Participant Portal before the Participant may deposit funds or any 
Underlying with the Company. A Participant must deposit funds or 
Underlying on the same day as the Participant submits to the Company a 
deposit notification to the Company.
    B. Deposits occur, and funds and Underlying are available for use 
with respect to Trading Privileges and Clearing Privileges, no later 
than the next Settlement Bank Business Day after a Participant submits 
a deposit notification and deposits funds or Underlying with the 
Company in accordance with Rule 6.3A[.]
    C. Participants are responsible for all transfers of funds from 
their Company-approved accounts to the Collateral Account or transfers 
of any Underlying to the Company for credit to the relevant Participant 
Account.
    D. In the event a Participant deposits funds or Underlying to the 
Company without submitting a deposit notification, the Participant 
agrees to: (1) cooperate with the Company to resolve any issues that 
may arise; and (2) agree that the Company will send the funds or 
Underlying back to the account or address from which it was transferred 
within two (2) Settlement Bank Business Days if there has been no 
resolution.
Rule 6.4  Withdrawal Procedures
    A. Only an Authorized Representative may submit a withdrawal 
notification through the Participant Portal before the Company 
transfers funds or Underlying to a Participant or a Customer. Upon 
receipt of a withdrawal notification, the Company no longer permits 
funds or Underlying in the amount listed in the withdrawal notification 
to be used for Trading Privileges and Clearing Privileges.
    B. Participants are responsible for providing accurate account 
numbers or wallet addresses, as the case may be, to allow the Company 
to effect transfers to the Participants or Customers.
    C. Withdrawals occur, and funds and Underlying are available, no 
later than the next Settlement Bank Business Day after a Participant 
has submitted a withdrawal notification if the Participant submits a 
withdrawal notification during Trading Hours.
    D. With respect to withdrawals of Digital Currency collateral, the 
Company shall deliver to the Participant a cryptographically signed 
Digital Currency transaction, which shall include the two signatures, 
the LedgerX ``from'' address, the Participant ``to'' address and the 
appropriate Digital Currency withdrawal amount.
    E. If a Participant fails to adhere to the withdrawal procedures 
set forth herein or in the Company Contract Specifications, as 
applicable, the Company will take reasonable measures to effect the 
withdrawal; however, if unable to effect the withdrawal, the 
Participant's collateral may become the sole property of the Company, 
to the extent permitted by Applicable Law. The Company may apply the 
collateral (including any Underlying held in such Participant's 
Participant Account) against the Participant's Obligations.
Rule 6.5  Deliveries
    A Participant that is required to make or accept delivery under a 
Company Contract (either for itself or on behalf of a Customer) agrees 
that it is required to provide full collateralization prior to entering 
any such Transaction or exercising any Company Contract so as to allow 
the Company to complete all necessary delivery requirements as set 
forth in the Rules. Deliveries will occur on the Company's books and 
records unless otherwise specified in the Company Contract 
Specifications. Any failure to deposit funds or collateral in 
accordance with Rule 6.3 or withdraw funds or collateral in accordance 
with Rule 6.4 may be deemed a default of an Obligation and an act 
detrimental to the interest or welfare of the Company.
Rule 6.6  Reconciliation
    The Company shall reconcile the positions and cash and collateral 
balances of each Participant at the end of each Settlement Bank 
Business Day. The Company shall make available to each Participant the 
positions and cash and collateral balances of each such Participant and 
any Customers of the Participant. All Participants shall be responsible 
for reconciling their records of their positions and cash and 
collateral balances with the records of positions and cash and 
collateral balances that the Company makes available to Participants.
Rule 6.7  Swap Data Reporting
    A. The Company shall report Regulatory Swap Data for Swaps to a 
single Swap Data Repository for purposes of complying with the CEA and 
applicable CFTC Regulations governing the regulatory reporting of 
swaps. The Company shall report all data fields as required by Appendix 
A to Part 43 of CFTC Regulations and Appendix 1 to Part 45 of CFTC 
Regulations, as applicable, including, but not limited to, Swap 
counterparties, Company Contract type, option method, option premium, 
LEIs, User IDs, buyer, seller, USIs, unique product identifiers, 
underlying asset description, the Swap price or yield, quantity, 
maturity or expiration date, the size, settlement method, execution 
timestamp, timestamp of submission to the SDR, the CTI Code, 
Participant Accounts, and whether a Participant is a swap dealer, major 
swap participant or a financial entity. The Company shall identify each 
counterparty to any Transaction in all recordkeeping and all Regulatory 
Swap Data reporting using a single LEI as prescribed under CFTC 
Regulation 45.6. As soon as technologically practicable after 
execution, the Company also shall transmit to both Swap counterparties 
and the LedgerX DCO, the USI for the Swap created pursuant to CFTC 
Regulation 45.5 and the identity of the SDR. For Swaps involving 
allocation, the Company will transmit the USI to the Reporting 
Counterparty and the agent as required by CFTC Regulation 45.5(d)(1).
    B. The Company shall from time to time designate a Swap Data 
Repository in respect of one or more Swaps and shall notify 
Participants of such designation. Currently, the Company reports all 
Regulatory Swap Data for all Swaps to ICE Trade Vault.
    C. Participants that become aware of an error or omission in 
Regulatory Swap Data for a Transaction shall promptly submit corrected 
data to the Company. Participant shall not submit or agree to submit a 
cancellation or correction in order to gain or extend a delay in public 
dissemination of accurate Swap Transaction and Pricing Data or to 
otherwise evade the reporting requirements of Part 43 of CFTC 
Regulations. LedgerX will report any errors or omissions in Regulatory 
Swap Data to the same SDR to which it originally submitted the Data, as 
soon as technologically practicable after discovery of any such error 
or omission.
    D. The Company sends the Regulatory Swap Data as set forth in Rule 
6.7A to the Swap Data Repository as soon as technologically practicable 
after a trade has been executed on the Platform, or pursuant to the 
Company Rules. Following the transmittal of the Data to the Swap Data 
Repository, the Company will make available the Swap Transaction and 
Pricing Data to all Participants accessing the Platform. However, due 
to transmission and posting timing of the Swap Data Repository, 
Participants should be aware that the Swap Transaction and Pricing Data 
may be available on the Company Platform prior to being publicly 
disseminated by the Swap Data Repository.
Chapter 7  Margin
Rule 7.1  Initial Margin, Variation Margin, and Maintenance Margin 
        Requirements
    A. Each Participant shall deposit with, pay to, or maintain with 
the Company unencumbered assets sufficient to satisfy the Initial 
Margin, Variation Margin and option premiums for each Company Contract 
in such amounts, in such forms, at such times and in accordance with 
such systems as may be prescribed by or pursuant to these Rules or the 
Company's policies in respect thereof.
    B. Each transfer of funds or Digital Currency in respect of Initial 
Margin or Variation Margin shall constitute a settlement (within the 
meaning of CFTC Rule 39.14) and shall be final as of the time the 
Company's accounts are debited or credited with the relevant payment.
    C. Initial Margin

          1. Initial Margin requirements shall be as determined by the 
        staff of the Company from time to time, in accordance with CFTC 
        Regulation 39.13(g) and the applicable margin policies of the 
        Company. The methodology used by the Company to calculate 
        Initial Margin shall incorporate at a minimum the following 
        factors, among others as determined by the Chief Risk Officer 
        (``CRO'') from time to time consistent with the guidance of the 
        Risk Management Committee and in consultation therewith as 
        appropriate:

                  a. An estimate of the potential risk exposure of the 
                Company to price movements in the Company Contract over 
                an estimated liquidation period which shall be no less 
                than 1-day liquidation for each futures position, or 
                such longer liquidation time as is appropriate based on 
                the specific characteristics of a particular Company 
                Contract or Participant's positions, and
                  b. One or more measures designed to limit pro-
                cyclicality, including but not limited to 25% weighting 
                in the market risk portion of margin to stressed 
                observations. Further, the Company's pro-cyclicality 
                measures shall be designed to deliver forward looking, 
                stable and prudent margin requirements that limit pro-
                cyclicality to the extent that the soundness and 
                financial security of the Company is not negatively 
                affected.

          2. The Company shall determine the amount of Initial Margin 
        owing from a Participant at the time the Participant enters 
        into a Company Contract. To satisfy the Initial Margin 
        requirement on a Company Contract, Participant shall maintain 
        on deposit with the Company assets in the same currency in 
        which Participant's obligations under such Company Contract are 
        collateralized under its contract terms.
          3. Notwithstanding alerts that may be available through the 
        Company website or APIs informing Participant of Initial Margin 
        requirements and changes thereto, the Company shall be under no 
        obligation to provide Participant with advanced notice, actual 
        or constructive, of any changes to Initial Margin requirements.
          4. In compliance with CFTC Regulation 39.13(g)(8)(ii), 
        Participants shall at all times maintain on deposit with 
        Company unencumbered assets in each account of Participant 
        sufficient to satisfy 100 percent of the Initial Margin 
        requirements for Participant's Company account.
          5. Should a Participant fail to maintain the minimum Initial 
        Margin in Participant's Company account at any time, the 
        Company reserves the right to liquidate some or all 
        Participant's positions as set forth in Rule 14.3, in whole or 
        in part, in any or all accounts of Participant at the Company's 
        sole and absolute discretion with no prior notice to such 
        Participant. No action or inaction by the Company shall 
        constitute a waiver of this right, which may be exercised by 
        the Company at any time in the Company's sole judgment and 
        discretion. The Participant also is not entitled to rely on the 
        Company to liquidate Participant's positions, and any 
        deficiency in Participant's accounts shall remain the sole 
        responsibility of Participant.
          6. The Company may, in its sole and absolute discretion, 
        reduce the Initial Margin requirements for the related 
        positions of a Participant in accordance with CFTC Regulation 
        39.13(g)(4) if the price risks are significantly and reliably 
        correlated, and based on such other factors as determined by 
        the CRO, consistent with the guidance of the Risk Management 
        Committee and in consultation therewith as appropriate.

    D. Maintenance Margin

          1. Minimum Maintenance Margin requirements shall be posted 
        through the Company's web interface and shall change, at such 
        time and in such amount as is determined at the discretion of 
        the CRO, consistent with the guidance of the Risk Management 
        Committee and in consultation therewith as appropriate. 
        Participants shall receive no other notice of the minimum 
        Maintenance Margin requirements.
          2. If at any time a Participant fails to satisfy the minimum 
        Maintenance Margin requirements, the Company reserves the right 
        to liquidate some or all of the Participant's positions as set 
        forth in Rule 14.3, in whole or in part, and in any or all 
        accounts of Participant, at the Company's sole and absolute 
        discretion with no other or prior notice to such Participant. 
        The Company shall not be required to limit the liquidation of 
        Participant's portfolio only to the point where it raises 
        Participant's net equity above the Maintenance Margin 
        threshold, and Company shall be entitled to liquidate 
        Participant's entire Portfolio at the Company's sole and 
        absolute discretion. No action or inaction by the Company shall 
        constitute a waiver of this right, which may be exercised by 
        the Company at any time in the Company's sole judgment and 
        discretion. The Participant also is not entitled to rely on the 
        Company to liquidate Participant's positions, and any 
        deficiency in Participant's accounts shall remain the sole 
        responsibility of Participant.
          3. If at any time a Participant fails to satisfy the minimum 
        Maintenance Margin requirements, and the Company is unable to 
        liquidate immediately enough of Participant's positions through 
        the central limit order book for the net equity in 
        Participant's account to be higher than the minimum Maintenance 
        Margin requirements, then the Participant shall be in 
        ``default'' within the meaning of CFTC Regulation 39.16. No 
        formal written determination need be made in connection 
        herewith.
          4. If a Participant is in default as set forth above, the 
        Company reserves the right to take all actions specified in 
        CFTC Regulation 39.16(c) and Rule 14.1, including, without 
        limitation, the prompt transfer, liquidation, hedging, 
        auctioning, or allocation of some or all of the Participant's 
        positions, in whole or in part, away from the Company's central 
        limit order book. If the liquidation of any of Participant's 
        Company Contracts through the Company's central limit order 
        book is not accomplished immediately, is impractical in the 
        Company's judgment, or may be pro-cyclicality in the Company's 
        judgment, then the Company may utilize an alternative 
        liquidation mechanism, such as a transfer, allocation, or 
        auction, in the sole and absolute discretion of the CRO, with 
        none of those methods being required to proceed in any 
        particular order. To the extent a Participant's Company 
        Contracts are transferred or allocated, then the Company shall 
        estimate the residual value of a Participant's account, which 
        may be zero or in deficit.
          5. No action or inaction by the Company shall constitute a 
        waiver of the Company's right to take the actions set forth in 
        this Section 7.1.D, which may be exercised by the Company at 
        any time after a Participant fails to satisfy the minimum 
        Margin Maintenance requirements, in the Company's sole judgment 
        and discretion. The Participant also shall not rely on the 
        Company to liquidate Participant's positions in any particular 
        time frame or manner, or at all, or to take the other actions 
        set forth in this Section 7.1.D to resolve Participant's 
        ``default,'' and any deficiency in Participant's accounts shall 
        remain the sole responsibility of Participant.

    E. Optional Request for Variation Margin

          1. The Company is under no obligation to require Variation 
        Margin from any Participant, and may do so only as a courtesy 
        to Participants. Participants receive notice of the adequacy of 
        the margin on deposit with the Company through the posting of 
        Maintenance Margin requirements through the Company's web 
        interface. If the Company requests Variation Margin from any 
        Participant, that request shall in no way diminish or delay the 
        minimum Maintenance Margin requirements of the Company. The 
        failure of a Participant to satisfy any Maintenance Margin 
        requirement shall trigger the liquidation mechanisms described 
        in Rule 7.1.D and Rule 14.3, notwithstanding anything in this 
        Rule 7.1.E.
          2. After a Participant has entered into a Company Contract 
        utilizing margin, the Company may require Participant to 
        deposit additional funds known as Variation Margin by such 
        time, and in such amount, as the Company shall specify, 
        notwithstanding Participant's previous deposit of funds 
        sufficient to satisfy the Company's Initial Margin for a 
        Company Contract or Participant account.
          3. Variation Margin may be required from a Participant within 
        such time and in such amount as is determined at the sole and 
        absolute discretion of the Company, for already existing 
        positions, as determined by the CRO consistent with the 
        guidance of the Risk Management Committee and in consultation 
        therewith as appropriate. That Variation Margin may apply to 
        long positions, short positions, or both.
          4. The CRO may determine that Variation Margin is required, 
        consistent with the guidance of the Risk Management Committee 
        and in consultation therewith as appropriate, if the CRO 
        determines (1) that unstable conditions relating to one or more 
        Company Contracts exist, or that the maintenance of an orderly 
        market or the preservation of the fiscal integrity of the 
        Company so requires, or (2) that any Participant is carrying 
        Company Contracts or incurring risks in its account(s) that are 
        larger than is accounted for by Participant's Initial Margin or 
        justified by the financial and/or operational condition of the 
        Participant. No formal written determination need be made in 
        connection herewith.

                  a. Variation Margin requirements on the bases 
                described in clause (1) above may be required of any or 
                all Participants.
                  b. Variation Margin requirements on the bases 
                specified in clause (2) above may be required of any 
                Participant with respect to which such determination is 
                made.

    F. Intraday Profit and Loss Settlements

          1. The Company shall mark-to-market all positions in the 
        Participant's Company accounts, and calculate the net profit or 
        loss in each Participant account as measured against the last 
        time the Participant's positions were marked-to-market. This 
        calculation shall be conducted intra-day, at a frequency 
        determined by the CRO.
          2. A Participant's Company account shall be debited or 
        credited the net profit or loss described above intra-day, at a 
        frequency determined by the CRO in accordance with the 
        Company's policies and procedures in effect from time to time.
          3. The net loss in each Participant's Company account shall 
        be due and payable or immediately in U.S. dollars on deposit 
        with the Company.

    G. Asset Management; Withdrawal Limitations

          1. The Company shall not be liable to Participant for any 
        interest income on assets deposited with the Company for 
        Initial Margin, Variation Margin, or otherwise.
          2. The Company shall retain the amount of Initial Margin or 
        Variation Margin deposited with respect to any Company Contract 
        for which a delivery notice has been issued until such time as 
        provided for in the applicable Rules (or if not so provided, 
        until all delivery and payment obligations in respect of such 
        contract have been satisfied in full).
          3. Excess Initial Margin or Variation Margin on deposit with 
        the Company shall not be released to Participant unless the 
        Participant has paid all margins, premiums and other amounts 
        due from Participant for all of Participant's accounts or 
        otherwise pursuant to these Rules. Notwithstanding any 
        provision to the contrary in these Rules, the Company may 
        refuse to release the amount of excess Initial Margin on 
        deposit in the Company account of a Participant which has 
        requested such release if the CRO concludes that the financial 
        or operational condition of the Participant is such that the 
        release of excess Initial Margin or Variation Margin would be 
        contrary to the fiscal integrity of the Company.
          4. The CRO may, consistent with the guidance of the Risk 
        Management Committee and in consultation therewith as 
        appropriate, limit withdrawals of excess Initial Margin or 
        Variation Margin already on deposit for a specified time, when 
        the CRO concludes that it is required due to unstable 
        conditions relating to one or more Company Contracts, or for 
        the maintenance of an orderly market or the preservation of the 
        fiscal integrity of the Company, or where a Participant is 
        carrying a quantity of Company Contracts that is larger than is 
        justified by the financial and/or operational condition of the 
        Participant.
          5. Without limitation of the Company's other rights to use or 
        apply a Participant's Initial Margin or Variation Margin as 
        permitted in these Rules, under applicable law or otherwise, 
        the Company (i) may invest Initial Margin or Variation Margin 
        in the form of cash in accordance with the Company's investment 
        policies and applicable law, and (ii) may use Participant's 
        assets constituting Initial Margin or Variation Margin in its 
        account from time to time to meet temporary liquidity needs of 
        the Company (whether or not such Participant is in default), in 
        a manner consistent with the Company's liquidity policies and 
        applicable law, including by way of assignment, transfer, 
        pledge, repledge or creation of a lien on or security interest 
        in such Initial Margin or Variation Margin in connection with 
        borrowing, repurchase transactions or other liquidity 
        arrangements to support payment obligations of the Company in 
        respect of Company Contracts. The Company will restore any such 
        Initial Margin or Variation Margin so used as soon as 
        practicable following the conclusion of the event requiring the 
        use of a Participant's Initial Margin or Variation Margin for 
        liquidity purposes. Prior to the occurrence of a default with 
        respect to a Participant, the Company may use, invest or apply 
        the Initial Margin or Variation Margin of such Participant only 
        as set forth in this Rule 7.1. This Rule 7.1 shall not be 
        deemed to limit the Company's rights to use or apply a 
        Participant's Initial Margin or Variation Margin as permitted 
        in the Rules, under applicable law or otherwise following the 
        occurrence of a default of that Participant, as determined by 
        the Company.
          6. Subject to all other limitations set forth in this Rule 
        7.1, the Company shall return to a Participant, by such time as 
        may be specified by the Company, the amount of any excess 
        Initial Margin or Variation Margin on deposit from such 
        Participant, provided that the Company receives a request for 
        such a release from such Participant.
Rule 7.2  Collateral
    A. Subject to the terms and conditions of Company-approved margin 
collateral, the Company will accept from Participants the following as 
margin collateral: (1) cash; (2) the Underlying; and (3) any other form 
of collateral deemed acceptable by the Risk Management Committee upon 
the Risk Management Committee's approval of such collateral as 
communicated through Participant Notices and on the Website. The 
Company will value margin collateral as it deems appropriate.
    B. Except as otherwise provided herein, Collateral must be and 
remain unencumbered. Each Participant posting collateral hereby grants 
to the Company a continuing first priority security interest in, lien 
on, right of setoff against and collateral assignment of all of such 
Participant's right, title and interest in and to any property and 
collateral deposited with the Company by the Participant, whether now 
owned or existing or hereafter acquired or arising, including without 
limitation the following: (i) such Participant's Participant Account 
and all securities entitlements held therein and all funds held in a 
Collateral Account; (ii) all Digital Currencies that, in each case, are 
held in or otherwise credited to a virtual ``wallet'' or other account 
maintained by the Company; (iii) such virtual ``wallet'' or other 
account; and (iv) all proceeds of the foregoing. A Participant shall 
execute any documents required by the Company to create, perfect and 
enforce such lien.
    C. Each Participant hereby agrees that with respect to any Digital 
Currency and any other financial asset which is or may be credited to 
the Participant's Participant Account, the Company shall have control 
pursuant to Section 9-106(a) and 8-106(e) of the UCC and a perfected 
security interest pursuant to Section 9-314(a) of the UCC.
    D. A Participant must transfer the collateral to the Company or to 
a Collateral Account and the Company will hold collateral transferred 
to the Company on behalf of the Participant. The Company will credit to 
the Participant the collateral that such Participant deposits. 
Collateral shall be held by the Company until a Participant submits a 
withdrawal notification unless otherwise stipulated by these Rules.
    E. The Company will not be responsible for any diminution in value 
of collateral that a Participant deposits with the Company. Any 
fluctuation in markets is the risk of each Participant. Any interest 
earned on Participant collateral may be retained by the Settlement Bank 
or the Company.
    F. The Company has the right to liquidate a Person's Company 
Contracts or non-cash collateral to the extent necessary to close or 
transfer Company Contracts, fulfill obligations to the Company or other 
Participants, and/or to return collateral in the event that (1) the 
Person ceases to be a Participant; (2) the Company suspends or 
terminates the Person's Trading Privileges or Clearing Privileges; (3) 
the Person's open position in any Company Contract becomes less than 
fully collateralized; or (4) the Company determines in its sole 
discretion that it is necessary to take such measures.
Rule 7.3  Segregation of Participant Funds
    The Company shall separately account for and segregate from the 
Company's proprietary funds all Participant funds used to purchase, 
margin, guarantee, secure or settle Company Contracts, and all money 
accruing to such Participant as the result of Company Contracts so 
carried in a Collateral Account. The Company shall maintain a 
proprietary account that will be credited with fees or other payments 
owed to the Company that are debited from the Collateral Account as a 
result of Participant trades and settlements of Company Contracts. The 
Company shall maintain a record of each Participant's account balances 
and Company Contracts. The Company shall not hold, use or dispose of 
Participant funds except as belonging to Participants.
Rule 7.4  Concentration Limits
    The Company may apply appropriate limitations or charges on the 
concentration of assets posted as collateral, as necessary, in order to 
ensure its ability to liquidate such assets quickly with minimal 
adverse price effects, and may evaluate the appropriateness of any such 
concentration limits or charges, on a periodic basis. In the event that 
the Company determines in its sole discretion that the Participant's 
deposit is in material excess of the amount necessary to collateralize 
the Participant's Company Contracts, the Company shall have the right 
to (1) transfer non-cash collateral, including Digital Currencies, back 
to a Participant, and Participant agrees to accept such transfer, or 
(2) take other action the Company deems to be necessary to safeguard 
the collateral. The Company shall be entitled to charge fees related to 
holding non-cash collateral in material excess of the amount necessary 
to collateralize a Participant's Company Contracts.
Chapter 8  Business Conduct and Trading Practices
Rule 8.1  Scope
    This Chapter 8 applies to all Transactions except as may be 
provided herein. Participants and, where applicable, Authorized Users, 
shall adhere to and comply fully with this Chapter 8.
Rule 8.2  Procedures
    A. With respect to trading on the Platform, the Company may adopt 
procedures relating to Transactions and trading on the Platform, 
including, without limitation, procedures to:

          1. determine the daily settlement price of a Company 
        Contract;
          2. disseminate the prices of bids and offers on, and trades 
        in, Company Contracts;
          3. record, and account for, Company Contracts and activity on 
        the Company;
          4. perform market surveillance and regulation on matters 
        affecting Company Contracts and activity on the Company;
          5. establish limits on the number and/or size of Orders that 
        may be submitted by a Participant on the Platform;
          6. establish limits on the number of Company Contracts that 
        may be held by a Participant; and
          7. establish a limit on the maximum daily price fluctuations 
        for any Company Contract and provide for any related 
        restriction or suspension of trading in the Company Contract.

    B. The Company may, in its discretion and at any time, amend any 
procedures adopted pursuant to Rule 8.2A, and will publish the 
amendments in a Participant Notice and on the Website.
Rule 8.3  Prohibited Trading Activity; Prohibitions on Fictitious 
        Transactions, Fraudulent Activity and Manipulation
    No Person shall engage in any of the following activities in 
connection with or related to any Company activity:

          A. any fraudulent act or scheme to defraud, deceive, trick or 
        mislead;
          B. trading ahead of a Customer or front-running;
          C. fraudulent trading;
          D. trading against a Customer Order or entering into a cross-
        trade, except as permitted by Rule 8.11;
          E. accommodation trading;
          F. fictitious Transactions;
          G. pre-arranged or non-competitive Transactions (except for 
        Transactions specifically authorized under these Rules);
          H. cornering, or attempted cornering, of any Company 
        Contract;
          I. violations of bids or offers;
          J. spoofing;
          K. any manipulation proscribed under CEA Section 9(a)(2) or 
        CFTC Regulations 180.1(a) or 180.2, whether attempted or 
        completed;
          L. demonstrating intentional or reckless disregard for the 
        orderly execution of Transactions during the closing period;
          M. making fictitious or trifling bids or offers, offering to 
        enter into a Company Contract at a price variation less than 
        the minimum price fluctuation permitted for such Company 
        Contract under the Rules, or knowingly making any bid or offer 
        for the purpose of making a market price that does not reflect 
        the true state of the market; or
          N. other conduct that constitutes a disruptive trading 
        practice or is otherwise prohibited under CEA Section 4c(a)(5) 
        or applicable CFTC Regulations.
Rule 8.4  Prohibition on Money Passing, Pre-Arranged, Pre-Negotiated 
        and Non-Competitive Trades
    A. No Person may enter Orders for the purpose of entering into 
Transactions without a net change in either party's open positions but 
a resulting profit to one party and a loss to the other party, commonly 
known as a ``money pass''.
    B. No Person shall pre-arrange or pre-negotiate any purchase or 
sale or non-competitively execute any Transaction, except to effect a 
Negotiated Trade Order, a Block Trade or an EFP transaction. Pre-
execution communications related to the material terms of a Negotiated 
Trade Order, a Block Trade or an EFP transaction must take place on the 
Company Telecommunication Systems.
Rule 8.5  Acts Detrimental to the Welfare or Reputation of the Company 
        Prohibited
    No Participant, Authorized Representative, Authorized User or ISV 
shall engage in any Company activity that tends to impair the welfare, 
reputation, integrity or good name of the Company.
Rule 8.6  Misuse of the Platform
    Misuse of the Platform is strictly prohibited. It shall be deemed 
an act detrimental to the Company to permit unauthorized use of the 
Platform, to assist any Person in obtaining unauthorized access to the 
Platform, to trade on the Platform without an agreement, to alter the 
equipment associated with the Platform (except with the Company's 
consent), to interfere with the operation of the Platform, to intercept 
or interfere with information provided thereby, or in any way to use 
the Platform in a manner contrary to these Rules.
Rule 8.7  Supervision; Information Sharing
    A. A Participant shall be responsible for establishing, maintaining 
and administering reasonable supervisory procedures to ensure that its 
Authorized Users comply with these Rules and Applicable Law, and such 
Participant may be held accountable for the actions of such Authorized 
Users with respect to the Company.
    B. Participants and Authorized Users shall cooperate fully with the 
Company or a Regulatory Agency in any investigation, call for 
information, inquiry, audit, examination or proceeding.
    C. Participants and Authorized Users shall ensure that any 
information disclosed to the Company is accurate, complete and 
consistent. No existing or prospective Participant or Authorized User 
shall make any false statements or misrepresentations in any 
application, report or other communication to the Company.
Rule 8.8  Business Conduct
    A. Conducting trading activities in an honorable and principled 
manner consistent with these Rules is the essence of ethical conduct 
with respect to the Company. Participants, Authorized Users and other 
Persons subject to the Company's jurisdiction shall act with ethical 
integrity with regard to their Company activity, and shall adhere to 
the following ethical standards:

          1. A Participant, Authorized User and any other Person 
        subject to the Company's jurisdiction shall abstain from 
        engaging in conduct that is a violation of these Rules or 
        Applicable Law, and will conduct its business in accordance 
        with Applicable Law, and in good faith, with a commitment to 
        honest dealing.
          2. No Participant, Authorized User or other Person subject to 
        the Company's jurisdiction shall engage in any fraudulent act 
        or engage in any scheme to defraud, deceive, trick or mislead 
        in connection with or related to any Company activity.
          3. No Participant, Authorized User or other Person subject to 
        the Company's jurisdiction shall knowingly enter, or cause to 
        be entered, bids or offers on the Platform other than in good 
        faith for the purpose of executing bona fide Transactions.
Rule 8.9  Trading Practices
    A. No Participant, Authorized User or other Person subject to the 
Company's jurisdiction shall knowingly effect or induce the purchase or 
sale of any Company Contract for the purpose of creating or inducing a 
false, misleading, or artificial appearance of activity in such Company 
Contract, or for the purpose of unduly or improperly influencing the 
market price of such Company Contract or for the purpose of making a 
price which does not reflect the true state of the market in such 
Company Contract. No such Participant, Authorized User or other Person 
shall arrange and execute simultaneous offsetting buy and sell Orders 
in a Company Contract with the intent to artificially affect reported 
revenues, trading volumes or prices.
    B. No Participant, Authorized User or other Person subject to the 
Company's jurisdiction shall attempt to manipulate, or manipulate the 
market, in any Company Contract or Underlying. No such Participant, 
Authorized User or other Person shall directly or indirectly 
participate in or have any interest in the profit of a manipulative 
operation or knowingly manage or finance a manipulative operation. This 
includes any pool, syndicate, or joint account, whether in corporate 
form or otherwise, organized or used intentionally for the purposes of 
unfairly influencing the market price of any Company Contract.
    C. Orders entered on the Platform for the purpose of upsetting the 
equilibrium of the market in any Company Contract or creating a 
condition in which prices do not or will not reflect fair market values 
are prohibited, and any Person who makes or assists in entering any 
such Order with knowledge of the purpose thereof or who, with such 
knowledge, in any way assists in carrying out any plan or scheme for 
the entering of any such Order, will be deemed to have engaged in an 
act detrimental to the Company.
    D. No Participant, Authorized User or other Person subject to the 
Company's jurisdiction shall engage in any trading, practice, or 
conduct that constitutes a disruptive or a manipulative trading 
practice, as defined by the CEA, CFTC Regulations or in any 
interpretive guidance issued by the Commission.
    E. No Participant, Authorized User or other Person subject to the 
Company's jurisdiction shall make any knowing misstatement of a 
material fact to the Company, any Company Official, or any Board 
committee.
    F. No Participant, Authorized User or other Person subject to the 
Company's jurisdiction shall knowingly disseminate false or misleading 
reports regarding Transactions, the Company or one or more markets in 
any Company Contract.
    G. Abusive trading practices are prohibited on the Platform. No 
Participant, Authorized User or other Person subject to the Company's 
jurisdiction shall place or accept buy and sell Orders in the same 
product and expiration month, and for options, the same strike, when 
they know or reasonably should know that the purpose of the Orders is 
to avoid taking a bona fide market position exposed to market risk 
(transactions commonly known or referred to as ``wash sales''). Buy and 
sell Orders that are entered with the intent to negate market risk or 
price competition shall be deemed to violate the prohibition on wash 
sales. Additionally, no Participant, Authorized User or other Person 
subject to the Company's jurisdiction shall knowingly execute or 
accommodate the execution of such Orders by direct or indirect means.
    H. No Participant, Authorized User or other Person subject to the 
Company's jurisdiction shall disclose an Order to buy or sell, except 
to a Company Representative or official of the CFTC or as necessary to 
efficiently execute the Order, nor shall any such Participant, 
Authorized User or other Person solicit or induce another Person to 
disclose Order information. No Participant, Authorized User or other 
Person shall take action or direct another to take action based on non-
public Order information, however acquired, except as permitted by Rule 
8.4B. The mere statement of opinions or indications of the price at 
which a market may open or resume trading does not constitute a 
violation of this Rule.
Rule 8.10  Customer Order Priority
    A. No Participant, Authorized User or other Person subject to the 
Company's jurisdiction shall knowingly enter an Order on the Platform 
for its own account, an account in which it has a direct or indirect 
financial interest, or an account over which it has discretionary 
trading authority (a ``Discretionary Order''), including, without 
limitation, an Order allowing discretion as to time and price, when 
such Person is in possession of a Customer Order that can be but has 
not been entered on the Platform.
    B. For purposes of this Rule 8.10, a Person shall not be deemed to 
knowingly buy or sell a Company Contract or execute a Discretionary 
Order if:

          1. such Person is a corporate or other legal entity 
        consisting of more than one individual trader;
          2. such Person has in place appropriate ``firewall'' or 
        separation of function policies and procedures; and
          3. the Person or Authorized User buying or selling the 
        Company Contract or executing the Discretionary Order in 
        question has no direct knowledge of the Order to buy or sell 
        the same Company Contract for any other Person at the same 
        price or at the market price or of the Customer Order for the 
        same Company Contract, as the case may be.

    C. Nothing in this Rule 8.10 limits the ability of an ``eligible 
account manager'' to bunch Orders in accordance with CFTC Regulation 
1.35(b)(5).
Rule 8.11  Trading Against Customer Orders
    A. No Person in possession of a Customer Order shall knowingly 
take, directly or indirectly, the opposite side of such Order for its 
own account, an account in which it has a direct or indirect financial 
interest, or an account over which it has discretionary trading 
authority.
    B. The foregoing restriction does not prohibit permissible pre-
execution discussions conducted in accordance with Rule 8.4.
Rule 8.12  Prohibition on Withholding of Customer Orders
    No Executing Participant or FCM Participant shall withhold or 
withdraw from the market any Customer Order, or any part of an Order, 
for the benefit of any Person other than the Customer.
Rule 8.13  Execution Priority
    A. Executable Customer Orders must be entered on the Platform 
immediately upon receipt. An FCM Participant or Executing Participant 
that receives a Customer Order that is not immediately entered on the 
Platform must create a non-erasable record of the Order, including the 
Order instructions, account designation, date, time of receipt and any 
other information that may be required by the Company.
    B. Customer Orders received by an FCM Participant or Executing 
Participant shall be entered on the Platform in the sequence received. 
Customer Orders that cannot be immediately entered on the Platform must 
be entered when the Orders become executable in the sequence in which 
the Orders were received.
    C. Non-discretionary Customer Orders received by an FMC Participant 
or Executing Participant shall be entered on the Platform in the 
sequence in which they were received. Non-discretionary Customer Orders 
that cannot be immediately entered on the Platform must be entered when 
the Orders become executable in the sequence in which the Orders were 
received.
Rule 8.14  Crossing Orders
    Independently initiated Orders on opposite sides of the market for 
different beneficial account owners that are immediately executable 
against each other may be entered without delay. Orders must not 
involve pre-execution communications, except as permitted by Rule 8.4B.
Rule 8.15  Position Limits
    A. To reduce the potential threat of market manipulation or 
congestion, LedgerX shall adopt for each of its Company Contracts, as 
is necessary and appropriate, position limitations or position 
accountability levels for speculators. The Company may establish 
position limits for one or more Company Contracts at a level not higher 
than any limit set by the CFTC for any Company Contract. The position 
limit levels shall be set forth in a Position Limit and Position 
Accountability Level Table as may be amended from time to time by the 
Company in a Participant Notice and on the Website. The Company may 
grant exemptions from position limits in accordance with CFTC 
Regulations.
    B. A Participant seeking an exemption from position limits, 
including position limits established pursuant to a previously approved 
exemption, must file the required application with the Company in the 
form and manner as the Company may require from time to time and 
receive approval before exceeding such position limits. Notwithstanding 
the foregoing, a Participant who establishes an exemption-eligible 
position in excess of position limits and files the required 
application with the Company shall not be in violation of this Rule, 
provided the filing occurs within one Settlement Bank Business Day 
after assuming the position. In the event that the positions in excess 
of the position limits are not deemed to be exemption-eligible, the 
applicant and the Executing Participant, if any, will be in violation 
of speculative position limits for the period of time in which the 
excess positions remained open.
    C. A Participant who owns or controls aggregate positions in a 
Company Contract in excess of the reportable levels set forth in the 
Position Limit and Position Accountability Level Table or where such 
Person otherwise holds substantial positions in Company Contracts 
shall:

          1. keep records, including records of such Participant's 
        activity in the Underlying and related derivative markets, and 
        make such records available, upon request, to the Company;
          2. provide to the Company, in a timely manner upon request by 
        the Company and in a form and manner acceptable to the Company, 
        information relating to the positions owned or controlled by 
        such Participant, including but not limited to the nature and 
        size of the position, the trading strategy employed with 
        respect to the position, and hedging information, if 
        applicable;
          3. be deemed to have consented, when so ordered by the 
        Company, in its sole discretion, not to further increase the 
        positions, to comply with any prospective limit which exceeds 
        the size of the position owned or controlled, or to liquidate 
        any open position which exceeds position limits; and
          4. liquidate Company Contracts, if applicable, in an orderly 
        manner.

    D. This Rule 8.15 shall not limit the jurisdiction of the Company 
to take action that it determines necessary or appropriate in respect 
of any positions on the Company, including but not limited to the 
Company taking steps to liquidate such Company Contracts on behalf and 
at the expense of such Participant to the extent necessary to eliminate 
such excess.
Rule 8.16  Position Accountability Levels
    A. The Company shall establish position accountability levels for 
Company Contracts not subject to position limits pursuant to Rule 8.15. 
The position accountability levels shall be set forth in a Position 
Limit and Position Accountability Level Table as may be amended from 
time to time by the Company in a Participant Notice and on the Website.
    B. A Participant that owns or controls aggregate positions in a 
Company Contract in excess of the reportable levels set forth in the 
Position Limit and Position Accountability Level Table or where such 
Participant otherwise holds substantial positions in Company Contracts 
shall:

          1. keep records, including records of such Person's activity 
        in the Underlying and related derivative markets, and make such 
        records available, upon request, to the Company;
          2. provide to the Company, in a timely manner upon request by 
        the Company and in a form and manner acceptable to the Company, 
        information relating to the positions owned or controlled by 
        such Person, including but not limited to the nature and size 
        of the position, the trading strategy employed with respect to 
        the position, and hedging information, if applicable;
          3. be deemed to have consented, when so ordered by the 
        Company, in its sole discretion, not to further increase the 
        positions, to comply with any prospective limit which exceeds 
        the size of the position owned or controlled, or to liquidate 
        any open position which exceeds position accountability levels; 
        and
          4. liquidate Company Contracts, if applicable, in an orderly 
        manner.

    C. This Rule shall not limit the jurisdiction of the Company to 
take action that it determines necessary or appropriate in respect of 
any positions on the Company, including but not limited to the Company 
taking steps to liquidate such Company Contracts on behalf and at the 
expense of such Participant to the extent necessary to eliminate such 
excess.
Rule 8.17  Aggregation of Positions
    A. For purposes of Rule 8.15 and Rule 8.16, all positions in 
Company Contracts must be aggregated as required by CFTC Regulations. 
Aggregation of positions shall apply to:

          1. All positions in accounts for which a Person by power of 
        attorney or otherwise directly or indirectly owns the positions 
        or controls the trading of the positions. Position limits shall 
        apply to positions held by two or more Persons acting pursuant 
        to an expressed or implied agreement or understanding, in the 
        same as if the positions were held by, or the trading of the 
        positions was done by, a single Person.
          2. Any Person holding positions in more than one account, or 
        holding accounts or positions in which the Person by power of 
        attorney or otherwise directly or indirectly has a ten percent 
        or greater ownership or equity interest, must aggregate all 
        such accounts or positions unless such Person is exempted from 
        aggregating such positions by CFTC Regulations.

    B. Any Participant seeking an exemption from aggregation of 
positions must (1) satisfy the exemptive requirements in CFTC 
Regulations; and (2) apply for a Company-approved exemption in the form 
and manner as may be prescribed by the Company from time to time.
Rule 8.18  Large Trader Reporting
    A. Each Participant shall submit to the Company (i) a daily report 
of all positions that exceed the reportable position levels set forth 
on the Website and (ii) a copy of the CFTC Form 102 (Identification of 
Special Accounts, Volume Threshold Accounts and Consolidated Accounts 
and which shall include a Series S filing made pursuant to CFTC 
Regulation 20.5) filed by the Participant or Executing Participant with 
the CFTC for such Participant's or Executing Participant's Customers' 
reportable accounts. The Form 102 shall be submitted to the Company no 
later than the Settlement Bank Business Day following the date on which 
the account becomes reportable.
    B. Positions in Company Contracts at or above the reportable level 
set forth on the Website trigger reportable status. For a Participant 
in reportable status, all positions, regardless of size, in relevant 
Company Contracts must be reported to the Company, in addition to any 
regulatory obligations a Participant may have separate and apart from 
these Rules.
    C. All large trader reports shall be submitted in the form and 
manner specified by the Company. The Company may require that more than 
one large trader report be submitted daily. The Regulatory Oversight 
Committee may require certain Participants to provide reports on a 
lesser number of positions than otherwise required by the Company.
Rule 8.19  Compliance
    Each Participant shall have a compliance program commensurate with 
the size and scope of its trading activities on the Company and 
designed to ensure appropriate, timely and ongoing review of trading 
practices and compliance with the Rules. Each Participant shall act in 
accordance with these practices for compliance and monitoring with 
regard to its Company activity:

          A. Provide for proper training of personnel on the provisions 
        of the Rules;
          B. Maintain internal policies and procedures to promote 
        compliance with the Rules;
          C. Promptly disclose to the Company the details of any 
        violations of the Rules involving a Participant's activities on 
        the Company, including its own activities or those of another 
        Participant, and a Participant shall promptly disclose to the 
        Company the details of any disciplinary sanctions, fines or 
        other related determinations made by a Regulatory Agency or 
        another market on which such Participant trades, or provision 
        of market information to the Company or any of its Affiliates;
          D. Provide an environment that encourages employees to engage 
        in safe and confidential discussions and to disclose to senior 
        management any trading practices that might violate the Rules;
          E. Require any consultant, contractor and subcontractor to 
        disclose all financial affiliations and conflicts of interest. 
        Ensure that consultants, contractors or subcontractors do not 
        cause any disclosure of information in violation of the Rules, 
        including this code of conduct, and that confidentiality 
        agreements are in effect where appropriate; and
          F. Establish clear lines of accountability for trading 
        practices, including provisions relating to the 
        responsibilities of corporate officers, with appropriate 
        oversight by the board of directors or other senior corporate 
        management committee.
Chapter 9  Discipline and Enforcement
Rule 9.1  General
    A. Market Monitoring

          1. The Company shall record and store a record of all data 
        entered into the Platform, including the Participant's and 
        Authorized User's identity, information on Transactions and any 
        other information required and in accordance with the Company's 
        policies.
          2. The Company shall conduct market surveillance and trade 
        practice surveillance by monitoring and reviewing data entered 
        into the Platform using programs designed to alert the Company 
        of potentially unusual or violative trading activity.
          3. The Company, through the Compliance Department, shall 
        initiate a review of unusual or violative trading activity and, 
        where appropriate, investigate such activity. The Compliance 
        Department will also conduct investigations when Compliance 
        Department staff at any time has reason to believe that 
        inappropriate activity of any sort is taking place on the 
        Company, Platform or Website.

    B. All Persons within the Company's jurisdiction are subject to 
this Chapter 9 if they are alleged to have violated, to have aided and 
abetted a violation, to be violating, or to be about to violate, any 
Rule or any provision of Applicable Law for which the Company possesses 
disciplinary jurisdiction.
    C. Compliance Department

          1. The Company has a Compliance Department consisting of one 
        or more compliance staff. The Chief Compliance Officer is 
        responsible for overseeing the Compliance Department and shall 
        report to the Regulatory Oversight Committee and the CEO.
          2. The Compliance Department shall investigate unusual 
        trading activity or other activity that the Compliance 
        Department has reasonable cause to believe could constitute a 
        violation of these Rules, and shall enforce the Rules and 
        prosecute possible Rule violations within the Company's 
        disciplinary jurisdiction.
          3. The Compliance Department shall conduct at least annual 
        reviews of all Participants to verify compliance with Company 
        Rules. The Compliance Department may conduct periodic reviews 
        of all persons and firms subject to the Company's Rules to 
        verify compliance with the Company Rules. Such reviews may 
        include, but are not limited to, reviews of randomly selected 
        samples of audit trail data, reviews of the process by which 
        User ID records are maintained, reviews of usage patterns 
        associated with User IDs, and reviews of account numbers and 
        Customer Type Indicator codes.

    D. The Company, through the Compliance Department, Disciplinary 
Panel and Appeals Committee, shall conduct inquiries, investigations, 
disciplinary proceedings and appeals from disciplinary proceedings, 
summary impositions of fines, summary suspensions or other summary 
actions in accordance with this Chapter 9. Any Person subject to the 
Company's jurisdiction under Rule 3.1 is subject to the Company's 
disciplinary authority set forth in this Chapter 9.
    E. The Company, through the Compliance Department, will commence an 
investigation upon (i) the discovery or receipt of information that 
indicates a reasonable basis for finding that a violation may have 
occurred or will occur, or (ii) the receipt of a request from 
Commission staff.
    F. No Company Official shall interfere with or attempt to influence 
the process or resolution of any Disciplinary Action, except to the 
extent provided under these Rules with respect to a proceeding in which 
a Person is a member of the relevant Disciplinary Panel or Appeals 
Committee.
    G. Representation by Counsel

          1. A Respondent, upon being served with a Notice of Charges, 
        has the right to retain and be represented by legal counsel or 
        any other representation of its choosing, except any Director 
        or a member of the Disciplinary Panel or person substantially 
        related to the underlying investigations, such as material 
        witnesses or respondents during such proceedings.
          2. In the event of any appeal that requires the Company to 
        retain legal counsel, the Respondent shall be responsible for 
        the reasonable attorney's fees incurred by the Company if the 
        Respondent does not prevail in the dispute.

    H. The Company may hold a Participant liable for, and impose 
sanctions against such Participant, for such Participant's own acts and 
omissions that constitute a violation as well as for the acts and 
omissions of each Authorized User, Authorized Representative or other 
Person using a User ID of such Participant, or other agent or 
representative of such Participant (other than an Executing Participant 
acting as agent for such Participant), in each case, that constitute a 
violation as if such violation were that of the Participant.
    I. Ex Parte Communications

          1. A Respondent (and any counsel or representative of such 
        Respondent) and the Compliance Department (and any counsel or 
        representative of the Compliance Department) shall not 
        knowingly make or cause to be made an ex parte communication 
        relevant to the merits of a disciplinary proceeding or an 
        appeal from a disciplinary proceeding to any member of the 
        Disciplinary Panel or the Appeals Committee that hears such 
        proceeding.
          2. Members of a Disciplinary Panel or Appeals Committee shall 
        not knowingly make or cause to be made an ex parte 
        communication relevant to the merits of a disciplinary 
        proceeding or an appeal from a disciplinary proceeding to any 
        Respondent (and any counsel or representative of such 
        Respondent) or the Compliance Department (and any counsel or 
        representative of the Compliance Department).
          3. Any Person who receives, makes or learns of any 
        communication that is prohibited by this Rule 9.1I shall 
        promptly give notice of such communication and any response 
        thereto to the Compliance Department and all parties to the 
        proceeding to which the communication relates.
          4. A Person shall not be deemed to have violated this Rule 
        9.1I if the Person refuses an attempted communication 
        concerning the merits of a proceeding as soon as it becomes 
        apparent that the communication concerns the merits.
Rule 9.2  Investigations
    A. The Compliance Department will endeavor to complete any 
investigation within 12 months of the time unusual trading activity or 
a potential Rule violation is suspected, unless there exists 
significant reason to extend the investigation beyond such period. Upon 
the conclusion of any investigation, the Compliance Department shall 
draft a report detailing the facts that led to the opening of the 
investigation, the facts that were found during the investigation, and 
the Compliance Department's analysis and conclusion. Such internal 
report shall be maintained in accordance with Rule 2.14.
    B. The Compliance Department has the authority to:

          1. initiate and conduct inquiries and investigations;
          2. examine books and records of any Person subject to the 
        Company's jurisdiction under Rule 3.1;
          3. prepare investigative reports and make recommendations 
        concerning initiating disciplinary proceedings;
          4. issue a Notice of Charges to a Respondent;
          5. prosecute alleged violations within the Company's 
        disciplinary jurisdiction; and
          6. represent the Company on appeal from any disciplinary 
        proceeding, summary imposition of fines, summary suspension or 
        other summary action.

    C. Each Person subject to the jurisdiction of the Company:

          1. is obligated to appear and testify and respond in writing 
        to interrogatories within the time period required by the 
        Compliance Department in connection with:

                  a. any Rule;
                  b. any inquiry or investigation; or
                  c. any preparation by and presentation during a 
                Disciplinary Action;

          2. is obligated to produce books, records, papers, documents 
        or other tangible evidence in its possession, custody or 
        control within the time period required by the Compliance 
        Department in connection with:

                  a. any Rule;
                  b. any inquiry or investigation; or
                  c. any preparation by and presentation during a 
                Disciplinary Action; and

          3. may not impede or delay any Disciplinary Action.
Rule 9.3  Disciplinary Panel
    A. The Respondent disputes the Compliance Department's findings 
with respect to a Disciplinary Action, the Company shall convene the 
Disciplinary Panel to adjudicate the findings by the Compliance 
Department that are under dispute. The Chief Compliance Officer or an 
individual designated by the Chief Compliance Officer may be appointed 
to argue the matter on behalf of the Company.

          1. Members of the Disciplinary Panel shall be individuals 
        that do not have a direct interest (financial, personal or 
        otherwise) in the matter, but in no event may be members of the 
        Compliance Department or any Persons involved in adjudicating 
        any other stage of the same proceeding.
          2. In the event that members of the Disciplinary Panel do not 
        satisfy the requirements of this Rule 9.3A.2, then the 
        Regulatory Oversight Committee may substitute a new member for 
        the Disciplinary Panel or act as the Disciplinary Panel, to the 
        extent that the substituted member or the Regulatory Oversight 
        Committee, as the case may be, does not have a direct interest 
        (financial, personal or otherwise) in the matter.

    B. Members of the Disciplinary Panel and the Compliance Department 
may not communicate regarding the merits of a matter brought before the 
Disciplinary Panel without informing the Respondent who is the subject 
of the communication of the substance of such communication and 
allowing the Respondent an opportunity to respond. The Compliance 
Department may compel testimony, subpoena documents, and require 
statements under oath from any Respondent or, to the extent the 
Respondent is a Participant, any of its Authorized Users, Authorized 
Representatives or other employees or agents.
    C. The Compliance Department and other Company Representatives 
working under the supervision of the Compliance Department may not 
operate under the direction or control of any Participant, Authorized 
User, Authorized Representative or any other representative of a 
Participant, or trade, directly or indirectly, in any commodity 
interest traded on or subject to the rules of any Designated Contract 
Market or Swap Execution Facility.
Rule 9.4  Notice of Charges
    A. The Compliance Department shall issue a Notice of Charges to a 
Respondent by electronic mail and the U.S. Postal Service to that 
Respondent's last known address if the Compliance Department determines 
that there is reasonable cause to believe that a Respondent has 
violated these Rules or Applicable Law. The Notice of Charges shall 
include:

          1. the reason the investigation was initiated;
          2. the Rule or Rules alleged to have been violated;
          3. the Respondent's response, if any, or a summary of the 
        response;
          4. a summary of the investigation conducted;
          5. findings of fact and the Compliance Department's 
        conclusions as to each charge, including which of these Rules 
        the Respondent violated, if any;
          6. a summary of the Respondent's, and any relevant Authorized 
        User's or Authorized Representative's, disciplinary history, if 
        any;
          7. the penalty, if any, proposed by the Compliance 
        Department; and
          8. the Respondent's right to a hearing.

    B. If the Compliance Department institutes an investigation of any 
Affiliate of the Company, the Chief Compliance Officer shall notify the 
Commission's Division of Market Oversight, or its successor division, 
of that fact. At the conclusion of any such investigation, the Chief 
Compliance Officer shall provide the Commission's Division of Market 
Oversight, or its successor division, with a copy of the report or 
other documentation specified in Rule 9.2.
Rule 9.5  Contesting and Appeals
    A. The Respondent subject to the investigation may contest the 
Notice of Charges by submitting an answer to the Notice of Charges by 
electronic mail to the Compliance Department within 15 days of receipt 
of the Notice of Charges. The Respondent's answer must contain a 
detailed response to the findings and conclusions as to each charge and 
any other information the Respondent believes is relevant.
    B. The Respondent has a right to examine all relevant books, 
documents, or other evidence in the possession or under the control of 
the Compliance Department, except that the Compliance Department may 
withhold from inspection any documents that:

          1. are privileged or that constitute attorney work product;
          2. were prepared by any Company Representative but which will 
        not be offered in evidence in the disciplinary proceedings;
          3. may disclose a technique or guideline used in 
        examinations, investigations, or enforcement proceedings; or
          4. disclose the identity of a confidential source.

    C. If the Respondent fails to answer a Notice of Charges, then such 
failure shall be deemed an admission to the findings in the Notice of 
Charges, and the Compliance Department's findings and conclusions shall 
become final and the Compliance Department shall impose the penalty (if 
any) that it proposes. The Compliance Department shall notify the 
Respondent of the imposition of any penalty and send a copy of the 
Notice of Charges by electronic mail and the U.S. Postal Service to 
that Respondent's last known address.
    D. If the findings of the Compliance Department are contested, the 
Compliance Department's report and the Respondent's response will be 
submitted to a Disciplinary Panel.
    E. The Disciplinary Panel will conduct a fair hearing with the 
Compliance Department or other Company Representative and the 
Respondent within 15 calendar days of receipt of the Participant's 
answer to the Notice of Charges contesting such Notice of Charges. 
Parties may attend telephonically. The formal rules of evidence shall 
not apply, but the hearing procedures must not deny a fair hearing.

          1. The hearing shall be recorded, and all information 
        submitted by the parties and the recording of the hearing shall 
        be preserved by the Compliance Department, along with the 
        Disciplinary Panel's findings, as the record of the proceedings 
        (the ``hearing record'') in accordance with Rule 2.14.
          2. The hearing record shall be transcribed if requested by 
        the Commission or Respondent, if the decision is appealed 
        pursuant to these Rules, or if the Commission reviews the 
        decision pursuant to Section 8c of the CEA or Part 9 of CFTC 
        Regulations.

    F. Prior to the Disciplinary Panel's hearing, the parties may (but 
need not) submit proposed findings, briefs, and exhibits (including 
affidavits), and during the hearing the parties may present witnesses. 
The Respondent is entitled to cross-examine witnesses. Persons within 
the Company's jurisdiction who are called as witnesses must participate 
in the hearing and produce evidence. The Compliance Department shall 
use reasonable efforts to secure the presence of all other witnesses 
whose testimony would be relevant.
    G. Within 15 days after the Disciplinary Panel's hearing, the 
Disciplinary Panel shall issue a decision, which shall be delivered to 
the Respondent by electronic mail and the U.S. Postal Service to the 
Respondent's last known address. The findings of the Disciplinary Panel 
shall contain the following information:

          1. the Notice of Charges or a summary thereof, and any answer 
        to the charges or a summary thereof;
          2. a summary of the evidence received;
          3. findings and conclusions with respect to each charge, and 
        a complete explanation of the evidence and other basis for such 
        findings and conclusions;
          4. an indication of each specific rule that the Respondent 
        was found to have violated;
          5. a declaration of any penalty to be imposed on the 
        Respondent as the result of the findings and conclusions, 
        including the basis for such penalty;
          6. the effective date and duration of that penalty; and
          7. a statement that the Respondent has the right to appeal 
        any adverse decision by the Disciplinary Panel to the Appeals 
        Committee within 15 calendar days of receipt of the 
        Disciplinary Panel's decision.

    H. The Disciplinary Panel's decision shall be final on the date it 
is signed by the members of the Disciplinary Panel, the finality of 
which shall be effective on the day after the last day of the appeal 
period.
    I. Either the Participant or the Compliance Department or the 
Company Representative may appeal the decision of the Disciplinary 
Panel within 15 calendar days by filing an appeal by electronic mail 
with the Appeals Committee and forwarding a copy to the other parties 
to the appeal. The Appeals Committee may review a decision on its own 
initiative. Any penalties shall be stayed pending appeal unless the 
Regulatory Oversight Committee determines that a stay pending appeal 
would likely be detrimental to the Company, other Participants, or the 
public. The Appeals Committee shall review the hearing record and any 
information submitted by the Compliance Department or the Company 
Representative and the Respondent on appeal and issue a decision, which 
shall be final on the date of such issuance. The Respondent shall be 
notified of the Appeals Committee's decision by electronic mail and by 
the U.S. Postal Service to the Respondent's last known address. The 
hearing record, any information submitted on appeal, and the Appeals 
Committee's decision shall be preserved as the record on appeal in 
accordance with Rule 2.14. The decision shall contain the information 
listed in Rule 9.5 except for 9.5(G)(7), and will also contain:

          1. a statement that any Person aggrieved by the action may 
        have a right to appeal the action pursuant to Part 9 of the 
        Commission's Regulations, within 30 calendar days of service; 
        and
          2. a statement that any Person aggrieved by the action may 
        petition the Commission for a stay pursuant to Part 9 of the 
        Commission's Regulations, within 10 calendar days of service.
Rule 9.6  Settlements
    A. The Company may enter into settlements with any Respondent any 
time following the issuance of a Notice of Charges and prior to any 
final decision by the Appeals Committee. The Respondent may initiate a 
settlement offer. Any settlement offer shall be forwarded to the 
Disciplinary Panel with a recommendation by the Compliance Department 
that the proposed settlement be accepted, rejected, or modified. A 
settlement offer may be withdrawn at any time before it is accepted by 
the Disciplinary Panel.
    B. The Disciplinary Panel may accept or reject a proposed 
settlement, and the decision of the Disciplinary Panel shall be final. 
In addition, the Disciplinary Panel may propose a modification to the 
proposed settlement for consideration by the Respondent and the 
Compliance Department.
    C. Any settlement under this Rule shall be in writing and shall 
state:

          1. the Notice of Charges or a summary thereof;
          2. the Respondent's answer, if any, or a summary thereof;
          3. a summary of the investigation conducted;
          4. findings and conclusions as to each charge, including each 
        act the Respondent was found to have committed or omitted, be 
        committing or omitting, or be about to commit or omit, and each 
        of these Rules or Applicable Law that such act or practice 
        violated, is violating, or is about to violate;
          5. any penalty imposed and the penalty's effective date; and
          6. where customer harm is found to exist, full customer 
        restitution where it can be reasonably determined.

    D. Failed settlement negotiations, or withdrawn settlement offers, 
will not prejudice a Respondent or otherwise affect subsequent 
procedures in the Rule enforcement process.
Rule 9.7  Notice of Decision
    A. The Compliance Department shall provide to the Respondent notice 
of the Disciplinary Action, decision of the Disciplinary Panel or 
Appeals Committee, or settlement in which sanctions are imposed, no 
later than two Settlement Bank Business Days after it becomes final.
    B. The Compliance Department shall provide to the NFA for inclusion 
in its Internet-accessible database of disciplinary matters within two 
Settlement Bank Business Days after a decision becomes final, notice of 
any decision providing that a Respondent is suspended, expelled, 
disciplined or denied access to the Company.
    C. The Compliance Department shall make public notice of the 
Disciplinary Action when the Disciplinary Action becomes final by 
posting on its Website the information required by CFTC Regulation 
9.11, for a period of 5 consecutive Settlement Bank Business Days in 
accordance with CFTC Regulation 9.13.
Rule 9.8  Penalties
    As a result of a Disciplinary Action or as part of a settlement, 
the Compliance Department may impose one or more of the following 
penalties, commensurate with the violation committed, in consideration 
with the Respondent's disciplinary history, and including full customer 
restitution where customer harm is found and where such restitution can 
be reasonably determined:

          A. a letter of warning, censure, or reprimand (although no 
        more than one such letter may be issued to the same Person 
        found to have committed the same Rule violation within a 
        rolling 12 month period);
          B. a fine or penalty for each Rule or Applicable Law 
        violation sufficient to deter recidivism plus the monetary 
        value of any benefit received as a result of the violation or 
        the cost of damages to the unoffending counterparty;
          C. suspension of Participant or Authorized User status or 
        privileges for a specified period, including partial suspension 
        of such privileges (for example, suspension of Trading 
        Privileges or Clearing Privileges in particular types of 
        Company Contracts or of placement of certain types of orders);
          D. a prohibition against FCM Participants and/or Executing 
        Participants from entering Transactions on behalf of a Customer 
        who has violated these Rules, the CEA or CFTC Regulation or 
        other Applicable Law; and
          E. revocation of Participant or Authorized User status or 
        privileges, including partial revocation of such privileges 
        (for example, revocation of Trading Privileges or Clearing 
        Privileges in particular types of Company Contracts or of 
        placement of certain types of orders).
Rule 9.9  Summary Suspension
    A. The Compliance Department may summarily suspend or restrict a 
Participant's or an Authorized User's privileges if the Chief 
Compliance Officer believes suspension or restriction is necessary to 
protect the swaps, commodity futures or options markets, the Company, 
the public, or other Participants.
    B. All access denials, suspensions, expulsions and other 
restrictions imposed upon a Participant or Authorized User by the 
Compliance Department pursuant to these Rules shall restrict with equal 
force and effect, access to, and use of, the Company.
    C. The Compliance Department may deny or terminate the status of a 
Participant, including an FCM Participant, Executing Participant or 
Liquidity Provider, and any Authorized User if (i) such Person is 
unable to demonstrate its ability to satisfy the applicable criteria 
set forth in Chapter 3 of these Rules; (ii) such Person is unable to 
demonstrate its compliance with all other applicable Rules; (iii) such 
Person's inability to demonstrate compliance with such criteria or 
Rules would, in the Company's sole discretion, bring the Company into 
disrepute or cause the Company to fail to be in compliance with the CEA 
or CFTC Regulations or other laws and regulations; (iv) such Person or 
any of its Authorized Users, as applicable, has committed a violation 
of the Rules; or (v) other good cause is shown as the Company may 
reasonably determine in its discretion.
    D. Upon any suspension or revocation of an FCM Participant, any 
open Order on the Platform for such FCM Participant's Customer(s) shall 
be canceled by the Company.
    E. Whenever practicable the Compliance Department shall notify the 
Participant or Authorized User whose privileges are to be summarily 
suspended by electronic mail before the action is taken. If prior 
notice is not practicable, the Participant or Authorized User shall be 
served with notice by electronic mail at the earliest opportunity. This 
notice shall:

          1. state the action taken or to be taken;
          2. briefly state the reasons for the action;
          3. state the time and date when the action became or becomes 
        effective and its duration; and
          4. state that any Person aggrieved by the action may petition 
        the Commission for a stay of the effective date of the action 
        pending a hearing pursuant to Part 9 of CFTC Regulations, 
        within 10 calendar days of service.

    F. The Participant or Authorized User whose privileges are to be 
summarily suspended shall be given an opportunity for appeal under the 
procedures outlined inRule 9.5I. The decision affirming, modifying, or 
reversing the summary suspension shall be furnished by electronic mail 
to the suspended Participant or Authorized User, and to the Commission 
no later than one Settlement Bank Business Day after it is issued. The 
decision shall contain:

          1. a description of the action taken and the reasons for the 
        action;
          2. a brief summary of the evidence received during the appeal 
        process;
          3. findings and conclusions;
          4. a determination as to whether the summary action that was 
        taken should be affirmed, modified, or reversed;
          5. a declaration of any action to be taken against the 
        suspended Participant or Authorized User as the result of that 
        determination;
          6. the effective date and duration of that action;
          7. a determination of the appropriate relief based on the 
        findings and conclusions;
          8. a statement that any Person aggrieved by the action may 
        have a right to appeal the action pursuant to Part 9 of the 
        Commission's Regulations, within 30 calendar days of service; 
        and
          9. a statement that any Person aggrieved by the action may 
        petition the Commission for a stay pursuant to Part 9 of the 
        Commission's Regulations, within 10 calendar days of service.
Rule 9.10  Reporting Violations to the Commission
    A. Whenever the Company suspends, expels, fines or otherwise 
disciplines or denies any Person access to the Platform, the Company 
will make the disclosures required by Commission Regulations. Without 
limiting the generality of the foregoing, upon rendering a final 
decision regarding a disciplinary or access denial action, the Company 
shall provide notice to the Commission by filing with NFA's BASIC.
    B. The Company will submit to the Commission a schedule listing all 
those Company Rule violations which constitute disciplinary offenses as 
defined in paragraph (a)(6)(i) of CFTC Regulation 1.63 and, to the 
extent necessary to reflect revisions, will submit an amended schedule 
within thirty days of the end of each calendar year. The Company will 
maintain the schedule required by this section, and post the schedule 
on the Company's website.
    C. The Company will submit to the Commission within thirty days of 
the end of each calendar year a certified list of any Participants or 
Persons who have been removed from any Disciplinary Panel, the Board or 
any Company committee pursuant to these Rule or Applicable Law during 
the prior year.
    D. Whenever the Company finds by final decision that a Participant 
or Person has violated a Rule or otherwise committed a disciplinary 
offense and such finding makes such person ineligible to serve on the 
Company's Disciplinary Panels, Company committees, or the Board, the 
Company shall inform the Commission of such finding and the length of 
the ineligibility in a notice it is required to provide to the 
Commission pursuant to either CEA Section 17(h)(1) or CFTC Regulation 
9.11.
Chapter 10  Arbitration
Rule 10.1  In General
    A. If so elected by a Customer, any Claim by the Customer against a 
Participant (including any related counterclaims) shall be settled by 
arbitration in accordance with this Chapter 10.
    B. Any Claim by a Participant against another Participant 
(including any related counterclaims) shall be settled by arbitration 
in accordance with this Chapter 10. Arbitration proceedings invoked 
pursuant to this paragraph shall be independent of, and shall not 
interfere with or delay the resolution of Customers' Claims submitted 
for arbitration pursuant to paragraph A.
    C. Notwithstanding paragraph B, the arbitration panel, in its sole 
and absolute discretion, may decline to take jurisdiction of, or, 
having taken jurisdiction may at any time decline to proceed further 
with, any Claim or any other dispute, controversy or counterclaim, 
other than such as may be asserted under paragraph A.
    D. A Claim brought pursuant to this Rule 10.1 shall be adjudicated 
by qualified arbitrators appointed in accordance with Rule 10.5 below.
    E. Persons to a dispute resolved in accordance with this Chapter 10 
shall have the right to retain and be represented by legal counsel or 
any other representation of its choosing, except any Director or a 
member of the Disciplinary Panel or person substantially related to the 
underlying investigations, such as material witnesses or respondents 
during such proceedings. Persons to a dispute resolved in accordance 
with this Chapter 10 shall be responsible for their own costs, expenses 
and attorneys' fees incurred in connection with the dispute. 
Notwithstanding the foregoing, the Person that prevails shall be 
entitled to recover from the other party all costs, expenses and 
reasonable attorneys' fees incurred in any arbitration arising out of 
or relating to this Chapter 10, and in any legal action or 
administrative proceeding to enforce any arbitration award or relief.
    F. Any award or relief granted by the arbitrators hereunder shall 
be final and binding on the parties hereto and may be enforced by any 
court of competent jurisdiction.
    G. Notwithstanding the foregoing, this Chapter 10 does not apply to 
disputes between Participants where:

          1. such Persons are required by the rules of a non-Company 
        Self-Regulatory Organization to submit to the dispute 
        resolution procedures of that Self-Regulatory Organization; or
          2. such Persons have, by valid and binding agreement, 
        committed to arbitrate or litigate in a forum other than the 
        Company.

    H. For purposes of this Chapter 10, the term ``Claim'' means any 
dispute which arises out of any Transaction, which dispute does not 
require for adjudication the presence of essential witnesses or third 
parties over whom the Company does not have jurisdiction or who are 
otherwise not available. The term ``Claim'' does not include disputes 
arising from underlying commodity transactions which are not a part of, 
or directly connected with, any Transaction.
Rule 10.2  Fair and Equitable Arbitration Procedures
    A. A Person desiring to initiate an arbitration as provided in Rule 
10.1 shall file a notice of arbitration (a ``Notice'') within two years 
from the time the Claim arose. The Notice must set forth the name and 
address of the party or parties against whom the Claim is being 
asserted, the nature and substance of the Claim, the relief requested 
and the factual and legal bases alleged to underlie such relief.
    B. The Notice shall be accompanied by a non-refundable check 
payable to the Company in payment of the arbitration fee. The amount of 
the fee shall be (i) $500 for a Claim requesting relief totaling less 
than $25,000 in the aggregate or (ii) $1,000 for a Claim requesting 
relief totaling $25,000 or more in the aggregate.
    C. Upon receipt, the Company shall promptly convene an arbitration 
panel in accordance with Rule 10.5. The Company shall deliver a copy of 
the Notice to each other party and to the arbitration panel.
    D. Within 20 days following the delivery of the Notice, each 
respondent shall file a written response (a ``Response'') with the 
Company, with a copy to the claimant, setting forth its or his position 
and any counterclaims, as applicable. If the Response sets forth one or 
more counterclaims, the claimant shall file within 20 days a written 
reply to such counterclaims with the Company, with a copy to the 
claimant.
    E. Once each party has had an opportunity to respond to the Claim 
and all counterclaims, the arbitration panel shall promptly schedule a 
hearing. Notwithstanding, Claims requesting relief totaling less than 
$5,000 in the aggregate may, in the interests of efficiency and 
economy, be resolved without hearing.
    F. The chairman of the arbitration panel shall preside over the 
hearing and shall make such determinations on the relevancy and 
procedure as will promote a fair and expeditious adjudication.
    G. The arbitration panel shall consider all relevant, probative 
testimony and documents submitted by the parties. The arbitration panel 
shall not be bound by the formal rules of evidence.
    H. The final decision of the panel shall be by majority vote of the 
arbitrators, as applicable.
    I. Within 60 days after the termination of the hearing, the 
arbitration panel shall render its final decision in writing and 
deliver a copy thereof either in person or by first-class mail to each 
of the parties. The arbitration panel may grant any remedy or relief 
which it deems just and equitable, including, without limitation, the 
awarding of interest and the arbitration fee.
    J. The final decision of the arbitration panel shall not be subject 
to appeal within the Company.
    K. No verbatim record shall be made of the proceedings, unless 
requested by a party who shall bear the cost of such record.
Rule 10.3  Withdrawal of Arbitration Claim
    Any Notice may be withdrawn at any time before the Response is 
filed in accordance with this Chapter 10. If a Response has been filed, 
any withdrawal shall require consent of the party against which the 
Claim is asserted.
Rule 10.4  Penalties
    A. Any failure on the part of a Person to arbitrate a dispute 
subject to this Chapter 10, or the commencement by any such Person of a 
suit in any court prior to arbitrating a case that is required to be 
arbitrated pursuant to this Chapter 10, violates these Rules and shall 
subject such Person to disciplinary proceedings pursuant to Chapter 9. 
Any Person that does not arbitrate a dispute pursuant to Rule 10.1G 
shall not be deemed to have violated these Rules.
    B. The Chief Compliance Officer, in consultation with the 
Regulatory Oversight Committee, may summarily suspend, pursuant to Rule 
9.9, a Participant that fails to timely satisfy an arbitration award 
rendered in any arbitration pursuant to this Chapter 10.
Rule 10.5  Arbitration Panel
    A. On an as-needed basis, the Company shall convene an arbitration 
panel to adjudicate an arbitration claim under this Chapter 10. For a 
Claim requesting relief totaling less than $25,000 in the aggregate, 
the arbitration panel shall consist of one individual. For a Claim 
requesting relief totaling $25,000 or more in the aggregate, the 
arbitration panel shall consist of three individuals.
    B. Members of the arbitration panel shall be individuals that do 
not have a direct interest (financial, personal or otherwise) in the 
matter.
    C. Any member of the arbitration panel may disqualify himself for 
any reason he deems appropriate.
    D. Each member of the arbitration panel shall conduct himself in a 
manner consistent with the American Bar Association/American 
Arbitration Association's ``Code of Ethics for Arbitrators in 
Commercial Disputes,'' which the Company hereby adopts as its own code 
of ethics for arbitrators.
    E. Each member of the arbitration panel must have no less than 5 
years' experience in the financial services industry, and no less than 
one arbitrator must have no less than 5 years' experience in the 
commodity futures or swap industry.
    F. In the event that members of the arbitration panel do not 
satisfy the requirements of this Rule 10.5, then the Regulatory 
Oversight Committee may substitute a new member for the arbitration 
panel or act as the arbitration panel, to the extent that the 
substituted member or the Regulatory Oversight Committee, as the case 
may be, does not have a direct interest (financial, personal or 
otherwise) in the matter.
Chapter 11  Miscellaneous
Rule 11.1  Adjustments Necessitated by Material Changes in the 
        Underlying
    In the event that, prior to or during the term of a Series, changes 
beyond the control of the Company occur in the availability of the 
Underlying or in the way the Underlying is calculated, or a value for 
the Underlying is unavailable or undefined in light of intervening 
events, the Company may delay listing Series or adjust the terms of 
outstanding Series as it deems appropriate in its discretion to achieve 
fairness to holders of Company Contracts of the affected Series.
Rule 11.2  Prohibition on Trading by Company Personnel; Misuse of 
        Material, Non-Public Information
    A. Terms used in this Rule 11.2 and not otherwise defined in these 
Rules shall have the meanings set forth in CFTC Regulations 1.3 and 
1.59.
    B. Company Personnel may not trade, directly or indirectly any 
Company Contract or any related financial instrument.
    C. Company Representatives may not trade, directly or indirectly 
any Company Contract or financial instrument where such Company 
Representative has access to material, non-public information 
concerning such Company Contract or financial instrument.
    D. The Chief Compliance Officer (or, in the case of the Chief 
Compliance Officer, the Board) may grant exemptions in accordance with 
the provisions of this Rule 11.2 to Company Personnel on a case-by-case 
basis under circumstances where the Company Personnel is participating 
in pooled investment vehicles and the Company Personnel has no direct 
or indirect control over Transactions effected by or for the account of 
the pool.
    E. For the avoidance of doubt, participation by Company Personnel 
in a retirement plan sponsored by the Company shall not be deemed to 
constitute trading directly or indirectly in a Company Contract or 
financial instrument, notwithstanding such plan's trading of Company 
Contracts or financial instruments.
    F. Any exempt Company Personnel that has received an exemption 
under Rule 11.2D must:

          1. furnish to the Company (or, in the case of the Chief 
        Compliance Officer, to the Board) account statements and other 
        documents relevant to the trading activities that are so 
        exempted; and
          2. inform the Chief Compliance Officer (or, in the case of 
        the Chief Compliance Officer, the Board) within one Settlement 
        Bank Business Day of any material change of information that 
        may affect such Company Personnel's qualification for such 
        exemption.

    G. Company Representatives are prohibited from disclosing material, 
non-public information obtained as a result of their employment, agency 
relationship or engagement with the Company for any purpose 
inconsistent with such Person's duties or responsibilities as an 
employee, agent, independent contractor, Director or Committee member.
Rule 11.3  Property Rights
    A. Each Participant on behalf of itself and each of its Affiliates, 
Authorized Users and other Persons affiliated with any of the 
foregoing, hereby acknowledges and agrees that LedgerX LLC owns and 
shall retain all right, title and interest in and to the Company, all 
components thereof, including, without limitation, all related 
applications, all application programming interfaces, user interface 
designs, software and source code and any and all intellectual property 
rights therein, including, without limitation, all registered or 
unregistered, as applicable, (a) copyright, (b) trademark, (c) service 
mark, (d) trade secret, (e) trade name, (f) data or database rights, 
(g) design rights, (h) moral rights, (i) inventions, whether or not 
capable of protection by patent or registration, (j) rights in 
commercial information or technical information, including know-how, 
research and development data and manufacturing methods, (k) patent, 
and (l) other intellectual property and ownership rights, including 
applications for the grant of any of the same, in or to LedgerX LLC and 
all other related proprietary rights of LedgerX LLC and/or any of its 
Affiliates (together, with any and all enhancements, corrections, bug 
fixes, updates and other modifications to any of the foregoing and any 
and all data or information of any kind, other than Proprietary Data 
and Personal Information, transmitted by means of any of the foregoing, 
including, without limitation, market data, the ``Proprietary 
Information''). Each Participant on behalf of itself and each of its 
Affiliates, Authorized Users and other Persons affiliated with any of 
the foregoing, further acknowledges and agrees that the Proprietary 
Information is the exclusive, valuable and confidential property of 
LedgerX LLC. Each Participant acknowledges and agrees that it shall not 
and shall not permit its Affiliates, Authorized Users and other Persons 
affiliated with any of the foregoing to reverse engineer, copy, bug 
fix, correct, update, transfer, reproduce, republish, broadcast, create 
derivative works based on or otherwise modify, in any manner, all or 
any part of the Company or the Proprietary Information. Each 
Participant further agrees to and to cause each of its Affiliates, 
Authorized Users and other Persons affiliated with any of the foregoing 
to keep the Proprietary Information confidential and not to transfer, 
rent, lease, copy, loan, sell or distribute, directly or indirectly, 
all or any portion of the Company or any Proprietary Information.
    B. Subject to the provisions of this Rule 11.3, each Participant on 
behalf of itself and each of its Affiliates, Authorized Users, and 
other Persons affiliated with any of the foregoing hereby acknowledges 
and agrees that LedgerX LLC is the owner of all rights, title and 
interest in and to all intellectual property and other proprietary 
rights (including all copyright, patent, trademark or trade secret 
rights) in market data, and all derivative works based thereon, and 
further agree not to distribute, create derivative works based on, or 
otherwise use or commercially exploit market data and any such 
derivative works, provided that Participants, Affiliates, Authorized 
Users, and such other Persons may use market data for their own 
internal business purposes. Without limiting the generality of the 
foregoing, Participants, Affiliates, Authorized Users, and other 
Persons affiliated with any of the foregoing may not distribute, sell 
or retransmit market data exchange to any third party.
    C. Notwithstanding any other provision of this Rule 11.3, each 
Participant and Authorized User retains such rights as it may enjoy 
under applicable law with respect to market data solely in the form 
such market data was submitted to the Company by such Participant or 
Authorized User.
    D. Transaction Data shall not be disclosed publicly other than on 
an aggregated or anonymous basis, or in a manner that does not directly 
or indirectly identify any market participant who has submitted such 
data.
    E. LedgerX LLC shall not condition access to the Company upon a 
Participant's consent to the use of Proprietary Data and Personal 
Information for business or marketing purposes. Proprietary Data and 
Personal Information may not be used by the Company for business and 
marketing purposes unless the market participant has clearly consented 
to the use of Proprietary Data and Personal Information in such manner. 
LedgerX LLC, where necessary, for regulatory purposes, may share 
Proprietary Data and Personal Information with one or more Designated 
Contract Markets or Swap Execution Facilities. Nothing in this Rule 
shall preclude LedgerX LLC from disclosing Proprietary Data and 
Personal Information: (1) as required by Applicable Law or legal 
process; (2) as the Company may deem necessary or appropriate in 
connection with any litigation affecting the Company; (3) to any 
Company Representative authorized to receive such information within 
the scope of his or her duties; (4) to a third party performing 
regulatory or operational services for the Company, provided that such 
party has executed a confidentiality and non-disclosure agreement in a 
form approved by the Company; (5) to a duly authorized representative 
of the CFTC lawfully requesting Proprietary Data and Personal 
Information; (6) in a manner in which a market participant consents to 
such disclosure; (7) pursuant to the terms of an information-sharing 
agreement; or (8) as permitted by CFTC Regulations.
Rule 11.4  Signatures
    Rather than rely on an original signature, the Company may elect to 
rely on a signature that is transmitted, recorded or stored by any 
electronic, optical, or similar means (including but not limited to 
telecopy, imaging, photocopying, electronic mail, electronic data 
interchange, telegram, or telex) as if it were (and the signature shall 
be considered and have the same effect as) a valid and binding 
original.
Rule 11.5  Governing Law
    The Rules, and the rights and Obligations of the Company and 
Participants under the Rules, shall be governed by, and construed in 
accordance with, the laws of the State of New York without regard to 
any provisions of New York law that would apply the substantive law of 
a different jurisdiction. The State of New York is the ``securities 
intermediary's jurisdiction'' within the meaning of Section 8-110(e) of 
the UCC for all purposes of the UCC.
Rule 11.6  Legal Proceedings
    A. Any action, suit or proceeding against the Company, its 
Officers, Directors, limited liability company members, employees, 
agents, or any member of any committee must be brought within one year 
from the time that a cause of action has accrued. Any such action, suit 
or proceeding shall be brought in the state or Federal courts located 
within the City of New York, New York. Each Participant and Authorized 
User expressly consents to the jurisdiction of any such court, waives 
any objection to venue therein, and waives any right it may have to a 
trial by jury.
    B. In the event that a Participant or Authorized User or an 
Affiliate of such Person who fails to prevail in a lawsuit or other 
legal proceeding instituted by such Participant or such Affiliate 
against (i) the Company or (ii) any Affiliate of the Company or any of 
its respective officers, directors, equity holders, employees, agents, 
or any member of any committee, and related to the business of the 
Company, such Participant or Authorized User shall pay to the Company 
all reasonable costs and expenses, including attorneys' fees, incurred 
by the Company in the defense of such proceeding. This Rule 11.7 shall 
not apply to Company disciplinary actions, appeals thereof, or an 
instance in which the Board has granted a waiver of the provisions 
hereof.
    C. The Company will provide to the Commission copies of documents 
pertaining to Company-related pending legal proceedings as required 
under CFTC Regulation 1.60.
Rule 11.7  Limitation of Liability; No Warranties
    A. Except as otherwise set forth in the rules, or due to company 
obligations arising from the act or CFTC regulations, including parts 
37, 38 and 39 of the CFTC regulations, or otherwise under applicable 
law, neither the company nor any of its company representatives, 
affiliates or affiliates' representatives shall be liable to any 
person, or any partner, director, officer, agent, employee, authorized 
user or authorized representative thereof, for any loss, damage, 
injury, delay, cost, expense, or other liability or claim, whether in 
contract, tort or restitution, or under any other cause of action, 
suffered by or made against them as a result of their use of some or 
all of the platform and by making use of the platform, such persons 
expressly agree to accept all liability arising from their use of same.
    B. Except as otherwise set forth in these rules or due to company 
obligations arising from the act or CFTC regulations, including parts 
37, 38 and 39 of the CFTC regulations, or otherwise under applicable 
law, neither the company nor any of its company representatives, 
affiliates or affiliates' representatives shall be liable to any 
person, or any partner, director, officer, agent, employee, authorized 
user or authorized representative thereof, for any loss, damage, 
injury, delay, cost, expense, or other liability or claim, whether in 
contract, tort or restitution, or under any other cause of action, 
suffered by or made against them, arising from (a) any failure or non-
availability of the platform; (b) any act or omission on the part of 
the company, company representatives, affiliates or affiliates' 
representatives including without limitation a decision of the company 
to suspend, halt, or terminate trading or to void, nullify or cancel 
orders or trades in whole or in part; (c) any errors or inaccuracies in 
information provided by the company, affiliates or the platform; (d) 
unauthorized access to or unauthorized use of the platform by any 
person; (e) any force majeure event, including, but not limited to, the 
unavailability of the blockchain as reasonably determined by the 
company, affecting the company or a company contract; or (f) any loss 
to any participant resulting from a participant's own security or the 
integrity of a participant's technology or technology systems. This 
limitation of liability will apply regardless of whether or not the 
company, any company representatives, any company affiliates or 
affiliates' representatives (or any designee thereof) was advised of or 
otherwise might have anticipated the possibility of such damages.
    C. A person's use of the platform, company property and any other 
information and materials provided by the company is at the person's 
own risk, and the platform, the company property and any other 
information and materials provided by the company hereunder are 
provided on an ``as is'' and ``as available'' basis, without warranties 
or representations of any kind, express or implied, by statute, common 
law or otherwise, including all implied warranties of merchantability, 
fitness for a particular purpose and non-infringement, and any 
warranties arising from a course of dealing, usage or trade practice. 
The company does not guarantee that (a) the company property or the 
platform will operate in an error-free, secure or uninterrupted manner; 
(b) any information or materials provided by the company or accessible 
through the company property or the platform will be accurate, 
complete, reliable, or timely; or (c) the company property or any 
aspects of the platform will be free from viruses or other harmful 
components. The company shall have no liability for the 
creditworthiness of any person or for the acts or omissions of any 
person utilizing the platform or any aspect of the company or platform. 
A person accessing the company is solely responsible for the security 
and integrity of the person's technology. A person's access to the 
company may be internet-based and the company has no control over the 
internet or a person's connections thereto. Any person accessing the 
company acknowledges that the internet, computer networks, and 
communications links and devices necessary to enable a person to access 
and use the platform are inherently insecure and vulnerable to attempts 
at unauthorized entry and that no form of protection can ensure that a 
participant's data, hardware, or software or the platform or other 
company property will be fully secure. Furthermore, the company shall 
have no obligation to monitor or verify any information displayed 
through the platform.
    D. A participant that deposits collateral for its benefit with the 
company pursuant to these rules shall hold the company harmless from 
all liability, losses and damages which may result from or arise with 
respect to the care and sale of such collateral provided that the 
company has acted reasonably and in accordance with applicable law 
under the circumstances. Furthermore, the company has no responsibility 
for any act or omission of any third party service provider that the 
company has chosen with reasonable care. The company has no 
responsibility or liability for any loss of collateral that results, 
directly or indirectly, from a breach to a participant's security or 
electronic systems, including but not limited to cyber attacks, or from 
a participant's negligence with respect to a wallet, address or the 
receipt of collateral upon the request of a withdrawal, or from a 
participant's deposit, mistake, error, negligence, or misconduct with 
respect to any collateral transfers a participant makes or attempts to 
make to the company.
    E. No participant, authorized user, authorized representative or 
any other person shall be entitled to commence or carry on any 
proceeding against the company, any of its company representatives, 
affiliates or affiliates' representatives, in respect of any act, 
omission, penalty or remedy imposed pursuant to the rules of the 
company. This section shall not restrict the right of such persons to 
apply for a review of a direction, order or decision of the company by 
a competent regulatory authority.
    F. notwithstanding anything to the contrary herein, in no event 
shall the company or any of its company representatives, affiliates or 
affiliates' representatives be liable for any indirect, incidental, 
consequential, punitive or special damages (whether or not the company 
or any such person had been informed or notified or was aware of the 
possibility of such damages).
    G. Any claim for redress or damages hereunder shall be filed in a 
court of competent jurisdiction within one year of the date on which 
such claim allegedly arose. Failure to institute litigation within such 
time period shall be deemed to be a waiver of such claim and the claim 
shall be of no further force or effect. The allocations of liability in 
this Rule 11.7 represent the agreed and bargained for understanding of 
the parties, and each party acknowledges that the other party's rights 
and obligations hereunder reflect such allocations. The parties agree 
that they will not allege that this remedy fails its essential purpose.
    H. The limitations on liability in this Rule 11.7 shall not protect 
any party for which there has been a final determination (including 
exhaustion of any appeals) by a court or arbitrator to have engaged in 
willful or wanton misconduct or fraud. Additionally, the foregoing 
limitations on liability of this rule shall be subject to the CEA and 
the regulations promulgated thereunder, each as in effect from time to 
time.
Rule 11.8  Error Trade Policy
    The Company shall have the discretion to delete Orders, adjust 
prices, cancel trades or suspend the market in the interest of 
maintaining a fair and orderly market, in accordance with this Rule 
11.8.

          A. In normal circumstances, the Company will only adjust 
        prices or cancel trades on the basis that the price traded is 
        not representative of market value. The Company will make the 
        final decision on whether a trade price is adjusted, or a trade 
        is canceled or is allowed to stand. In determining whether a 
        trade has taken place at an unrepresentative price, certain 
        factors will be taken into account. They may include, but not 
        be limited to:

                  1. price movements in other expiration months of the 
                same Company Contract;
                  2. current market conditions, including levels of 
                activity and volatility;
                  3. time period between different quotes and between 
                quoted and traded prices;
                  4. information regarding price movement in related 
                contracts, the release of economic data or other 
                relevant news just before or during electronic Trading 
                Hours, as applicable;
                  5. manifest error;
                  6. whether there is any indication that the trade in 
                question triggered stops or resulted in the execution 
                of spread trades;
                  7. whether another market user or client relied on 
                the price;
                  8. whether a transaction cancellation or price 
                adjustment will adversely impact market integrity, 
                facilitate market manipulation or other illegitimate 
                activity, or otherwise violate applicable rules or 
                regulations;
                  9. whether any Participants to the trade in question 
                request that any action be taken; and
                  10. any other factor which the Company, in its sole 
                discretion, may deem relevant.

          B. The Company, when applicable, may establish price and/or 
        volume reasonability levels (``Reasonability Levels'') within 
        the system for each Company Contract. The Company may also 
        establish alert levels (``Alert Levels'') as applicable, beyond 
        which the Company will send an alert (``Alert'') to the 
        relevant Participants via the Participant Portal or API. These 
        Reasonability Levels and Alert Levels necessarily are flexible 
        to take account of prevailing market conditions. The Company 
        incorporates Reasonability Levels in determining Alert Levels 
        for issuing Alerts for items such as ``fat finger'' type 
        errors. Reasonability Levels and Alert Levels are set by the 
        Company and may be varied from time to time according to market 
        conditions. The Company will notify Participants of any 
        modifications to the Reasonability Levels. Upon receipt of any 
        Alert, Participant can choose whether or not to proceed with 
        entry and execution of the applicable Order. If the applicable 
        Participants approve the volume and/or price following receipt 
        of the Alert, the Company will attempt to execute the Order and 
        the trade will be finalized.
          C. Any trade executed at a price outside of the No 
        Cancellation Range (as defined below), if identified to the 
        Company within the designated time period, may be considered an 
        alleged error trade.
          D. The Reasonability Levels applicable to each Company 
        Contract will be listed on the Company's website.
          E. Any trade which is alleged to be an error trade and 
        subsequently is canceled due to the determination that it has 
        been executed at an unrepresentative price may be investigated 
        by the Company.
          F. There is a defined ``no cancellation range'' (``No 
        Cancellation Range'') for each Company Contract. Trades 
        executed within this price range will not be canceled or price 
        adjusted. A component of market integrity is the assurance that 
        once executed, except in exceptional circumstances, a trade 
        will stand and not be subject to cancellation or price 
        adjustment. Any trades that do not have an adverse effect on 
        the market should not be able to be canceled or price adjusted, 
        even if executed in error.
          G. In applying the No Cancellation Range, the Company shall 
        determine the fair market price for the Company Contract. The 
        Company may consider any relevant information including, but 
        not limited to, the bid, the ask, the bid size, the ask size, 
        and the spot price.
          H. The No Cancellation Range will be determined per Company 
        Contract and will be available on the Company's website.
          I. If a trade takes place within the No Cancellation Range 
        and is alleged to be an error, the trade will not be canceled.
          J. Trades executed outside of the No Cancellation Range may 
        be reported to or considered by the Company as an error.
          K. Market users have ten (10) minutes from the time of the 
        original trade in which to allege a trade has been executed in 
        error.
          L. The Company will notify the market immediately through its 
        website that an error has been alleged, giving details of the 
        trade, including Company Contract month, price and volume. The 
        Company also will notify the Participants involved via e-mail. 
        The Company will then notify all Participants through a 
        Participant Notice whether the price is adjusted or the trade 
        is canceled or stands. The Company will then contact those 
        parties involved in the trade to explain the Company's 
        decision.
          M. In order to assist the Company in determining whether the 
        trade alleged to be an error has taken place at an 
        unrepresentative price, the Company may contact/consult 
        Participants and other market Participants. The Company will 
        not disclose to the parties to the alleged error trade the 
        identity of their counterparty. In addition, the identities of 
        the counterparties to the alleged error trade will not be 
        disclosed to any Participant or other Person the Company may 
        consult with. The Company will take into account a variety of 
        market factors in its determination. Each error situation will 
        be assessed on its individual circumstances.
          N. If the Company determines that a trade price is outside 
        the No Cancellation Range for a Company Contract, the trade 
        price may be adjusted to a price that equals the fair value 
        market price for that Company Contract at the time the trade 
        under review occurred. The Company may consult and obtain the 
        consent of the parties to the price adjustment or may determine 
        a price adjustment is appropriate regardless of any party's 
        consent or lack thereof. The Company, at its discretion, may 
        allow the trades to stand or cancel the trades rather than 
        adjusting the price. The decision of the Company is final.
          O. If the Company determines that the price differential of a 
        spread trade is not representative of the market for that 
        spread trade at the time of execution, then the differential of 
        such spread trade may be adjusted to the price differential for 
        that spread trade at the time the trade under review occurred. 
        The Company, at its discretion, may allow the trades to stand 
        or cancel the trades rather than adjusting the price 
        differential. The decision of the Company is final.
          P. The Company will make every attempt to ensure that a 
        decision on whether an alleged error trade will have its price 
        adjusted, will stand or be canceled will be communicated to the 
        market as soon as reasonably possible after the time of the 
        original trade.
          Q. The Company has the unilateral right to cancel any Order, 
        adjust the price of a trade and cancel any trade which it 
        considers to be at an unrepresentative price, even where there 
        has been no referral or request from a Participant or other 
        Person, in the interest of maintaining a fair and orderly 
        market. The Company aims to exercise this right within thirty 
        (30) minutes after the trade has been identified. The Company 
        also reserves its right to cancel any Order, adjust the price 
        of a trade and cancel any trade due to any market disrupting 
        event caused by (i) an error in Orders submitted to the 
        Platform or (ii) a technology failure or system malfunction, 
        even where there has been no referral or request from a 
        Participant or other Person, in the interest of maintaining a 
        fair and orderly market and aims to exercise this right within 
        thirty (30) minutes after the system or technology failure has 
        been identified. The Company reserves its right to consider 
        each alleged error trade situation on its individual merits and 
        may therefore amend these policies in light of the 
        circumstances of each individual case. The decision of the 
        Company is final.
          R. Canceled trades and prices that have been adjusted will be 
        noted as such in the Company's official record of time and 
        sales. A special marker will indicate trades that have been 
        priced adjusted in the official record of time and sales at the 
        adjusted trade price.
          S. Neither the company nor any of its representatives, its 
        affiliates or its affiliates' representatives shall be liable 
        to any person, or any partner, director, officer, agent, 
        employee, authorized user or authorized representative thereof, 
        for any loss, damage, injury, delay, cost, expense, or other 
        liability or claim, whether in contract, tort or restitution, 
        or under any other cause of action, suffered by or made against 
        them arising from any act or omission on the part of the 
        company, its representatives, its affiliates or its affiliates' 
        representatives relating to any decision by the company to, or 
        to not, void, nullify or cancel orders or trades or adjust the 
        prices of any trades in whole or in part. This limitation of 
        liability will apply regardless of whether or not the company, 
        its representatives, its affiliates or its affiliates' 
        representatives (or any designee thereof) were advised of or 
        otherwise might have anticipated the possibility of such 
        damages.
Rule 11.9  Company Contacts
    All requests to cancel Orders or trades must be directed to the 
Company via the Participant Portal or the Company telephone number 
posted on the website. Any such request for the removal of Orders will 
be acted upon on a best-efforts basis by the relevant Company 
Personnel.
Rule 11.10  Reasonability Levels
    The Error Trade Policy includes Reasonability Levels and No 
Cancellation Ranges for all Company Contracts on the Platform.

          A. Benchmark:

                  1. If there exists a last price in the applicable 
                Company Contract in the last 48 hours, then such price 
                will be used as the benchmark; or
                  2. If there exists no last price but there is a bid 
                AND an ask in the last 48 hours, then the Company will 
                use the midpoint of the most recent bid & most recent 
                ask as the benchmark.

          B. Reasonability Levels:

                  1. If Benchmark 1 or 2 is applicable, then the 
                Reasonability Level = 50% of the Benchmark; or

                          a. If neither Benchmark 1 nor 2 apply, then 
                        there will be no alerts generated for this 
                        Company Contract and error trades are subject 
                        to the No Cancellation Range and Company 
                        discretion with respect to adjusting or 
                        canceling trades.
Rule 11.11  No Cancellation Ranges
    A. Benchmark:

          1. If there exists a last price in the applicable Company 
        Contract in the last 48 hours, then such price will be used as 
        the benchmark; or
          2. If there exists no last price but there is a bid AND an 
        ask in the last 48 hours, then the Company will use the 
        midpoint of the most recent bid and most recent ask as the 
        benchmark.

    B. No Cancellation Range:

          1. If Benchmark 1 or 2 is applicable, then the No 
        Cancellation Range = 20% of the Benchmark; or
          2. If neither Benchmark 1 nor 2 apply, then there is not a No 
        Cancellation Range for that Company Contract at that time and 
        the Company will evaluate each error alleged error trade 
        situation on its individual merits and the facts and 
        circumstances of each individual case.
Rule 11.12  Amendments to the Rules
    These Rules may be amended or repealed, or new Rules may be 
adopted. An amendment to a Rule, repeal of a Rule or adoption of a new 
Rule shall be effective on a date set forth by the Company, and set 
forth in a Participant Notice and on the Website.
Rule 11.13  Transfer of Trades
    A. The Chief Compliance Officer or his or her designee may, upon 
request by the Participant(s), approve a transfer of existing trades 
and collateral either on the books of the same Participant, or from the 
books of one Participant to the books of another Participant if the 
transfer is (i) between accounts with identical beneficial ownership or 
(ii) in connection with, or as a result of, an asset purchase, 
corporate restructuring, consolidation or similar non-recurring 
transaction between two or more entities. Such a transfer must meet 
each of the following conditions:

          1. The transfer must result in the transfer of all existing 
        open positions and collateral in the transferor account;
          2. Immediately prior to the transfer, the transferee account 
        must not have any existing open positions or collateral; and
          3. All trades involved in the transfer must remain fully 
        collateralized upon completion of the transfer.

    B. Provided that the transfer is permitted pursuant to paragraph 
(A) above, the transactions must be recorded and carried on the books 
of the receiving Participant at the original trade dates with the 
original trade prices.
    C. All transfers shall be reported to the Company in a form 
acceptable to the Company for the type of transactions involved. The 
Participant(s) involved shall maintain a full and complete record of 
all transactions together with all pertinent memoranda.
Rule 11.14  Digital Currency Fork Policy
    At some point in the future, there may be a change, or anticipated 
change, to the relevant operating rules, protocols, processes, or 
standards applicable to a Digital Currency underlying a Company 
Contract, including without limitation a hard fork, a user activated 
soft fork, or other events resulting in a split, division, alteration, 
conversion, replacement, of substitution of a Digital Currency into 
another form, a restriction on the transfer of the Digital Currency 
(such as a lockup or freeze), or a distribution of another asset to 
existing holders of the Digital Currency (such as an airdrop). Such an 
event may result in the creation of an asset that is subject to the 
Securities Act of 1933, as amended, and is subject to the jurisdiction 
of the U.S. Securities and Exchange Commission
    In the event of such change, or anticipated change, LedgerX shall 
have the sole discretion to take such action, including (without 
limitation) emergency action under Rule 2.12, that it deems 
appropriate. Such action may include (without limitation) revising 
delivery obligations under the Company Contract (such as providing for 
the delivery of one or more assets resulting from such an event), 
revising other terms of the Company Contract, determining who should 
receive a newly created digital assets, assigning newly listed Company 
Contracts to Participants whose positions have been, or are anticipated 
to be affected, or refusing to transfer a newly created asset that is 
or may be subject to the Securities Act of 1933 or the jurisdiction of 
the U.S. Securities and Exchange Commission. LedgerX shall endeavor to 
provide reasonable notice to market participants and take action in 
consultation with market participants, where reasonably possible and 
appropriate, and shall endeavor to align the exposures of Participants 
holding positions in open Company Contracts with exposures in the spot 
market.
Chapter 12  Company Contract Specifications
Rule 12.1  USD/BTC Options
    A. Contract Description. Generally speaking, an option is an 
agreement that grants the option purchaser, in exchange for a premium, 
the right, but not the obligation, to purchase from (in the case of a 
call option) or to sell to (in the case of a put option) the option 
writer, at a specified exercise or ``strike'' price, and at specified 
time(s) or within a specified period, a specified underlying interest. 
This Rule 12.1 pertains to options on bitcoin (as described further 
herein) (the ``USDBTC Options'') and contains general terms and 
conditions. Participants may enter into USDBTC Options as buyers or 
sellers of calls and/or puts.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to USDBTC 
Options will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to USDBTC Options will be 
United States dollars, expressed as dollars and cents per bitcoin.
    E. Underlying. The USDBTC Option underlying will be bitcoin 
(sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Option contract size will be one 
bitcoin.
    G. Position Limits. No person will own or control positions in 
excess of:

          a. 100,000 USDBTC Options net long or net short in any single 
        Company Contract month; or
          b. 250,000 USDBTC Option net long or net short in all Company 
        Contract months combined.

    H. Collateral. All Company Contracts will be fully collateralized. 
Each Participant must post the maximum potential loss on a USDBTC 
Option prior to executing a USDBTC Option.
    I. Option Conventions.

          a. Traded Price. The traded price on the Trade Date.
          b. Strike Price. As of any Trade Date, (i) a range of 
        approximately 15% up and 15% down from the approximate 
        prevailing spot market price as of such date, with increments 
        of $100.00, (ii) a smaller number of additional strikes in 
        increments ranging from $250.00 to $1,000.00 for prices between 
        20% and 300% of the approximate prevailing spot market price as 
        of such date, and (iii) any previously-listed strikes with 
        remaining open interest, in each case as may be determined and 
        listed from time to time by the Company in its sole discretion.
          c. Daily Settlement Price. None. Because all Company 
        Contracts are fully collateralized and physically settled, it 
        is not necessary for the Company to publish a settlement price. 
        Each Participant determines whether the intrinsic value of the 
        underlying is greater than the relevant Strike Price as of the 
        Last Trading Date and makes a corresponding decision as to 
        exercise.
          d. Business Day Convention. Previous.
          e. Exercise Type. European.
          f. Contract Series. Consecutive months up to and including 60 
        months from the month including the Trade Date, or as otherwise 
        determined and listed from time to time by the Company in its 
        sole discretion.
          g. Last Trading Date. The last Friday of each USDBTC Option 
        month.
          h. Expiration Time. With respect to any USDBTC Option, 4:00 
        p.m. New York time on the Last Trading Date applicable thereto.
          i. Settlement. Physical delivery upon exercise. With respect 
        to any USDBTC Option, physical delivery will occur on the 
        Business Day next succeeding the Last Trading Day in respect of 
        such Company Contract.
          j. Final Payment Date. With respect to any USDBTC Option, the 
        Business Day next succeeding the Last Trading Day in respect of 
        such Company Contract.

    J. Exercise. On the Last Trading Date, Participants submit or 
update exercise instructions for any long USDBTC Option positions. All 
exercise instructions are processed on the Last Trading Date not 
earlier than 5:00 p.m.
    Because the Company does not publish a settlement price, there is 
no provision for automatic exercise of Company Contracts.
    K. Block Trading. Each USDBTC Option Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
USDBTC Option is equal to the contract size set forth in Section F 
above. All parties to a USDBTC Option Block Trade must be Eligible 
Contract Participants.
Rule 12.2  Day-Ahead USD/BTC Swaps
    A. Contract Description. The term ``swap'' is a generic one that 
covers many types of instruments, including (among other things) any 
agreement, contract or transaction that is for the purchase or sale of 
any one or more currencies or commodities. This Rule 12.2 pertains to 
swaps on bitcoin (as described further herein) (the ``Day-ahead 
Swaps'') and contains general terms and conditions. A Participant may 
enter into a Day-ahead Swap as a buyer, whereby such Participant will 
pay USD and receive BTC, or as a seller, whereby such Participant will 
pay BTC and receive USD. The Day-ahead Swap requires that a buyer pay 
USD on the Initial Payment Date, and that the seller pay BTC on the 
Final Payment Date.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the Day-
ahead Swap will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to Day-ahead Swaps will be 
United States dollars, which will be expressed in dollars and cents per 
bitcoin.
    E. Underlying. The underlying applicable to Day-ahead Swaps will be 
bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each Day-ahead Swap will be for a single 
Underlying (i.e., one bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 100,000 Day-ahead Swaps.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company will accept a buy order for one or more Day-ahead 
Swaps from a Participant, such Participant must have sufficient USD 
available for trading in its account to satisfy its settlement 
obligations on such Company Contract(s). Before the Company will accept 
a sell order for one or more Day-ahead Swaps from a Participant, such 
Participant must have sufficient bitcoin available for trading in its 
account to satisfy its delivery obligations on such Company 
Contract(s).
    I. Swap Tenor. One Business Day.
    J. Swap Conventions.

          a. Trade Date. With respect to any Day-ahead Swap, the date 
        on which the Company, in its sole discretion, accepts a buy or 
        sell order, as the case may be.
          b. Effective Date. With respect to any Day-ahead Swap, the 
        Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any Day-ahead 
        Swap, $0.25.
          d. Initial Payment Date. With respect to any Day-ahead Swap, 
        the Trade Date applicable thereto. The buyer of a Day-ahead 
        Swap will pay the bid amount of such Company Contract on the 
        Trade Date thereof.
          e. Premium. With respect to any Day-ahead Swap, the Buyer 
        thereof will pay the premium thereon on the Initial Payment 
        Date. In the context of a Day-ahead Swap, the bid amount is 
        equal to the Premium.
          f. Final Payment Date. With respect to any Day-ahead Swap, 
        the Business Day next succeeding the Trade Date applicable 
        thereto.
          g. Expiration Time. With respect to any Day-ahead Swap, 4:00 
        p.m. New York time (EDT/EST) on the Trade Date applicable 
        thereto.
          h. Business Day Convention. Previous.
          i. Settlement. Physical delivery. With respect to any Day-
        ahead Swap, physical delivery will occur on the Final Payment 
        Date applicable thereto.

    K. Block Trading. Each Day-ahead Swap Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
Day-ahead Swap is equal to the contract size set forth in Section F 
above. All parties to a Day-ahead Swap Block Trade must be Eligible 
Contract Participants.
Rule 12.3  USD/BTC Weekly Options
    A. Contract Description. Generally speaking, an option is an 
agreement that grants the option purchaser, in exchange for a premium, 
the right, but not the obligation, to purchase from (in the case of a 
call option) or to sell to (in the case of a put option) the option 
writer, at a specified exercise or ``strike'' price, and at specified 
time(s) or within a specified period, a specified underlying interest. 
This Rule 12.3 pertains to options on bitcoin (as described further 
herein) (the ``USDBTC Weekly Options'') and contains general terms and 
conditions. Participants may enter into USDBTC Weekly Options as buyers 
or sellers of calls and/or puts.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The Trading Hours that are applicable to the 
USDBTC Weekly Option will be as stated in Rule 5.6 above; provided, 
that, with respect to a USDBTC Weekly Option with any given tenor and/
or strike, the Company may establish different Trading Hours by 
providing notice to participants on its Website and by Participant 
Notice.
    D. Currency. The currency applicable to USDBTC Weekly Options will 
be United States dollars, expressed as dollars and cents per bitcoin.
    E. Underlying. The USDBTC Weekly Option underlying will be bitcoin 
(sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Weekly Option will be one bitcoin.
    G. Position Limits. No person will own or control positions in 
excess of:

          a. 100,000 USDBTC Weekly Options net long or net short in any 
        single Company Contract month; or
          b. 250,000 USDBTC Weekly Options net long or net short in all 
        Company Contract months combined.

    H. Collateral. All Company Contracts will be fully collateralized. 
Each Participant must post the maximum potential loss on a USDBTC 
Weekly Option prior to executing a USDBTC Weekly Option.
    I. Option Conventions.

          a. Traded Price. The traded price on the Trade Date.
          b. Strike Price. As of any Trade Date, (i) a range of 
        approximately 15% up and 15% down from the approximate 
        prevailing spot market price as of such date, with increments 
        of $100.00, (ii) a smaller number of additional strikes in 
        increments ranging from $250.00 to $1,000.00 for prices between 
        20% and 300% of the approximate prevailing spot market price as 
        of such date, and (iii) any previously-listed strikes with 
        remaining open interest, in each case as may be determined and 
        listed from time to time by the Company in its sole discretion.
          c. Daily Settlement Price. None. Because all Company 
        Contracts are fully collateralized and physically settled, it 
        is not necessary for the Company to publish a settlement price. 
        Each Participant determines whether the intrinsic value of the 
        underlying is greater than the relevant Strike Price as of the 
        Last Trading Date and makes a corresponding decision as to 
        exercise.
          d. Business Day Convention. Previous.
          e. Exercise Type. European.
          f. Contract Series. Consecutive weeks up to and including 4 
        weeks from the week including the Trade Date, or as otherwise 
        determined and listed from time to time by the Company in its 
        sole discretion.
          g. Last Trading Date. Friday of each calendar week.
          h. Last Trading Time. 4:00 p.m. ET on the Last Trading Date.
          i. Settlement. Physical delivery upon exercise. With respect 
        to any USDBTC Weekly Option, physical delivery will occur on 
        the Business Day next succeeding the Last Trading Day in 
        respect of such Company Contract.
          j. Final Payment Date. With respect to any USDBTC Weekly 
        Option, the Business Day next succeeding the Last Trading Day 
        in respect of such Company Contract.

    J. Exercise. On the Last Trading Date, Participants submit or 
update exercise instructions for any long USDBTC Weekly Option 
positions. All exercise instructions are processed on the Last Trading 
Date not earlier than 5:00 p.m. ET.
    Because the Company does not publish a settlement price, there is 
no provision for automatic exercise of Company Contracts.
    K. Block Trading. Each USDBTC Weekly Option Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
USDBTC Weekly Option is equal to the contract size set forth in Section 
F above. All parties to a USDBTC Weekly Option Block Trade must be 
Eligible Contract Participants.
Rule 12.4  Day-Ahead USD/BTC Options
    A. Contract Description. Generally speaking, an option is an 
agreement that grants the option purchaser, in exchange for a premium, 
the right, but not the obligation, to purchase from (in the case of a 
call option) or to sell to (in the case of a put option) the option 
writer, at a specified exercise or ``strike'' price, and at specified 
time(s) or within a specified period, a specified underlying interest. 
This Rule 12.4 pertains to options on bitcoin (as described further 
herein) (the ``USDBTC Day-ahead Options'') and contains general terms 
and conditions. Participants may enter into USDBTC Day-ahead Options as 
buyers or sellers of calls and/or puts.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The Trading Hours that are applicable to the 
USDBTC Day-ahead Option will be as stated in Rule 5.6 above; provided, 
that, with respect to a USBTC Day-ahead Option with any given tenor 
and/or strike, the Company may establish different Trading Hours by 
providing notice to participants on its Website and by Participant 
Notice.
    D. Currency. The currency applicable to USDBTC Day-ahead Options 
will be United States dollars, expressed as dollars and cents per 
bitcoin.
    E. Underlying. The USDBTC Day-ahead Option underlying will be 
bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Day-ahead Option will be one bitcoin.
    G. Position Limits. No person will own or control positions in 
excess of: 100,000 USDBTC Day-ahead Options net long or net short.
    H. Collateral. All Company Contracts will be fully collateralized. 
Each Participant must post the maximum potential loss on a USDBTC Day-
ahead Option prior to executing a USDBTC Day-ahead Option.
    I. Option Conventions.

          a. Traded Price. The traded price on the Trade Date.
          b. Strike Price. As of any Trade Date, (i) a range of 
        approximately 15% up and 15% down from the approximate 
        prevailing spot market price as of such date, with increments 
        of $50.00, (ii) a smaller number of additional strikes in 
        increments ranging from $100.00 to $1,000.00 for prices between 
        20% and 300% of the approximate prevailing spot market price as 
        of such date, and (iii) any previously-listed strikes with 
        remaining open interest, in each case as may be determined and 
        listed from time to time by the Company in its sole discretion.
          c. Daily Settlement Price. None. Because all Company 
        Contracts are fully collateralized and physically settled, it 
        is not necessary for the Company to publish a settlement price. 
        Each Participant determines whether the intrinsic value of the 
        underlying is greater than the relevant Strike Price as of the 
        Last Trading Date and makes a corresponding decision as to 
        exercise.
          d. Business Day Convention. Previous.
          e. Exercise Type. European.
          f. Last Trading Time. With respect to any USDBTC Day-ahead 
        Option, 4:00 p.m. New York time (EDT/EST) on the Trade Date 
        applicable thereto.
          g. Settlement. With respect to any USDBTC Day-ahead Option, 
        physical delivery will occur on the Final Payment Date 
        applicable thereto.
          h. Final Payment Date. With respect to any USDBTC Day-ahead 
        Option, the Business Day next succeeding the Trade Date 
        applicable thereto.

    J. Exercise. On the Last Trading Date, Participants submit or 
update exercise instructions for any long USDBTC Day-ahead Option 
positions. All exercise instructions are processed on the Last Trading 
Date not earlier than 5:00 p.m. ET.
    Because the Company does not publish a settlement price, there is 
no provision for automatic exercise of Company Contracts.
    K. Block Trading. Each USDBTC Day-ahead Option Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
USDBTC Day-ahead Option is equal to the contract size set forth in 
Section F above. All parties to a USDBTC Day-ahead Option Block Trade 
must be Eligible Contract Participants.
Rule 12.5  BTC Block Height Options
    A. Contract Description. This Rule 12.5 pertains to an options 
contract (as described further herein) (the ``Block Height Options'') 
and contains general terms and conditions. The Block Height Options 
contract is a binary options contract on whether bitcoin has reached a 
particular Bitcoin Block Height (as defined below) before a specific 
date and time. A purchaser of a Block Height Options contract will 
receive the Payout Value (as defined below) if the bitcoin blockchain 
has reached the Bitcoin Block Height before the expiration of the 
contract. In contrast, the purchaser will not receive the Payout Value 
if the bitcoin blockchain has not reached the Bitcoin Block Height 
before the expiration of the contract.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Bitcoin Block Height. The block number as part of the bitcoin 
blockchain. The Bitcoin Block Height shall be specified by the Company 
for the Company Contract.
    D. Trading Hours. The trading hours that are applicable to the BTC 
Block Height Options will be as stated in Rule 5.6 above.
    E. Currency. The currency applicable to BTC Block Height Options 
will be United States dollars, expressed as dollars and cents per 
bitcoin.
    F. Underlying. The BTC Block Height Options underlying will be 
Bitcoin Block Height.
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 100,000 options.
    H. Collateral. All Company Contracts will be fully collateralized. 
Each Participant must post the maximum potential loss on a Company 
Contract prior to executing a Company Contract.
    I. Expiration Date. The Expiration Date shall be the date specified 
by the Company for the Company Contract.
    J. Expiration Time. The Expiration Time shall be the time specified 
by the Company for the Company Contract.
    K. Settlement Date. The Settlement Date shall be the earlier of the 
date on which the Bitcoin Block Height is reached, or the Expiration 
Date.
    L. Payout Criterion. If the Bitcoin Block Height has been reached 
prior to the Expiration Time on the Expiration Date, the Company 
Contract shall payout the Payout Value at such time that the Block 
Height has reached 6 confirmations.
    M. Payout Value. $100.00.
    N. Block Trading. The BTC Block Height Option is not eligible for 
Block Trading.
Rule 12.6  Monthly USD/BTC Mini Options
    A. Contract Description. Generally speaking, an option is an 
agreement that grants the option purchaser, in exchange for a premium, 
the right, but not the obligation, to purchase from (in the case of a 
call option) or to sell to (in the case of a put option) the option 
writer, at a specified exercise or ``strike'' price, and at specified 
time(s) or within a specified period, a specified underlying interest. 
This Rule 12.6 pertains to options on bitcoin (as described further 
herein) (the ``USDBTC Monthly Mini Options'') and contains general 
terms and conditions. Participants may enter into USDBTC Monthly Mini 
Options as buyers or sellers of calls and/or puts.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the 
USDBTC Monthly Mini Options will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to USDBTC Monthly Mini Options 
will be United States dollars, which will be expressed in dollars and 
cents per bitcoin.
    E. Underlying. The underlying applicable to USDBTC Monthly Mini 
Options will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Monthly Mini Option will be for \1/
100\ Underlying (i.e., one-one hundredth bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 2,000,000 USDBTC Monthly Mini 
Options.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more USDBTC 
Monthly Mini Options from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more USDBTC Monthly Mini 
Options from a Participant, such Participant must have sufficient 
bitcoin available for trading in its account to satisfy its delivery 
obligations on such Company Contract(s).
    I. Conventions.

          a. Trade Date. With respect to any USDBTC Monthly Mini 
        Option, the date on which the Company, in its sole discretion, 
        accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDBTC Monthly Mini 
        Option, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDBTC 
        Monthly Mini Option, $0.01.
          d. Initial Payment Date. With respect to any USDBTC Monthly 
        Mini Option, the Trade Date applicable thereto. The buyer of a 
        USDBTC Monthly Mini Option will pay the bid amount of such 
        Company Contract on the Trade Date thereof.
          e. Premium. With respect to any USDBTC Monthly Mini Option, 
        the Buyer thereof will pay the premium thereon on the Initial 
        Payment Date. In the context of a USDBTC Monthly Mini Option, 
        the bid amount is equal to the Premium.
          f. Last Trading Date. Friday of the calendar month, or as 
        otherwise determined by the Company in its sole discretion.
          g. Business Day Convention. Previous.
          h. Final Payment Date. With respect to any USDBTC Monthly 
        Mini Option, the Business Day next succeeding the Last Trading 
        Date.
          i. Settlement. Physical delivery on the Final Payment Date.

    J. Block Trading. Each USDBTC Monthly Mini Option Block Trade must 
be effectuated in accordance with Rule 5.7. The minimum block size for 
the USDBTC Monthly Mini Option is equal to 100 contracts. All parties 
to a USDBTC Monthly Mini Option Block Trade must be Eligible Contract 
Participants.
Rule 12.7  Day-Ahead USD/BTC Mini Swaps
    A. Contract Description. The term ``swap'' is a generic one that 
covers many types of instruments, including (among other things) any 
agreement, contract or transaction that is for the purchase or sale of 
any one or more currencies or commodities. A Participant may enter into 
a Company Contract as a buyer, whereby such Participant will pay USD 
and receive BTC, or as a seller, whereby such Participant will pay BTC 
and receive USD. This Rule 12.7 pertains to swaps on bitcoin (as 
described further herein) (the ``Day-ahead Mini Swaps'') and contains 
general terms and conditions. The Day-ahead Mini Swap requires that a 
buyer pay USD on the Initial Payment Date, and that the seller pay BTC 
on the Final Payment Date.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the 
USDBTC Day-ahead Mini Swap will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to USDBTC Day-ahead Mini Swap 
will be United States dollars, which will be expressed in dollars and 
cents per bitcoin.
    E. Underlying. The underlying applicable to USDBTC Day-ahead Mini 
Swaps will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Day-ahead Mini Swap will be for \1/
100\ Underlying (i.e., one-one hundredth bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 2,000,000 USDBTC Day-ahead Mini 
Swaps.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more USDBTC 
Day-ahead Mini Swaps from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more USDBTC Day-ahead Mini 
Swaps from a Participant, such Participant must have sufficient bitcoin 
available for trading in its account to satisfy its delivery 
obligations on such Company Contract(s).
    I. Conventions.

          a. Trade Date. With respect to any USDBTC Day-ahead Mini 
        Swap, the date on which the Company, in its sole discretion, 
        accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDBTC Day-ahead Mini 
        Swap, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDBTC Day-
        ahead Mini Swap, $0.01.
          d. Initial Payment Date. With respect to any USDBTC Day-ahead 
        Mini Swap, the Trade Date applicable thereto. The buyer of a 
        USDBTC Day-ahead Mini Swap will pay the bid amount of such 
        Company Contract on the Trade Date thereof.
          e. Premium. With respect to any USDBTC Day-ahead Mini Swap, 
        the Buyer thereof will pay the premium thereon on the Initial 
        Payment Date. In the context of a USDBTC Day-ahead Mini Swap, 
        the bid amount is equal to the Premium.
          f. Last Trading Date. With respect to any Day-ahead Mini 
        Swap, the Business Day next succeeding the Trade Date 
        applicable thereto.
          g. Business Day Convention. Previous.
          h. Final Payment Date. With respect to any USDBTC Day-ahead 
        Mini Swap, the Business Day next succeeding the Last Trading 
        Date.
          i. Settlement. Physical delivery on the Final Payment Date.

    J. Block Trading. Each USDBTC Day-ahead Mini Swap Block Trade must 
be effectuated in accordance with Rule 5.7. The minimum block size for 
the USDBTC Day-ahead Mini Swap is equal to 100 contracts. All parties 
to a USDBTC Day-ahead Mini Swap Block Trade must be Eligible Contract 
Participants.
Rule 12.8  Weekly USD/BTC Mini Options
    A. Contract Description. Generally speaking, an option is an 
agreement that grants the option purchaser, in exchange for a premium, 
the right, but not the obligation, to purchase from (in the case of a 
call option) or to sell to (in the case of a put option) the option 
writer, at a specified exercise or ``strike'' price, and at specified 
time(s) or within a specified period, a specified underlying interest. 
This Rule 12.8 pertains to options on bitcoin (as described further 
herein) (the [``]USDBTC Weekly Mini Options'') and contains general 
terms and conditions. Participants may enter into USDBTC Weekly Mini 
Options as buyers or sellers of calls and/or puts.
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the 
USDBTC Weekly Mini Options will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to USDBTC Weekly Mini Options 
will be United States dollars, which will be expressed in dollars and 
cents per bitcoin.
    E. Underlying. The underlying applicable to USDBTC Weekly Mini 
Options will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Weekly Mini Option will be for \1/
100\ Underlying (i.e., one-one hundredth bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 2,000,000 USDBTC Weekly Mini 
Options.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more USDBTC 
Weekly Mini Options from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more USDBTC Weekly Mini Options 
from a Participant, such Participant must have sufficient bitcoin 
available for trading in its account to satisfy its delivery 
obligations on such Company Contract(s).
    I. Conventions.

          a. Trade Date. With respect to any USDBTC Weekly Mini Option, 
        the date on which the Company, in its sole discretion, accepts 
        a buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDBTC Weekly Mini 
        Option, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDBTC 
        Weekly Mini Option, $0.01.
          d. Initial Payment Date. With respect to any USDBTC Weekly 
        Mini Option, the Trade Date applicable thereto. The buyer of a 
        USDBTC Weekly Mini Option will pay the bid amount of such 
        Company Contract on the Trade Date thereof.
          e. Premium. With respect to any USDBTC Weekly Mini Option, 
        the Buyer thereof will pay the premium thereon on the Initial 
        Payment Date. In the context of a USDBTC Weekly Mini Option, 
        the bid amount is equal to the Premium.
          f. Last Trading Date. Friday of the calendar week, or as 
        otherwise determined by the Company in its sole discretion.
          g. Business Day Convention. Previous.
          h. Final Payment Date. With respect to any USDBTC Weekly Mini 
        Option, the Business Day next succeeding the Last Trading Date.
          i. Settlement. Physical delivery on the Final Payment Date.

    J. Block Trading. Each USDBTC Weekly Mini Option Block Trade must 
be effectuated in accordance with Rule 5.7. The minimum block size for 
the USDBTC Weekly Mini Option is equal to 100 contracts. All parties to 
a USDBTC Weekly Mini Option Block Trade must be Eligible Contract 
Participants.
Rule 12.9  Day-Ahead USD/BTC Futures
    A. Contract Description. In general, a futures contract is a 
legally binding agreement to buy or sell a standardized asset at a 
specified time in the future. This Rule 12.9 pertains to futures on 
bitcoin (as described further herein) (the ``Day-ahead Futures'') and 
contains general terms and conditions. The Day-ahead Futures contract 
requires that a buyer pay USD on the Initial Payment Date (as defined 
below), and that the seller pay BTC on the Final Payment Date (as 
defined below).
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the Day-
ahead Futures contract will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to Day-ahead Futures will be 
United States dollars, which will be expressed in dollars and cents per 
bitcoin.
    E. Underlying. The underlying applicable to Day-ahead Futures will 
be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each Day-ahead Futures contract will be for a 
single Underlying (i.e., one bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 20,000 Day-ahead Futures.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more Day-
ahead Futures from a Participant, such Participant must have sufficient 
USD available for trading in its account to satisfy its settlement 
obligations on such Company Contract(s). Before the Company DCM will 
accept a sell order for one or more Day-ahead Futures from a 
Participant, such Participant must have sufficient bitcoin available 
for trading in its account to satisfy its delivery obligations on such 
Company Contract(s).
    I. Tenor. One Business Day.
    J. Conventions.

          a. Trade Date. With respect to any Day-ahead Futures 
        contract, the date on which the Company, in its sole 
        discretion, accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any Day-ahead Futures 
        contract, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any Day-ahead 
        Futures contract, $0.25.
          d. Initial Payment Date. With respect to any Day-ahead 
        Futures contract, the Trade Date applicable thereto. The buyer 
        of a Day-ahead Futures contract will pay the bid amount of such 
        Company Contract on the Trade Date thereof.
          e. Premium. With respect to any Day-ahead Futures contract, 
        the Buyer thereof will pay the premium thereon on the Initial 
        Payment Date. In the context of a Day-ahead Futures contract, 
        the bid amount is equal to the Premium.
          f. Final Payment Date. With respect to any Day-ahead Futures 
        contract, the Business Day next succeeding the Trade Date 
        applicable thereto.
          g. Business Day Convention. Previous.
          h. Settlement. Physical delivery. With respect to any Day-
        ahead Futures contract, physical delivery will occur on the 
        Final Payment Date applicable thereto.

    K. Block Trading. Each Day-ahead Futures Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
Day-ahead Futures contract is equal to the contract size set forth in 
Section F above. All parties to a Day-ahead Futures Block Trade must be 
Eligible Contract Participants.
Rule 12.10  Weekly USD/BTC Futures
    A. Contract Description. In general, a futures contract is a 
legally binding agreement to buy or sell a standardized asset at a 
specified time in the future. This Rule 12.10 pertains to futures on 
bitcoin (as described further herein) (the ``USDBTC Weekly Futures'') 
and contains general terms and conditions. The USDBTC Weekly Futures 
contract requires that a buyer pay USD on the Initial Payment Date (as 
defined below), and that the seller pay BTC on the Final Payment Date 
(as defined below).
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the 
USDBTC Weekly Futures contract will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to USDBTC Weekly Futures will 
be United States dollars, which will be expressed in dollars and cents 
per bitcoin.
    E. Underlying. The underlying applicable to USDBTC Weekly Futures 
will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Weekly Futures contract will be for a 
single Underlying (i.e., one bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 20,000 USDBTC Weekly Futures.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more USDBTC 
Weekly Futures from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more USDBTC Weekly Futures from 
a Participant, such Participant must have sufficient bitcoin available 
for trading in its account to satisfy its delivery obligations on such 
Company Contract(s).
    I. Conventions.

          a. Trade Date. With respect to any USDBTC Weekly Futures 
        contract, the date on which the Company, in its sole 
        discretion, accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDBTC Weekly Futures 
        contract, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDBTC 
        Weekly Futures contract, $0.25.
          d. Initial Payment Date. With respect to any USDBTC Weekly 
        Futures contract, the Trade Date applicable thereto. The buyer 
        of a USDBTC Weekly Futures contract will pay the bid amount of 
        such Company Contract on the Trade Date thereof.
          e. Premium. With respect to any USDBTC Weekly Futures 
        contract, the Buyer thereof will pay the premium thereon on the 
        Initial Payment Date. In the context of a USDBTC Weekly Futures 
        contract, the bid amount is equal to the Premium.
          f. Last Trading Date. Friday of the calendar week, or as 
        otherwise determined by the Company in its sole discretion.
          g. Business Day Convention. Previous.
          h. Final Payment Date. With respect to any USDBTC Weekly 
        Futures contract, the Business Day next succeeding the Last 
        Trading Date.
          i. Settlement. Physical delivery on the Final Payment Date.

    J. Block Trading. Each USDBTC Weekly Futures Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
USDBTC Weekly Futures contract is equal to the contract size set forth 
in Section F above. All parties to a USDBTC Weekly Futures Block Trade 
must be Eligible Contract Participants.
Rule 12.11  Monthly USD/BTC Futures
    A. Contract Description. In general, a futures contract is a 
legally binding agreement to buy or sell a standardized asset at a 
specified time in the future. This Rule 12.11 pertains to futures on 
bitcoin (as described further herein) (the ``USDBTC Monthly Futures'') 
and contains general terms and conditions. The USDBTC Monthly Futures 
contract requires that a buyer pay USD on the Initial Payment Date (as 
defined below), and that the seller pay BTC on the Final Payment Date 
(as defined below).
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the 
USDBTC Monthly Futures contract will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to USDBTC Monthly Futures will 
be United States dollars, which will be expressed in dollars and cents 
per bitcoin.
    E. Underlying. The underlying applicable to USDBTC Monthly Futures 
will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Monthly Futures contract will be for 
a single Underlying (i.e., one bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 20,000 USDBTC Monthly Futures.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more USDBTC 
Monthly Futures from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more USDBTC Weekly Futures from 
a Participant, such Participant must have sufficient bitcoin available 
for trading in its account to satisfy its delivery obligations on such 
Company Contract(s).
    I. Conventions.

          a. Trade Date. With respect to any USDBTC Monthly Futures 
        contract, the date on which the Company, in its sole 
        discretion, accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDBTC Monthly Futures 
        contract, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDBTC 
        Monthly Futures contract, $0.25.
          d. Initial Payment Date. With respect to any USDBTC Monthly 
        Futures contract, the Trade Date applicable thereto. The buyer 
        of a USDBTC Monthly Futures contract will pay the bid amount of 
        such Company Contract on the Trade Date thereof.
          e. Premium. With respect to any USDBTC Monthly Futures 
        contract, the Buyer thereof will pay the premium thereon on the 
        Initial Payment Date. In the context of a USDBTC Monthly 
        Futures contract, the bid amount is equal to the Premium.
          f. Last Trading Date. Friday of the calendar week, or as 
        otherwise determined by the Company in its sole discretion.
          g. Business Day Convention. Previous.
          h. Final Payment Date. With respect to any USDBTC Monthly 
        Futures contract, the Business Day next succeeding the Last 
        Trading Date.
          i. Settlement. Physical delivery on the Final Payment Date.

    J. Block Trading. Each USDBTC Monthly Futures Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
USDBTC Monthly Futures contract is equal to the contract size set forth 
in Section F above. All parties to a USDBTC Monthly Futures Block Trade 
must be Eligible Contract Participants.
Rule 12.12  Day-Ahead USD/BTC Mini Futures
    A. Contract Description. In general, a futures contract is a 
legally binding agreement to buy or sell a standardized asset at a 
specified time in the future. This Rule 12.12 pertains to futures on 
bitcoin (as described further herein) (the ``Day-ahead Mini Futures'') 
and contains general terms and conditions. The Day-ahead Mini Futures 
contract requires that a buyer pay USD on the Initial Payment Date (as 
defined below), and that the seller pay BTC on the Final Payment Date 
(as defined below).
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the Day-
ahead Mini Futures contract will be as stated in Rule 5.6 above.
    D. Currency. The currency applicable to Day-ahead Mini Futures will 
be United States dollars, which will be expressed in dollars and cents 
per bitcoin.
    E. Underlying. The underlying applicable to Day-ahead Mini Futures 
will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each Day-ahead Futures contract will be for a \1/
100\ Underlying (i.e., one-one hundredth bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 2,000,000 Day-ahead Futures.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more Day-
ahead Mini Futures from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more Day-ahead Futures from a 
Participant, such Participant must have sufficient bitcoin available 
for trading in its account to satisfy its delivery obligations on such 
Company Contract(s).
    I. Tenor. One Business Day.
    J. Conventions.

          a. Trade Date. With respect to any Day-ahead Mini Futures 
        contract, the date on which the Company, in its sole 
        discretion, accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any Day-ahead Mini Futures 
        contract, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any Day-ahead 
        Mini Futures contract, $0.01.
          d. Initial Payment Date. With respect to any Day-ahead Mini 
        Futures contract, the Trade Date applicable thereto. The buyer 
        of a Day-ahead Futures contract will pay the bid amount of such 
        Company Contract on the Trade Date thereof.
          e. Premium. With respect to any Day-ahead Mini Futures 
        contract, the Buyer thereof will pay the premium thereon on the 
        Initial Payment Date. In the context of a Day-ahead Mini 
        Futures contract, the bid amount is equal to the Premium.
          f. Final Payment Date. With respect to any Day-ahead Mini 
        Futures contract, the Business Day next succeeding the Trade 
        Date applicable thereto.
          g. Business Day Convention. Previous.
          h. Settlement. Physical delivery. With respect to any Day-
        ahead Mini Futures contract, physical delivery will occur on 
        the Final Payment Date applicable thereto.

    K. Block Trading. Each Day-ahead Mini Futures Block Trade must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
Day-ahead Mini Futures contract is equal to 100 contracts. All parties 
to a Day-ahead Mini Futures Block Trade must be Eligible Contract 
Participants.
Rule 12.13  Weekly USD/BTC Mini Futures
    A. Contract Description. In general, a futures contract is a 
legally binding agreement to buy or sell a standardized asset at a 
specified time in the future. This Rule 12.13 pertains to futures on 
bitcoin (as described further herein) (the ``USDBTC Weekly Mini 
Futures'') and contains general terms and conditions. The USDBTC Weekly 
Mini Futures contract requires that a buyer pay USD on the Initial 
Payment Date (as defined below), and that the seller pay BTC on the 
Final Payment Date (as defined below).
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the 
USDBTC Weekly Mini Futures contract will be as stated in Rule 5.6 
above.
    D. Currency. The currency applicable to USDBTC Weekly Mini Futures 
will be United States dollars, which will be expressed in dollars and 
cents per bitcoin.
    E. Underlying. The underlying applicable to USDBTC Weekly Mini 
Futures will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Weekly Mini Futures contract will be 
for a \1/100\ Underlying (i.e., one-one hundredth bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 2,000,000 USDBTC Weekly Mini 
Futures.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more USDBTC 
Weekly Mini Futures from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more USDBTC Weekly Mini Futures 
from a Participant, such Participant must have sufficient bitcoin 
available for trading in its account to satisfy its delivery 
obligations on such Company Contract(s).
    I. Conventions.

          a. Trade Date. With respect to any USDBTC Weekly Mini Futures 
        contract, the date on which the Company, in its sole 
        discretion, accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDBTC Weekly Mini 
        Futures contract, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDBTC 
        Weekly Mini Futures contract, $0.01.
          d. Initial Payment Date. With respect to any USDBTC Weekly 
        Mini Futures contract, the Trade Date applicable thereto. The 
        buyer of a USDBTC Weekly Mini Futures contract will pay the bid 
        amount of such Company Contract on the Trade Date thereof.
          e. Premium. With respect to any USDBTC Weekly Mini Futures 
        contract, the Buyer thereof will pay the premium thereon on the 
        Initial Payment Date. In the context of a USDBTC Weekly Mini 
        Futures contract, the bid amount is equal to the Premium.
          f. Last Trading Date. Friday of the calendar week, or as 
        otherwise determined by the Company in its sole discretion.
          g. Business Day Convention. Previous.
          h. Final Payment Date. With respect to any USDBTC Weekly Mini 
        Futures contract, the Business Day next succeeding the Last 
        Trading Date.
          i. Settlement. Physical delivery on the Final Payment Date.

    J. Block Trading. Each USDBTC Weekly Mini Futures Block Trade must 
be effectuated in accordance with Rule 5.7. The minimum block size for 
the USDBTC Weekly Mini Futures contract is equal to 100 contracts. All 
parties to a USDBTC Weekly Mini Futures Block Trade must be Eligible 
Contract Participants.
Rule 12.14  Monthly USD/BTC Mini Futures
    A. Contract Description. In general, a futures contract is a 
legally binding agreement to buy or sell a standardized asset at a 
specified time in the future. This Rule 12.14 pertains to futures on 
bitcoin (as described further herein) (the ``USDBTC Monthly Mini 
Futures'') and contains general terms and conditions. The USDBTC 
Monthly Mini Futures contract requires that a buyer pay USD on the 
Initial Payment Date (as defined below), and that the seller pay BTC on 
the Final Payment Date (as defined below).
    B. Bitcoin. Bitcoin is a computer network and protocol that allows 
digital currency to be stored and transferred in a distributed manner 
without the need for a central intermediary. The Bitcoin network is a 
form of blockchain, which allows consensus to be built and maintained 
on a distributed, decentralized basis by parties with no inherent 
reason to trust one another. Each individual bitcoin transaction is 
validated by the network of decentralized parties, or nodes, over a 
period of time and then added to a ``block'', which is then 
cryptographically linked to the immediately preceding block (over time, 
creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours that are applicable to the 
USDBTC Monthly Mini Futures contract will be as stated in Rule 5.6 
above.
    D. Currency. The currency applicable to USDBTC Monthly Mini Futures 
will be United States dollars, which will be expressed in dollars and 
cents per bitcoin.
    E. Underlying. The underlying applicable to USDBTC Monthly Mini 
Futures will be bitcoin (sometimes referred to as ``BTC'').
    F. Contract Size. Each USDBTC Monthly Mini Futures contract will be 
for \1/100\ Underlying (i.e., one-one hundredth bitcoin).
    G. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 2,000,000 USDBTC Monthly Mini 
Futures.
    H. Collateral. All Company Contracts will be fully collateralized. 
Before the Company DCM will accept a buy order for one or more USDBTC 
Monthly Mini Futures from a Participant, such Participant must have 
sufficient USD available for trading in its account to satisfy its 
settlement obligations on such Company Contract(s). Before the Company 
DCM will accept a sell order for one or more USDBTC Monthly Mini 
Futures from a Participant, such Participant must have sufficient 
bitcoin available for trading in its account to satisfy its delivery 
obligations on such Company Contract(s).
    I. Conventions.

          a. Trade Date. With respect to any USDBTC Monthly Mini 
        Futures contract, the date on which the Company, in its sole 
        discretion, accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDBTC Monthly Mini 
        Futures contract, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDBTC 
        Monthly Mini Futures contract, $0.01.
          d. Initial Payment Date. With respect to any USDBTC Monthly 
        Mini Futures contract, the Trade Date applicable thereto. The 
        buyer of a USDBTC Monthly Mini Futures contract will pay the 
        bid amount of such Company Contract on the Trade Date thereof.
          e. Premium. With respect to any USDBTC Monthly Mini Futures 
        contract, the Buyer thereof will pay the premium thereon on the 
        Initial Payment Date. In the context of a USDBTC Monthly Mini 
        Futures contract, the bid amount is equal to the Premium.
          f. Last Trading Date. Friday of the calendar month, or as 
        otherwise determined by the Company in its sole discretion.
          g. Business Day Convention. Previous.
          h. Final Payment Date. With respect to any USDBTC Monthly 
        Mini Futures contract, the Business Day next succeeding the 
        Last Trading Date.
          i. Settlement. Physical delivery on the Final Payment Date.

    J. Block Trading. Each USDBTC Monthly Mini Futures Block Trade must 
be effectuated in accordance with Rule 5.7. The minimum block size for 
the USDBTC Monthly Mini Futures contract is equal to 100 contracts. All 
parties to a USDBTC Monthly Mini Futures Block Trade must be Eligible 
Contract Participants.
Rule 12.15  USD/ETH Deci Options
    A. Contract Description. A Participant may enter into a Company 
Contract as the buyer or the seller of a call or put option contract on 
ETH. For both call and put options, on the Initial Payment Date the 
buyer must pay the Premium in USD and the seller's Participant Account 
will be credited with the Premium in USD. On the Final Payment Date, 
the buyer may elect to exercise the contract, at which point the 
Company Contract will be settled as described in Rule 6.2. All Company 
Contracts referencing Underlying Digital Currency, are subject to the 
LedgerX Digital Currency Fork Policy found in Rule 11.14.
    B. Ethereum. Ethereum is a computer network and protocol that 
allows digital currency to be stored and transferred in a distributed 
manner without the need for a central intermediary. The Ethereum 
network is a form of blockchain, which allows consensus to be built and 
maintained on a distributed, decentralized basis by parties with no 
inherent reason to trust one another. Each individual Ethereum 
transaction is validated by the network of decentralized parties, or 
nodes, over a period of time and then added to a ``block'', which is 
then cryptographically linked to the immediately preceding block (over 
time, creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours of the Exchange that are 
applicable to the Company Contract described in this Rule 12.15 will be 
24 hours a day, 7 days a week or as otherwise determined by the 
Exchange from time to time as disclosed on the Website and through 
Participant Notice.
    D. Currency. The currency applicable to USDETH Deci Options will be 
United States dollars, which will be expressed in dollars and cents per 
ETH.
    E. Underlying. The underlying applicable to USDETH Deci Options 
will be Ethereum (sometimes referred to as ``ETH'').
    F. Contract Size. Each USDETH Deci Option will be for \1/10\ 
Underlying (i.e., one-tenth ETH).
    G. Listing Cycle. LedgerX shall post in a location on its website 
available to Participants a list of Company Contracts that are 
available for trading. At a minimum, that list shall include Company 
Contracts expiring on each of the four nearest Fridays, plus Company 
Contracts that expire on the last Friday of each of the following three 
calendar quarters.
    H. Strike Prices and Intervals. For each expiration date on which 
Company Contracts are listed, LedgerX shall list strike prices 
denominated in U.S. dollars as follows:
    For the nearest 4 weeks, LedgerX shall list Company Contracts with 
at least five strike prices at each expiry. Those strike prices shall 
be separated by equal intervals of at least $10, or such other greater 
amount determined by LedgerX that is at least 20% above and below the 
spot market trading range over the prior 4 week period.
    For Company Contracts with later expiries, LedgerX shall list at 
least three strike prices at each expiry in intervals determined at the 
discretion of LedgerX based on its assessment of the movements of the 
ETH spot market.
    I. Exercise Style. European (Exercise available only on the day of 
expiration per the terms of this contract specification).
    J. Exercise Instructions and Procedures. For the buyer of a USDETH 
Deci Option contract to exercise that contract, the buyer must submit 
exercise instructions to the Exchange prior to the Final Payment Day/
Time, and have sufficient collateral available for trading in buyer's 
account at that time to satisfy buyer's Settlement obligation. See 
Rules 7.1 and 7.2. USDETH Deci Option contracts will not be exercised 
automatically. See Rule 6.2.E.
    K. Expiration. If a buyer of a USDETH Deci Option does not exercise 
that option timely, or lacks sufficient collateral available for 
trading to satisfy buyer's Settlement obligation, then the option shall 
expire valueless.
    L. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 1,000,000 USDETH Deci Options.
    M. Collateral. All Company Contracts will be fully collateralized. 
Before the Exchange will accept a buy order for an USDETH Deci Option 
from a Participant, such Participant must have sufficient USD available 
for trading in its account to satisfy its obligation to pay the Premium 
on such Company Contract(s). Additional collateral is required from 
buyer to exercise the option, as described above. Before the Exchange 
will accept a sell order for one or more USDETH Deci Options from a 
Participant, such Participant must have the following: (i) for call 
options, the seller must have sufficient ETH available for trading in 
its account to satisfy its delivery obligations on such Company 
Contract at Settlement; or (ii) for put options, the seller must have 
sufficient USD available for trading it its account to satisfy its 
payment obligations at Settlement.
    N. Conventions.

          a. Trade Date. With respect to any USDETH Deci Option, the 
        date on which the Exchange, in its sole discretion accepts a 
        buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDETH Deci Option, 
        the Trade Date applicable thereto.
          c. Strike Price. As of any Trade Date, the agreed price in 
        U.S. dollars to be paid at expiration for ETH.
          d. Minimum Price Fluctuation. With respect to any USDETH Deci 
        Option, $0.01.
          e. Initial Payment Date. With respect to any USDETH Deci 
        Option, the Trade Date applicable thereto. The buyer of a 
        USDETH Deci Option will pay the agreed amount of such Company 
        Contract on the Trade Date thereof.
          f. Premium. With respect to any USDETH Deci Option, the Buyer 
        thereof will pay the premium thereon on the Initial Payment 
        Date.
          g. Last Trading Day/Time. Up to but not including 5:00 p.m. 
        New York time (adjusted for daylight savings) on the Friday of 
        the week and month of expiry for that contract, or as otherwise 
        determined by the Exchange in its sole discretion.
          h. Settlement. Physical delivery on the Final Payment Day/
        Time.

    O. Block Trading. Each Block Trade of as USDETH Deci Options must 
be effectuated in accordance with Rule 5.7. The minimum block size for 
the USDETH Deci Options is equal to 10 contracts. All parties to a 
USDETH Deci Option Block Trade must be Eligible Contract Participants.
Rule 12.16  USD/ETH Deci Futures
    A. Contract Description. A Participant may enter into a Company 
Contract as a buyer, whereby such Participant will pay USD and receive 
ETH, or as a seller, whereby such Participant will pay ETH and receive 
USD. The Company Contract requires that a buyer pay USD on the Initial 
Payment Date, and that the seller pay ETH on the Final Payment Date. 
This Rule 12.16 pertains to Futures on ETH (as described further 
herein) and contains general Company Contract terms and conditions.
    B. Ethereum. Ethereum is a computer network and protocol that 
allows digital currency to be stored and transferred in a distributed 
manner without the need for a central intermediary. The Ethereum 
network is a form of blockchain, which allows consensus to be built and 
maintained on a distributed, decentralized basis by parties with no 
inherent reason to trust one another. Each individual Ethereum 
transaction is validated by the network of decentralized parties, or 
nodes, over a period of time and then added to a ``block'', which is 
then cryptographically linked to the immediately preceding block (over 
time, creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours of the Exchange's Designated 
Contract Market that are applicable to the Company Contract described 
in this Rule 12.16 will be 24 hours a day, 7 days a week or as 
otherwise determined by the Exchange from time to time as disclosed on 
the Website and through Participant Notice.
    D. Currency. The currency applicable to USDETH Deci Futures will be 
United States dollars, which will be expressed in dollars and cents per 
ETH.
    E. Underlying. The underlying applicable to USDETH Deci Futures 
will be Ether.
    F. Contract Size. Each USDETH Deci Future will be for \1/10\ 
Underlying (i.e., one-tenth ETH).
    G. Listing Cycle. LedgerX shall post in a location on its website 
available to Participants a list of Company Contracts that are 
available for trading. At a minimum, that list shall include Company 
Contracts maturing on each of the four nearest Fridays, plus Company 
Contracts that mature on the last Friday of each of the following three 
calendar quarters.
    H. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 1,000,000 USDETH Deci Futures.
    I. Collateral. All Company Contracts will be fully collateralized. 
Before the Exchange's Designated Contract Market will accept a buy 
order for one or more USDETH Deci Futures from a Participant, such 
Participant must have sufficient USD available for trading in its 
account to satisfy its payment obligations on such Company Contract(s). 
Before the Exchange's Designated Contract Market will accept a sell 
order for one or more USDETH Deci Futures from a Participant, such 
Participant must have sufficient ETH available for trading in its 
account to satisfy its delivery obligations on such Company 
Contract(s).
    J. Conventions.

          a. Trade Date. With respect to any USDETH Deci Future, the 
        date on which the Exchange, in its sole discretion accepts a 
        buy or sell order, as the case may be.
          b. Effective Date. With respect to any USDETH Deci Future, 
        the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any USDETH Deci 
        Future, $0.01.
          d. Initial Payment Date. With respect to any USDETH Deci 
        Future, date on which the buyer of a USDETH Deci Future will 
        pay the Purchase Price shall be the Trade Date applicable 
        thereto.
          e. Purchase Price. With respect to any USDETH Deci Future, 
        the total U.S. Dollar denominated amount that a Buyer agreed to 
        pay for a USDETH Deci Future is the Purchase Price.
          f. Last Trading Day/Time. Up to but not including 5:00 p.m. 
        New York time (adjusted for daylight savings) on the Friday of 
        the week and month of expiry for that contract, or as otherwise 
        determined by the Exchange in its sole discretion.
          g. Final Payment Day/Time. 5:00 p.m. New York time (adjusted 
        for daylight savings) on the Friday of the week and month of 
        expiry for that contract.
          h. Settlement. Physical delivery on the Final Payment Day/
        Time.

    K. Block Trading. Each Block Trade of as USDETH Deci Future must be 
effectuated in accordance with Rule 5.7. The minimum block size for the 
USDETH Deci Future is equal to 10 contracts. All parties to a USDETH 
Deci Future Block Trade must be Eligible Contract Participants.
Rule 12.17  Day-Ahead USD/ETH Deci Swaps
    A. Contract Description. The term ``swap'' is a generic one that 
covers many types of instruments, including (among other things) any 
agreement, contract or transaction that is for the purchase or sale of 
any one or more currencies or commodities. A Participant may enter into 
a Company Contract as a buyer, whereby such Participant will pay USD 
and receive ETH, or as a seller, whereby such Participant will pay ETH 
and receive USD. This Rule 12.17 pertains to swaps on Ether (as 
described further herein) (the ``Day-ahead USD/ETH Deci Swaps'') and 
contains general terms and conditions. The Day-ahead USD/ETH Deci-Swap 
requires that a buyer pay USD on the Initial Payment Date, and that the 
seller pay ETH on the Final Payment Date. All Company Contracts 
referencing Underlying Digital Currency, are subject to the LedgerX 
Digital Currency Fork Policy found in Rule 11.14.
    B. Ethereum. Ethereum is a computer network and protocol that 
allows digital currency to be stored and transferred in a distributed 
manner without the need for a central intermediary. The Ethereum 
network is a form of blockchain, which allows consensus to be built and 
maintained on a distributed, decentralized basis by parties with no 
inherent reason to trust one another. Each individual Ethereum 
transaction is validated by the network of decentralized parties, or 
nodes, over a period of time and then added to a ``block'', which is 
then cryptographically linked to the immediately preceding block (over 
time, creating a chain, or a ``blockchain'').
    C. Trading Hours. The trading hours of that are applicable to the 
Company Contract described in this Rule 12.17 will be 24 hours a day, 7 
days a week or as otherwise determined by the Exchange from time to 
time as disclosed on the Website and through Participant Notice.
    D. Currency. The currency applicable to Day-Ahead USD/ETH Deci 
Swaps will be United States dollars, which will be expressed in dollars 
and cents per ETH.
    E. Underlying. The underlying applicable to Day-Ahead USD/ETH Deci 
Swaps will be Ethereum (sometimes referred to as ``ETH'').
    F. Contract Size. Each Day-Ahead USD/ETH Deci Swap will be for \1/
10\ Underlying (i.e., one-tenth ETH).
    G. Listing Cycle. LedgerX shall list the Company Contract on a 
daily basis as available for trading.
    H. Prices and Intervals. LedgerX shall list prices denominated in 
U.S. dollars. Those prices shall be separated by equal intervals of at 
least $10, or such other greater amount determined by LedgerX that is 
at least 20% above and below the spot market trading range over the 
prior 1 week period.
    I. Position Limits. As of any date of determination, no person will 
own or control positions in excess of 1,000,000 Day-Ahead USD/ETH Deci 
Swaps.
    J. Collateral. All Company Contracts will be fully collateralized. 
Before the Exchange will accept a buy order for a Day-Ahead USD/ETH 
Deci Swap from a Participant, such Participant must have sufficient USD 
available for trading in its account to satisfy its obligation to pay 
the Premium on such Company Contract(s). Before the Exchange will 
accept a sell order for one or more Day-Ahead USD/ETH Deci Swaps from a 
Participant, such Participant must have sufficient ETH available for 
trading in its account to satisfy its delivery obligations on such 
Company Contract at Settlement.
    K. Conventions.

          a. Trade Date. With respect to any Day-Ahead USD/ETH Deci 
        Swap, the date on which the Exchange, in its sole discretion 
        accepts a buy or sell order, as the case may be.
          b. Effective Date. With respect to any Day-Ahead USD/ETH Deci 
        Swap, the Trade Date applicable thereto.
          c. Minimum Price Fluctuation. With respect to any Day-Ahead 
        USD/ETH Deci Swap, $0.01.
          d. Initial Payment Date. With respect to any Day-Ahead USD/
        ETH Deci Swap, the Trade Date applicable thereto. The buyer of 
        a Day-Ahead USD/ETH Deci Swap will pay the agreed Premium of 
        such Company Contract on the Trade Date thereof.
          e. Premium. With respect to any Day-Ahead USD/ETH Deci Swap, 
        the Buyer thereof will pay the premium thereon on the Initial 
        Payment Date. In the context of a Day-Ahead USD/ETH Deci Swap, 
        the agreed amount is equal to the Premium.
          f. Last Trading Day/Time. Up to but not including 5:00 p.m. 
        New York time (adjusted for daylight savings) on the Business 
        Day immediately preceding Settlement.
          g. Final Payment Day/Time. 5:00 p.m. New York time (adjusted 
        for daylight savings) on the Business Day immediately after the 
        Last Trading Day/Time.
          h. Settlement. Physical delivery on the Final Payment Day/
        Time.

    L. Block Trading. Each Block Trade of as Day-Ahead USD/ETH Deci 
Swaps must be effectuated in accordance with Rule 5.7. The minimum 
block size for the Day-Ahead USD/ETH Deci Swaps is equal to 10 
contracts. All parties to a Day-Ahead USD/ETH Deci Swap Block Trade 
must be Eligible Contract Participants.
Chapter 13  Clearing Services for Kalshi
Rule 13.1  Clearing Services for Kalshi
    A. Rules Applicable to Clearing Services.

          This Chapter 13 applies to the Clearing Services the Clearing 
        House will provide to Kalshi Participants for Kalshi Binary 
        Contracts.

    B. Application of Rules[.]

          Except as provided elsewhere in the Rules, only this Chapter 
        13 will apply to Clearing Services.

    C. The Clearing Services.

          The Clearing House shall provide the Clearing Services in a 
        timely, accurate and complete manner for all Kalshi Binary 
        Contracts that have been approved for clearing by the Clearing 
        House in accordance with this Chapter 13.
Rule 13.2  Clearance and Substitution of Kalshi Binary Contracts
Rule 13.2.1  Clearance and Substitution
    A. Upon submission of a Kalshi Binary Contract for clearing, the 
Clearing House will conduct a review of the Participant's Collateral 
Account to ensure that the Participant can fully collateralize the 
Kalshi Binary Contract prior to providing Clearing Services. If the 
Participant's Collateral Account does not have the necessary funds and/
or collateral, the Clearing House will not accept the Kalshi Binary 
Contract for clearing.
    B. Upon the successful acceptance of the Kalshi Binary Contract, 
the Clearing House shall immediately, through the process of Novation, 
be substituted as and assume the position of seller to the Participant 
buying and buyer to the Participant selling the relevant Kalshi Binary 
Contract. Upon such substitution, the buying and selling Participants 
shall be released from their Obligations to each other, and such 
Participants shall be deemed to have bought the Kalshi Binary Contract 
from or sold the Kalshi Binary Contract to the Clearing House, as the 
case may be, and the Clearing House shall have all the rights and be 
subject to all the liabilities of such Participants with respect to 
such Kalshi Binary Contracts. Such substitution shall be effective in 
law for all purposes. The Participants of the Kalshi Binary Contract 
are deemed to consent to the Novation by submitting the Kalshi Binary 
Contracts through KalshiEX, LLC to the Clearing House and the Clearing 
House consents to the Novation by accepting the Kalshi Binary Contract 
and performing the Clearing Services.
    C. Kalshi Binary Contracts with the same terms and conditions, as 
defined by the specifications of the Kalshi Binary Contracts, submitted 
to the Clearing House for clearing, are economically equivalent within 
the Clearing House and may be offset with each other within the 
Clearing House.
    D. Upon acceptance of a Kalshi Binary Contract by the Clearing 
House for clearing:

          1. The original Kalshi Binary Contract is extinguished;
          2. The original Kalshi Binary Contract is replaced by an 
        equal and opposite Kalshi Binary Contract between the Clearing 
        House and each Participant; and
          3. All terms of a cleared Kalshi Binary Contract must conform 
        to the Kalshi Binary Contract Specifications.

    E. If a Kalshi Binary Contract is rejected for clearing by the 
Clearing House for any reason, such Kalshi Binary Contract is void ab 
initio.
Rule 13.2.2  Settlement of Kalshi Binary Contracts
    A. The Company shall maintain, on its system, a record of each 
Kalshi Participant's account balances and Kalshi Binary Contracts.
    B. On the Settlement Date, the Clearing House will notify all 
Kalshi Participants of the final amount payable.
Rule 13.2.3  Deposit Procedures
    A. A Kalshi Participant must submit a deposit notification through 
the Kalshi Participant Portal before the Kalshi Participant may deposit 
funds with the Clearing House. A Kalshi Participant must deposit funds 
on the same day as the Kalshi Participant submits to the Clearing House 
a deposit notification to the Clearing House.
    B. Deposits occur, and funds are available for use with respect to 
Clearing Privileges, no later than the next Settlement Bank Business 
Day after a Kalshi Participant submits a deposit notification and 
deposits funds with the Clearing House in accordance with Rule 
13.2.3.A.
    C. Kalshi Participants are responsible for all transfers of funds 
from their Clearing House-approved accounts to the Collateral Account.
    D. In the event a Kalshi Participant deposits funds to the Clearing 
House without submitting a deposit notification, the Kalshi Participant 
agrees to: (1) cooperate with the Clearing House to resolve any issues 
that may arise; and (2) agree that the Clearing House will send the 
funds back to the account or address from which it was transferred 
within two (2) Settlement Bank Business Days if there has been no 
resolution.
Rule 13.2.4  Withdrawal Procedures
    A. Only an Authorized Representative may submit a withdrawal 
notification through the Kalshi Participant Portal before the Clearing 
House transfers funds to a Kalshi Participant. Upon receipt of a 
withdrawal notification, the Clearing House no longer permits funds in 
the amount listed in the withdrawal notification to be used for 
Clearing Privileges.
    B. Kalshi Participants are responsible for providing accurate 
account numbers to allow the Clearing House to effect transfers to the 
Kalshi Participants.
    C. Withdrawals occur, and funds are available, no later than the 
next Settlement Bank Business Day after a Kalshi Participant has 
submitted a withdrawal notification if the Kalshi Participant submits a 
withdrawal notification during Trading Hours.
    D. If a Kalshi Participant fails to adhere to the withdrawal 
procedures set forth herein or in the Kalshi Binary Contract 
Specifications, as applicable, the Clearing House will take reasonable 
measures to effect the withdrawal; however, if unable to effect the 
withdrawal, the Kalshi Participant's collateral may become the sole 
property of the Clearing House, to the extent permitted by Applicable 
Law. The Clearing House may apply the collateral against the 
Obligations of a Kalshi Participant.
Rule 13.2.5  [Reserved]
Rule 13.2.6  Reconciliation
    The Clearing House shall reconcile the positions and cash and 
collateral balances of each Kalshi Participant at the end of each 
Settlement Bank Business Day. The Clearing House shall make available 
to each Kalshi Participant through Kalshi the positions and cash and 
collateral balances of each such Kalshi Participant. All Kalshi 
Participants shall be responsible for reconciling their records of 
their positions and cash and collateral balances with the records of 
positions and cash and collateral balances that the Clearing House 
makes available to Kalshi Participants through Kalshi.
Rule 13.2.7  Swap Data Reporting
    A. With the assistance of Kalshi and to the extent required by 
Applicable Law, the Clearing House shall report Regulatory Swap Data 
for Swaps to a single Swap Data Repository for purposes of complying 
with the CEA and applicable CFTC Regulations governing the regulatory 
reporting of swaps. The Clearing House shall report all data fields as 
required by Appendix A to Part 43 of CFTC Regulations and Appendix 1 to 
Part 45 of CFTC Regulations, as applicable, including, but not limited 
to, Swap counterparties, Kalshi Binary Contract type, option method, 
option premium, LEIs, User IDs, buyer, seller, USIs, unique product 
identifiers, underlying asset description, the Swap price or yield, 
quantity, maturity or expiration date, the size, settlement method, 
execution timestamp, timestamp of submission to the SDR, the CTI Code, 
Kalshi Participant Accounts, and whether a Kalshi Participant is a swap 
dealer, major swap Kalshi Participant or a financial entity. The 
Clearing House shall identify each counterparty to any Kalshi Binary 
Contract in all recordkeeping and all Regulatory Swap Data reporting 
using a single LEI as prescribed under CFTC Regulation 45.6. As soon as 
technologically practicable after execution, the Clearing House also 
shall transmit to both Swap counterparties and the Clearing House, the 
USI for the Swap created pursuant to CFTC Regulation 45.5 and the 
identity of the SDR. For Swaps involving allocation, the Clearing House 
will transmit the USI to the Reporting Counterparty and the agent as 
required by CFTC Regulation 45.5(d)(1).
    B. The Clearing House shall from time to time designate a Swap Data 
Repository in respect of one or more Swaps and shall notify Kalshi 
Participants of such designation. Currently, the Clearing House reports 
all Regulatory Swap Data for all Swaps to ICE Trade Vault.
    C. Kalshi Participants that become aware of an error or omission in 
Regulatory Swap Data for a Kalshi Binary Contract shall promptly submit 
corrected data to the Clearing House. Kalshi Participant shall not 
submit or agree to submit a cancellation or correction in order to gain 
or extend a delay in public dissemination of accurate Kalshi Binary 
Contract transaction and Pricing Data or to otherwise evade the 
reporting requirements of Part 43 of CFTC Regulations. Clearing House 
will report any errors or omissions in Regulatory Swap Data to the same 
SDR to which it originally submitted the Data, as soon as 
technologically practicable after discovery of any such error or 
omission.
    D. The Clearing House sends the Regulatory Swap Data as set forth 
in Rule 13.2.7.A to the Swap Data Repository as soon as technologically 
practicable after a trade has been cleared, or pursuant to the Clearing 
House Rules. Following the transmittal of the Data to the Swap Data 
Repository, the Clearing House will make available the Swap Transaction 
and Pricing Data to all Kalshi Participants. However, due to 
transmission and posting timing of the Swap Data Repository, Kalshi 
Participants should be aware that the Kalshi Binary Contract 
transaction and Pricing Data may be available on the Clearing House 
Platform prior to being publicly disseminated by the Swap Data 
Repository.
Rule 13.3  Margin for Kalshi Binary Contracts
Rule 13.3.1  Full Collateralization of Kalshi Binary Contracts Required
    Each Kalshi Participant shall deposit funds required to fully 
collateralize the Kalshi Binary Contract pursuant to Kalshi Binary 
Contract Specifications prior to submission of such Orders to Kalshi, 
and in all cases, prior to the submission of the Kalshi Binary Contract 
to the Clearing House. Collateral transfers made by a Kalshi 
Participant to the Clearing House or by the Clearing House to a Kalshi 
Participant are irrevocable and unconditional when effected.
Rule 13.3.2  Collateral
    A. Subject to the terms and conditions of Clearing House-approved 
margin collateral, the Clearing House will accept from Kalshi 
Participants the following as margin collateral: U.S. Dollars. The 
Clearing House will value margin collateral as it deems appropriate.
    B. Except as otherwise provided herein, Collateral must be and 
remain unencumbered. Collateral posted by Kalshi Participants shall be 
legally and operationally segregated from (i) the property of the 
Clearing House; (ii) the property of other members of the DCO, and 
(iii) customer property posted to the Clearing House that is not 
associated with Kalshi Binary Contracts (i.e., when a Participant has 
been on-boarded separately both with the Company, acting in its 
capacity as a DCM and Kalshi, the DCO shall legally and operationally 
segregate the property posted by that participant at each separate DCM, 
as between the two DCMs).
    C. Each Kalshi Participant posting collateral hereby grants to the 
Clearing House a continuing first priority security interest in, lien 
on, right of setoff against and collateral assignment of all of such 
Kalshi Participant's right, title and interest in and to any property 
and collateral deposited with the Clearing House by the Kalshi 
Participant, whether now owned or existing or hereafter acquired or 
arising, including without limitation the following: (i) such Kalshi 
Participant Account and all securities entitlements held therein and 
all funds held in a Collateral Account and (ii) all proceeds of the 
foregoing. A Kalshi Participant shall execute any documents required by 
the Clearing House to create, perfect and enforce such lien.
    D. Each Kalshi Participant hereby agrees that with respect to any 
other financial asset which is or may be credited to the Kalshi 
Participant's Kalshi Participant Account, the Clearing House shall have 
control pursuant to Section 9-106(a) and 8-106(e) of the UCC and a 
perfected security interest pursuant to Section 9-314(a) of the UCC.
    E. A Kalshi Participant must transfer the collateral to the 
Clearing House or to a Collateral Account and the Clearing House will 
hold collateral transferred to the Clearing House on behalf of the 
Kalshi Participant. The Clearing House will credit to the Kalshi 
Participant the collateral that such Kalshi Participant deposits. 
Collateral shall be held by the Clearing House until a Kalshi 
Participant submits a withdrawal notification unless otherwise 
stipulated by these Rules.
    F. The Clearing House will not be responsible for any diminution in 
value of collateral that a Kalshi Participant deposits with the 
Clearing House. Any fluctuation in markets is the risk of each Kalshi 
Participant. Any interest earned on Kalshi Participant collateral may 
be retained by the Settlement Bank or the Clearing House.
    G. The Clearing House has the right to liquidate a Person's Kalshi 
Binary Contracts or non-cash collateral to the extent necessary to 
close or transfer Kalshi Binary Contracts, fulfill obligations to the 
Clearing House or other Kalshi Participants, and/or to return 
collateral in the event that (1) the Person ceases to be a Kalshi 
Participant; (2) the Clearing House suspends or terminates the Person's 
Trading Privileges or Clearing Privileges; or (3) the Clearing House 
determines in its sole discretion that it is necessary to take such 
measures.
Rule 13.3.3  Segregation of Kalshi Participant Funds
    The Clearing House shall separately account for and segregate from 
the Clearing House's proprietary funds all Kalshi Participant funds 
used to purchase, margin, guarantee, secure or settle Kalshi Binary 
Contracts, and all money accruing to such Kalshi Participant as the 
result of Kalshi Binary Contracts so carried in a Collateral Account. 
The Clearing House shall maintain a proprietary account that will be 
credited with fees or other payments owed to the Clearing House that 
are debited from the Collateral Account as a result of Kalshi 
Participant trades and settlements of Kalshi Binary Contracts. The 
Clearing House shall maintain a record of each Kalshi Participant's 
account balances and Kalshi Binary Contracts. The Clearing House shall 
not hold, use or dispose of Kalshi Participant funds except as 
belonging to Kalshi Participants.
Rule 13.3.4  Concentration Limits
    The Clearing House may apply appropriate limitations or charges on 
the concentration of assets posted as collateral, as necessary, in 
order to ensure its ability to liquidate such assets quickly with 
minimal adverse price effects, and may evaluate the appropriateness of 
any such concentration limits or charges, on a periodic basis. In the 
event that the Clearing House determines in its sole discretion that 
the Kalshi Participant's deposit is in material excess of the amount 
necessary to collateralize the Kalshi Participant's Kalshi Binary 
Contracts, the Clearing House shall have the right to (1) transfer non-
cash collateral, including Digital Currencies, back to a Kalshi 
Participant, and Kalshi Participant agrees to accept such transfer, or 
(2) take other action the Clearing House deems to be necessary to 
safeguard the collateral. The Clearing House shall be entitled to 
charge fees related to holding non-cash collateral in material excess 
of the amount necessary to collateralize a Kalshi Participant's Kalshi 
Binary Contracts.
Rule 13.4  Clearing House Systems and Collateral.
    Clearing House shall maintain information systems that track the 
amount of available collateral held from time to time by Kalshi 
Participants at Clearing House or Clearing House's settlement bank and 
make such information available to Kalshi to the same extent it is 
available to Clearing House so that Kalshi's automated systems can 
apply such information in the relevant systems to perform its 
functions.
Rule 13.5  LedgerX API.
    In order to provide the Clearing Services, Kalshi shall have and 
will maintain in effect an operational interface between its systems 
and the relevant systems of Clearing House. Clearing House shall 
maintain and support an Application Programming Interface (``Clearing 
House API''), to enable the transmission of data as necessary to 
provide Clearing Services.
Rule 13.6  Other Rules That Are Applicable To Kalshi Participants.
    All Rules in this Chapter 13 apply to the Clearing Services for 
Kalshi Binary Contracts.
    In addition, the following specific Rules apply to Kalshi 
Participants, as if they were Participants, and the Kalshi Binary 
Contracts, provided, however that such Rules are applicable only to the 
extent that such Rules are related to Clearing Services:

          A. Chapter 1 (Definitions)
          B. Chapter 2 (Company Governance)
          C. Rule 3.1 (Jurisdiction, Applicability of Rules)
          D. Rule 3.2 (Participants--Applications, Agreements, 
        Eligibility Criteria, Classifications and Privileges), provided 
        that Kalshi Participants are Participants only with regard to 
        Clearing Services.
          E. Rule 3.3 (Participant Obligations), provided that Kalshi 
        Participants have Participant Obligations only with regard to 
        Clearing Services.
          F. Rule 8.5 (Acts Detrimental to the Welfare or Reputation of 
        the Company Prohibited) and Rule 8.6 (Misuse of the Platform)
          G. Rule 8.19 (Compliance)
          H. Chapter 9 (Discipline and Enforcement), but only with 
        regard to Clearing Services.
          I. Chapter 11 (Miscellaneous), including Rule 11.2; Rule 
        11.3; Rule 11.4; Rule 11.5; Rule 11.6; Rule 11.7; Rule 11.9; 
        and Rule 11.13, but only with regard to the Clearing Services.
Rule 13.7  Other Rules That Are Not Applicable To Kalshi Participants.
    The following rules do not apply to Kalshi Participants, as such 
rules or related rules are set forth in the rules of Kalshi:

          A. Rule 3.4 (Customer Account Requirements for FCM 
        Participants)
          B. Chapter 4 (Liquidity Providers)
          C. Chapter 5 (Method for Trading Company Contracts)
          D. Chapter 6 (Clearing and Delivery), but see Rules 13.2, et. 
        seq.
          E. Chapter 7 (Margin), but see Rules 13.3, et. seq.
          F. Chapter 8 of this Rulebook does not apply to Kalshi 
        Participants, except for Rules 8.5, 8.6, and 8.19 as set forth 
        in Rule 13.6. For the avoidance of doubt, Kalshi is responsible 
        for all trade practice related activity on its exchange; 
        Clearing House is not responsible for trade practice 
        surveillance.
          G. Chapter 9, except as to Investigations, Discipline and 
        Enforcement related to Clearing Services.
          H. Chapter 10, except as applied to Clearing Services.
          I. Rules 11.8 (Error Trade Policy), 11.10 (Reasonability 
        Levels), and 11.11 (No Cancellation Ranges), provided, however, 
        that Clearing House and Kalshi shall coordinate with regard to 
        Error Trade pursuant to the rules of Kalshi.
          J. Chapter 12 does not apply to Kalshi Participants.
Rule 13.8  Liability
    For the avoidance of doubt, Clearing House shall not have any 
liability for trading issues on Kalshi, as it is only providing 
Clearing Services to Kalshi Participants.
Rule 13.9  Limitation of Liability; No Warranties for Clearing Services
    A. Except as otherwise set forth in the rules, or due to clearing 
house obligations arising from the act or CFTC regulations, including 
part 39 of the CFTC regulations, or otherwise under applicable law, 
neither the clearing house nor any of its clearing house 
representatives, affiliates or affiliates' representatives shall be 
liable to any person, or any partner, director, officer, agent, 
employee, authorized user or authorized representative thereof, for any 
loss, damage, injury, delay, cost, expense, or other liability or 
claim, whether in contract, tort or restitution, or under any other 
cause of action, suffered by or made against them as a result of their 
use of some or all of the clearing services, such persons expressly 
agree to accept all liability arising from their use of same as well as 
their use of Kalshi.
    B. Except as otherwise set forth in these rules or due to clearing 
house obligations arising from the act or CFTC regulations, including 
part 39 of the CFTC regulations, or otherwise under applicable law, 
neither the clearing house nor any of its clearing house 
representatives, affiliates or affiliates' representatives shall be 
liable to any person, or any partner, director, officer, agent, 
employee, authorized user or authorized representative thereof, for any 
loss, damage, injury, delay, cost, expense, or other liability or 
claim, whether in contract, tort or restitution, or under any other 
cause of action, suffered by or made against them, arising from (a) any 
failure or non-availability of the Kalshi or the platform; (b) any act 
or omission on the part of the clearing house, clearing house 
representatives, affiliates or affiliates' representatives including 
without limitation a decision of the clearing house to suspend, halt, 
or terminate trading or to void, nullify or cancel orders or trades in 
whole or in part; (c) any errors or inaccuracies in information 
provided by the clearing house, affiliates, the platform or Kalshi; (d) 
unauthorized access to or unauthorized use of the platform or Kalshi by 
any person; (e) any force majeure event affecting the clearing house or 
a Kalshi binary contract; or (f) any loss to any Kalshi participant 
resulting from a Kalshi participant's own security or the integrity of 
a Kalshi participant's technology or technology systems. This 
limitation of liability will apply regardless of whether or not the 
clearing house, any clearing house representatives, any clearing house 
affiliates or affiliates' representatives (or any designee thereof) was 
advised of or otherwise might have anticipated the possibility of such 
damages.
    C. A person's use of the platform, Kalshi, clearing house property 
and any other information and materials provided by the clearing house 
is at the person's own risk, and the platform, the clearing house 
property and any other information and materials provided by the 
clearing house hereunder are provided on an ``as is'' and ``as 
available'' basis, without warranties or representations of any kind, 
express or implied, by statute, common law or otherwise, including all 
implied warranties of merchantability, fitness for a particular purpose 
and non-infringement, and any warranties arising from a course of 
dealing, usage or trade practice. The clearing house does not guarantee 
that (a) the clearing house property or the platform will operate in an 
error-free, secure or uninterrupted manner; (b) any information or 
materials provided by the clearing house or accessible through the 
clearing house property or the platform will be accurate, complete, 
reliable, or timely; or (c) the clearing house property or any aspects 
of the platform will be free from viruses or other harmful components. 
The clearing house shall have no liability for the creditworthiness of 
any person or for the acts or omissions of any person utilizing the 
platform or any aspect of the clearing house or platform. A person 
accessing the clearing house is solely responsible for the security and 
integrity of the person's technology. A person's access to the clearing 
house may be internet-based and the clearing house has no control over 
the internet or a person's connections thereto. Any person accessing 
the clearing house acknowledges that the internet, computer networks, 
and communications links and devices necessary to enable a person to 
access and use the platform are inherently insecure and vulnerable to 
attempts at unauthorized entry and that no form of protection can 
ensure that a Kalshi participant's data, hardware, or software or the 
platform or other clearing house property will be fully secure. 
Furthermore, the clearing house shall have no obligation to monitor or 
verify any information displayed through the platform.
    D. A Kalshi participant that deposits collateral for its benefit 
with the clearing house pursuant to these rules shall hold the clearing 
house harmless from all liability, losses and damages which may result 
from or arise with respect to the care and sale of such collateral 
provided that the clearing house has acted reasonably and in accordance 
with applicable law under the circumstances. Furthermore, the clearing 
house has no responsibility for any act or omission of any third party 
service provider that the clearing house has chosen with reasonable 
care. The clearing house has no responsibility or liability for any 
loss of collateral that results, directly or indirectly, from a breach 
to a Kalshi participant's security or electronic systems, including but 
not limited to cyber attacks, or from a Kalshi participant's negligence 
with respect to a wallet, address or the receipt of collateral upon the 
request of a withdrawal, or from a Kalshi participant's deposit, 
mistake, error, negligence, or misconduct with respect to any 
collateral transfers a Kalshi participant makes or attempts to make to 
the clearing house.
    E. No Kalshi participant, authorized user, authorized 
representative or any other person shall be entitled to commence or 
carry on any proceeding against the clearing house, any of its clearing 
house representatives, affiliates or affiliates' representatives, in 
respect of any act, omission, penalty or remedy imposed pursuant to the 
rules of the clearing house. This section shall not restrict the right 
of such persons to apply for a review of a direction, order or decision 
of the clearing house by a competent regulatory authority.
    F. Notwithstanding anything to the contrary herein, in no event 
shall the clearing house or any of its clearing house representatives, 
affiliates or affiliates' representatives be liable for any indirect, 
incidental, consequential, punitive or special damages (whether or not 
the clearing house or any such person had been informed or notified or 
was aware of the possibility of such damages).
    G. Any claim for redress or damages hereunder shall be filed in a 
court of competent jurisdiction within one year of the date on which 
such claim allegedly arose. Failure to institute litigation within such 
time period shall be deemed to be a waiver of such claim and the claim 
shall be of no further force or effect. The allocations of liability in 
this 13.8 rule represent the agreed and bargained for understanding of 
the parties, and each party acknowledges that the other party's rights 
and obligations hereunder reflect such allocations. The parties agree 
that they will not allege that this remedy fails its essential purpose.
    H. The limitations on liability in this Rule 13.8 shall not protect 
any party for which there has been a final determination (including 
exhaustion of any appeals) by a court or arbitrator to have engaged in 
willful or wanton misconduct or fraud. Additionally, the foregoing 
limitations on liability of this rule shall be subject to the CEA and 
the regulations promulgated thereunder, each as in effect from time to 
time.
Rule 13.10  Approved Kalshi Binary Contract Specifications
Chapter 14  Default
Rule 14.1  Defaults
    If any of the following events shall occur with respect to any 
Participant (regardless of whether any such event is cured by any 
guarantor or other third party on behalf of such Participant or 
otherwise):

          A. If such Participant fails to meet any of its obligations 
        under its Company Contracts with the Company;
          B. If such Participant fails to pay any assessments levied 
        upon it by the Company when and as provided in these Rules, 
        including Rule 7.1;
          C. If such Participant fails to deposit with, pay to, or 
        maintain with the Company in full any Initial Margin, Variation 
        Margin or other sum (not including any dues, fees, or fines) 
        under or in connection with any Company Contract, when and as 
        required by or pursuant to the Rules, including Rule 7.1;
          D. If such Participant fails to maintain with the Company 
        sufficient net assets in the Participant's Company account to 
        satisfy the minimum Maintenance Margin requirements, and the 
        Company is unable to liquidate the Participant's positions on 
        its central limit order book, as set forth in Rule 7.1.D;
          E. If the Company shall determine that such Participant is 
        not in compliance with the provisions of Rule 3.2;
          F. If such Participant commences a voluntary or a joint case 
        in bankruptcy or files a voluntary petition or an answer 
        seeking liquidation, reorganization, arrangement, readjustment 
        of its debts or any other relief for the benefit of creditors 
        under any bankruptcy or insolvency act or law of any 
        jurisdiction, now or hereafter existing, or if such Participant 
        applies for or consents to the appointment of a custodian, 
        liquidator, conservator, receiver or trustee (or other similar 
        official) for all or a substantial part of its property; or if 
        such Participant makes an assignment for the benefit of 
        creditors; or if such Participant becomes or admits that it is 
        insolvent;
          G. If an involuntary case is commenced against such 
        Participant in bankruptcy or an involuntary petition is filed 
        seeking liquidation, reorganization, arrangement, readjustment 
        of its debts or any relief for the benefit of creditors under 
        any bankruptcy or insolvency act or law of any jurisdiction, 
        now or hereafter existing; or if a custodian, liquidator, 
        receiver or trustee (or other similar official) of the 
        Participant is appointed for all or a substantial part of its 
        property;
          H. If a warrant of attachment, execution or similar process 
        is issued against any substantial part of the property of the 
        Participant;
          I. If the Securities Investor Protection Corporation files an 
        application for a protective decree with respect to such 
        Participant;
          J. If such Participant holds a short futures contract 
        position and does not tender a delivery notice on or before 
        expiration, or fails to make delivery by the time specified in 
        these Rules; or
          K. If such Participant holds a long futures contract position 
        and does not accept delivery or does not make full payment when 
        due as specified in these Rules;

then, and in any such event, an ``Event of Default'' has occurred and 
the Company may (but is not required to) determine that such 
Participant shall be suspended as a Participant.
Rule 14.2  Liquidation or Termination or Suspension of Participant
    A. When a Person ceases to be a Participant or is suspended by the 
Company, all open Company Contracts carried by the Company for such 
Participant shall be liquidated in the manner set forth in Rule 14.3 as 
expeditiously as is practicable unless and to the extent that:

          a. Such open Company Contracts are transferred by the 
        Participant and accepted by one or more other Participants, 
        with the prior consent of the Company, or transferred by the 
        Company to one or more other Participants pursuant to an 
        auction or other procedure instituted by the Company;
          b. The CRO, consistent with the guidance of the Risk 
        Management Committee and in consultation therewith, as 
        appropriate determines that the protection of the financial 
        integrity of the Company does not require such a liquidation; 
        or
          c. Such liquidation is delayed because of the cessation or 
        curtailment of trading in such Company Contracts on the Company 
        DCM.

    B. If it is determined pursuant to paragraph (a)(ii) of this Rule 
14.2 not to liquidate any open Company Contracts of a Person, or if the 
Company is unable for any reason to liquidate such open Company 
Contracts in a prompt and orderly fashion, if the Company determines to 
delay such liquidation, or if the Company otherwise determines it is 
appropriate to do so for the protection of the Company or its other 
Participants, the CRO, consistent with the guidance of the Risk 
Management Committee and in consultation therewith as appropriate, may 
authorize the execution from time to time for the account of the 
Company, solely for the purpose of reducing the risk to the Company 
resulting from the continued maintenance of such open Participant 
Company Contracts, hedging transactions, including, without limitation, 
the purchase, grant or sale of Company Contracts or other agreements or 
instruments (and the modification or termination of such transactions 
from time to time). Such officers may delegate to one or more persons 
the authority to determine, within such guidelines as such officers 
shall prescribe, the nature and timing of such hedging transactions. 
Any costs or expenses, including losses, sustained by the Company in 
connection with transactions effected for its account pursuant to this 
paragraph shall be charged to such Person (which amounts, if such 
Person is a Defaulting Participant, shall constitute part of the 
Defaulted Obligation), and any gains, net of any costs and expenses, 
shall be credited to such Person.
Rule 14.3  Method of Closing Out Open Company Contracts
    A. The open Company Contracts of any Participant which, pursuant to 
(i) Rule 7.1 for failing to deposit or maintain the minimum Initial 
Margin, Variation Margin, or Maintenance Margin in the Participant's 
account at any time or failing to satisfy any Maintenance Margin 
requirement, or (ii) Rule 14.2, are required to be liquidated pursuant 
to this Rule 14.3, shall be treated in such manner as the Company, in 
its discretion, may direct. Without limiting the generality of the 
foregoing:

          a. Any such liquidation may be effected by directly entering 
        to the Company DCM's trading platform, limit orders and 
        marketable limit orders for the purchase, grant, exercise, or 
        sale of Company Contracts.
          b. Company Contracts on opposite sides of the market, having 
        different expiration months, may be liquidated by spread or 
        straddle transactions (regardless of whether they are held for 
        different accounts or different beneficial owners).
          c. The Person whose Company Contracts are liquidated shall be 
        liable to the Company for any commissions, fees, or other 
        expenses incurred in liquidating such Company Contracts.

    B. If the Company determines that it is not practicable or 
advisable under the circumstances in light of liquidity, open interest, 
market conditions or other relevant factors to liquidate or attempt to 
liquidate some or all of a Participant's open Company Contracts 
pursuant to Rule 14.3.A, the Company may, at its discretion, transfer a 
Participant's Company Contracts to a Backstop Liquidity Provider. The 
Backstop Liquidity Provider shall take the open positions from the 
Participant's Company Contracts in such quantity as agreed between the 
Company and the Backstop Liquidity Providers.
    C. Partial Tear-Up (``Secondary BLPs''). If the Company determines 
that it is not practicable or advisable under the circumstances in 
light of liquidity, open interest, market conditions or other relevant 
factors to liquidate or attempt to liquidate some or all of a 
Participant's net open Company Contracts pursuant to Rule 14.3.A, the 
Company may, at its discretion, implement the partial tear-up of open 
positions of Participants not in Default (``Non-Defaulting Tear-Up 
Positions'' of ``Secondary BLPs'') that offset the positions of 
Participants in Default that have not yet been liquidated (``Defaulted 
Positions''). The Company will determine and designate the Non-
Defaulting Tear-Up Positions pursuant to the following methodology:

          a. The Company will only designate Non-Defaulting Tear-Up 
        Positions in the identical Company Contracts (on the opposite 
        side of the market) and in an aggregate amount equal to that of 
        the remaining open Company Contract positions.
          b. The Company will designate Non-Defaulting Tear-Up 
        Positions in a particular Company Contract starting with 
        Participants who hold the largest number of open positions that 
        offset Defaulted Positions (i.e., the Secondary BLPs).
          c. Both Defaulted Positions and offsetting Non-Defaulting 
        Tear-Up Positions shall be automatically terminated at the 
        Partial Tear-Up Price, without need for any further stop by any 
        party to such Company contract.
          d. The Partial Tear-Up Price shall be deemed to be the price 
        that would set the Defaulted Participant's account value to 
        zero.

    D. If the Company determines that it is not practicable or 
advisable under the circumstances in light of liquidity, open interest, 
market conditions or other relevant factors to liquidate or attempt to 
liquidate some or all net open Company Contracts pursuant to Rule 
14.3.A, the Company may at its discretion determine to liquidate such 
net open Company Contracts pursuant to one or more default auctions 
(each a ``Default Auction'') to be conducted by the Company pursuant to 
the default auction procedures of the Company as in effect at the 
relevant time (``Default Auction Procedures''). The Company may also 
determine to liquidate some or all net open Company Contracts pursuant 
to one or more auctions not conducted under Default Auction Procedures 
in which participation by Participants or others will be voluntary 
(``Alternative Auctions''), on such other terms and conditions 
consistent with these Rules as are determined by the Company with the 
goal of facilitating a successful auction in light of the particular 
Company Contracts and positions to be auctioned, the prevailing market 
conditions for such Company Contracts and positions (including the 
depth, scope and nature of participation in such markets), and such 
other factors as the Company determines appropriate. The Company shall 
provide reasonable advance notice to qualifying Participants of an 
Alternative Auction and the terms and conditions on which it is to be 
conducted.
    E. If the Company determines that it is not practicable or 
advisable under the circumstances in light of liquidity, open interest, 
market conditions or other relevant factors to carry out the steps set 
forth in this Rule 14.3.A through Rule 14.3.D, the Company's automated 
systems will immediately apply guaranty fund resources (the ``Guaranty 
Fund''), provided by the Company's own capital, via internal ledger 
transactions whenever to address monetary shortfalls resulting from a 
default.
    F. Only after carrying out the steps set forth in this Rule 14.3.A 
through Rule 14.3.E, the Company will, in the following order:

          a. Variation Margin Haircuts

                  i. The Company may notify Participants and provide an 
                opportunity for Participants to make voluntary 
                contributions to the DCO.
                  ii. If the Participant holds excess Variation Margin 
                in its account(s) with respect to remaining open 
                Company Contracts following the last settlement cycle 
                conducted, the DCO shall, in consultation with the Risk 
                Management Committee, apply haircuts in a proportional 
                manner to excess Variation Margin so as to contribute 
                unrealized gains from the Participant's account to the 
                DCO for the current settlement cycle and each successor 
                settlement cycle on the current Business Day.

          b. Full Tear-Up

                  i. The Company may notify Participants and provide an 
                opportunity for Participants to voluntarily agree to 
                have their positions extinguished by the DCO.
                  ii. If positions in Company Contracts of a defaulted 
                Participant remain open (the ``Remaining Open 
                Positions'') following the last settlement cycle 
                conducted, the Company shall extinguish the Remaining 
                Open Positions through a full tear-up process (``Full 
                Tear-Up'') of all open positions of non-defaulted 
                Participants in Company Contracts.

          c. No persons shall have any claim or right against the 
        company regarding the timing of liquidation or the manner in 
        which or the price at which company contracts have been 
        liquidated pursuant to this Rule 14.3.
          d. References in this Rule 14.3 to the liquidation of Company 
        Contracts shall include liquidation, termination or adjustment 
        of any related hedging transactions entered into pursuant to 
        Rule 14.2 (b).
Rule 14.4  Amounts Payable to the Company
    Upon completion of the liquidation or transfer of the positions of 
a Person pursuant to Rule 14.3, the Company shall be entitled on demand 
to recover from such Person all amounts due to the Company for all 
losses, liabilities and expenses (including without limitation legal 
fees and disbursements and costs and expenses incurred by the Company 
in liquidity, borrowing or other necessary actions) incurred by the 
Company in connection with such liquidation or transfer.
Rule 14.5  Insolvency of the Company
    If at any time the Company: (i) institutes or has instituted 
against it a proceeding seeking a judgment of insolvency or bankruptcy 
or any other relief under any bankruptcy or insolvency law or other 
similar law affecting creditors' rights, or a petition is presented for 
its winding up or liquidation, and, in the case of any such proceeding 
or petition presented against it, such proceeding or petition results 
in a judgment of insolvency or bankruptcy or the entry of an Order for 
Relief or the making of an order for the Company winding-up or 
liquidation, or (ii) approves resolutions authorizing any proceeding or 
petition described in clause (i) above (collectively, a ``Bankruptcy 
Event''), all open positions in the Company shall be closed promptly in 
accordance with Rule 14.8.
Rule 14.6  Default of the Company
    If at any time the Company fails to comply with an undisputed 
obligation to pay money or deliver property to a Participant that is 
due and owing in connection with a transaction cleared by the Company, 
for a period of thirty calendar days from the date that the Company 
receives notice from the Participant of the past due obligation (any 
such event or a Bankruptcy Event, a ``Company Default''), all open 
positions of the Company shall be closed promptly in accordance with 
Rule 14.8.
Rule 14.7  Wind-Up of Company Contracts
    If at any time the Board determines, by virtue of the number of 
Withdrawing Participants or otherwise, that a winding up (offset) of 
all outstanding positions at the Company is prudent or desirable or 
that the Company's clearing service should be terminated, then all open 
positions at the Company shall be closed promptly in accordance with 
Rule 14.8.
Rule 14.8  Netting; Offset
    At such time as a Participant's positions are closed, the 
obligations of the Company to such Participant in respect of the 
Participant's proprietary positions, accounts, collateral and guaranty 
fund deposits shall be netted against the obligations of such 
Participant to the Company and to the Company DCM in respect of its 
proprietary positions, accounts, collateral, and any obligations to 
guarantee funds without respect to product category. This netting shall 
be performed in accordance with the Bankruptcy Code, the CEA and the 
regulations promulgated thereunder. All positions open immediately 
before being closed in accordance with this Rule shall be valued in 
accordance with Rule 14.9.
Rule 14.9  Valuation
    A. As promptly as reasonably practicable, but in any event within 
thirty days of the: (i) Bankruptcy Event, or (ii) if a Participant 
elects to have its open positions closed in a default as described in 
Rule 14.6, the date of the election, the Company shall, in a manner 
that is consistent with the requirements of the CEA and the regulations 
adopted thereunder (including, without limitation) Part 190 of CFTC 
Regulations, fix a U.S. dollar amount (the ``Close-out Value'') to be 
paid to or received from the Company by each Participant, after taking 
into account all applicable netting and offsetting pursuant to Rule 
14.8.
    B. The Company shall value open positions subject to close-out by 
using the market prices for the relevant market (including without 
limitation, any over the counter markets) at the moment that the 
positions were closed-out, assuming the relevant markets were operating 
normally at such moment. If the relevant markets were not operating 
normally at such moment, the Company shall exercise its discretion, 
acting in good faith and in a commercially reasonable manner, in 
adopting methods of valuation to produce reasonably accurate 
substitutes for the values that would have been obtained from the 
relevant market if it had been operating normally at the moment that 
the positions were closed-out.
    C. If a default of a Participant has also occurred, and the Company 
has not fully liquidated (or transferred) all of the Participant's 
positions, the Company shall value open positions subject to close-out 
by using the prices that were determined pursuant to the final 
settlement cycle that was conducted.
    D. In determining a Close-out Value, the Company may consider any 
information that it deems relevant. Amounts stated in a currency other 
than U.S. Dollars shall be converted to U.S. Dollars at the current 
rate of exchange, as determined by the Company. If a Participant has a 
negative Close-out Value it shall promptly pay that amount to the 
Company.
Item 08_CFTC Request for Comment on FTX Request for Amended DCO 
        Registration Order

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
    The Commodity Futures Trading Commission (Commission) has received
 inquiries from derivatives clearing organizations (DCO) or potential
 DCO applicants seeking to offer clearing of margined products directly
 to participants, such that participants would not clear through a
 futures commission merchant (FCM) intermediary (non-intermediated
 model). LedgerX, LLC d.b.a. FTX US Derivatives (FTX), has submitted a
 request to amend its order of registration as a DCO to allow it to
 modify its existing non-intermediated model. FTX currently clears
 futures and options on futures contracts on a fully collateralized
 basis. FTX proposes to clear margined products while continuing with a
 non-intermediated model.
------------------------------------------------------------------------

Current DCO clearing models
    Fifteen DCOs are currently registered with the Commission. The 
majority of DCOs operate under a model that includes three 
characteristics that are significant for present purposes: margined 
products, intermediated clearing, and mutualized losses.
    A margined product is one for which the DCO only collects a portion 
of the possible losses the counterparty could incur while holding the 
position. Therefore, a DCO that offers margined products is exposed to 
the risk that a counterparty will default, leaving the DCO to cover its 
obligations to the counterparty holding the other side of the position. 
To ensure it has sufficient resources, a DCO employs a margin model to 
determine initial margin requirements and maintains financial resources 
to be used in a predetermined order (default waterfall) to cover any 
losses from a default. Currently four DCOs, including FTX, clear only 
non-margined, fully collateralized trades. In a fully collateralized 
trade, the DCO holds as collateral 100 percent of the potential losses 
a counterparty could incur and the DCO is thus not exposed to the risk 
of a counterparty default.
    At an intermediated DCO, only FCMs (and potentially some large 
proprietary traders) are direct clearing members of the DCO. Most 
market participants are customers of an FCM that is a clearing member 
and guarantees the customers' obligations to the DCO. This model 
provides DCOs with additional protections against a customer default 
and relieves customers of some of the operational and financial costs 
of being a clearing member. At a non-intermediated DCO, all market 
participants are clearing members. Currently, the four DCOs clearing 
fully collateralized products operate a non-intermediated model. 
Additionally, ICE NGX Canada Inc. (ICE NGX), operates a non-
intermediated model for margined products.\1\ ICE NGX has minimum 
financial standards for clearing members that limit membership to 
individuals or entities with a high net worth or that own substantial 
assets.\2\
---------------------------------------------------------------------------
    \1\ ICE NGX Clearing and Settlement, https://www.theice.com/ngx/
clearing-settlement (last visited. Feb. 25, 2022)
    \2\ ICE NGX New Customer Sign-Up, https://www.theice.com/ngx/new-
customer-sign-up, (last visited Feb. 25, 2022); Specifically, ICE NGX 
limits its participants to those with a net worth exceeding CAD 
$5,000,000 or total tangible assets exceeding CAD $25,000,000. This 
differs from the ``Eligible Contract Participant'' standard contained 
in the Commodity Exchange Act, see 7 U.S.C.  1a(18), but is similarly 
used to exclude retail participation.
---------------------------------------------------------------------------
    When a DCO mutualizes losses in its default waterfall, the risk of 
loss from a default is shared by all clearing members. Typically, the 
default waterfall includes funds from all clearing members in the form 
of a guaranty fund that can be used to cover default losses that exceed 
the defaulting clearing member's resources. Guaranty fund contributions 
are used even when the contributing clearing member is not in default. 
These funds are usually required to be on deposit at the DCO before a 
default happens. Some DCOs are able to call for additional funds, 
through clearing member assessments, to cover losses in excess of the 
prefunded resources. Of the DCOs that offer margined products,\3\ only 
ICE NGX does not mutualize losses among its clearing members in this 
way.\4\ Instead, ICE NGX covers losses in excess of the margin it 
collects by holding a portion of its own capital in reserve and 
maintaining a line of credit backed by a default insurance policy.\5\
---------------------------------------------------------------------------
    \3\ Because fully collateralized DCOs do not face the risk of a 
clearing member default, there are no losses to mutualize and the 
concept does not apply.
    \4\ ICE NGX Clearing and Settlement, https://www.theice.com/ngx/
clearing-settlement.
    \5\ Id.
---------------------------------------------------------------------------
FTX proposal
    FTX has requested an amended order to permit it to clear non-
intermediated, margined products. FTX intends to offer its products to 
retail participants, and its financial and operational requirements for 
participants only require that the participant be able to post the 
margin required for a given position.
    FTX's model does not contemplate receiving any funds from a 
participant not on deposit when the trade is executed. FTX has two 
margin requirements for its participants, the initial margin 
requirement and the maintenance margin requirement. The initial margin 
requirement is the amount of margin the participant must post to open a 
position. Maintenance margin is a set minimum percentage of the 
notional value of the portfolio that the margin on deposit must exceed. 
A participant's margin level is recalculated every 30 seconds as 
positions are marked to market, and if the collateral on deposit falls 
below the maintenance margin level, FTX's automated system will begin 
to liquidate the portfolio. The automated system will liquidate 10 
percent of a portfolio at a time by placing offsetting orders on the 
central limit order book. Once the liquidation process results in 
collateral on deposit that exceeds the maintenance margin requirement, 
the liquidation will stop. Because the liquidation is done 
automatically and positions are marked to market every 30 seconds, 
these liquidations can occur at any time, on a ``24-7'' basis.
    Below the maintenance margin threshold, FTX will also set a ``full 
liquidation'' threshold based on a set percentage of the notional value 
of the positions. If the margin on deposit falls below that threshold, 
FTX will liquidate the remainder of the portfolio. To fully liquidate a 
portfolio, FTX intends to enter into agreements with backstop liquidity 
providers who agree ahead of time to accept a set amount of positions 
if a portfolio needs to be completely liquidated, and who will receive 
the remaining margin for the position once the full liquidation 
threshold is hit. FTX will also fund a guaranty fund with $250 million 
of its own capital to cover any losses incurred on positions beyond 
those accepted by the backstop liquidity providers. FTX will also use 
its guaranty fund to reimburse the backstop liquidity providers when 
the participant's margin does not cover the value of the portfolio 
acquired by the backstop liquidity providers. FTX does not propose to 
mutualize losses among its participants in its default waterfall.
Questions
DCO rules

  (1)  The Commission's regulations require a DCO to hold enough 
            financial resources to meet its obligations after a default 
            by the clearing member creating the largest financial 
            exposure for the DCO in extreme but plausible market 
            conditions (Cover-1 standard).\6\ The Cover-1 standard was 
            calibrated based on the assumption that the DCO will be 
            intermediated and that the clearing member creating the 
            largest exposure will represent a significant amount of the 
            risk a DCO faces. In a non-intermediated model where retail 
            participants are direct clearing members, the significance 
            of a default by the single participant presenting the 
            largest exposure will likely be much smaller.
---------------------------------------------------------------------------
    \6\ 17 CFR  39.11(a)(1).

      (a)  What standard, other than Cover-1, would be appropriate to 
            meet the re-
                quirement in Core Principle B that a DCO ``shall have 
            adequate finan-
                cial . . . resources, as determined by the 
            Commission,'' to meet its re-
                sponsibilities in extreme but plausible market 
            conditions in a non-inter-
                mediated model? \7\
---------------------------------------------------------------------------
    \7\ 7 U.S.C.  7a-1(c)(2)(B).

      (b)  In addition to characteristics about the products and 
            specific portfolios, 
                what metrics or market characteristics (such as the 
            distribution of partic-
                ipant exposures and the number and size of market 
            makers) should be 
                taken into consideration when determining whether Core 
            Principle B has 
                been adequately satisfied by the DCO's identified 
---------------------------------------------------------------------------
            resources?

      (c)  The Cover-1 standard requires financial resources that will 
            ensure ade-
                quate coverage in extreme, but plausible conditions. 
            Are there scenarios 
                or types of market events that could have an extreme 
            effect on a non-
                intermediated market with near real-time settlement 
            that would not have 
                an extreme effect on intermediated markets?

      (d)  Are there unique position or risk limits that the Commission 
            should re-
                quire a DCO to impose on its participants in a non-
            intermediated model?

  (2)  Are there tools commonly used after a default for intermediated 
            markets (e.g., variation margin gains haircutting or 
            partial tear up) that would not be applicable, or even 
            counterproductive, in the case of a non-intermediated 
            model? Are there tools that would remain applicable in a 
            non-intermediated model, but need adjustments to ensure 
            effectiveness? If so, what are these and what would be the 
            necessary revisions?

  (3)  FTX has proposed to size its financial resources to cover a 
            default by up to the three clearing members that create the 
            largest exposure for the DCO. FTX will first calculate its 
            financial resources based on a Cover-1 standard. If the 
            Cover-1 clearing member does not represent at least 10% of 
            the initial margin on deposit, FTX will calculate its 
            financial resources based on a Cover-2 standard. If the 
            Cover-2 clearing members do not collectively account for 
            10% of the initial margin on deposit, then FTX will apply a 
            Cover-3 standard to size its financial resources.

      (a)  Does FTX's proposal provide an adequate level of financial 
            resources to 
                protect the DCO and its participants in the event of a 
            default?

      (b)  Does the likelihood of more frequent, but smaller, defaults 
            under FTX's 
                model decrease the effectiveness of a Cover-1 (or -2 or 
            -3) standard?

      (c)  FTX does not intend to mutualize the risk of loss following 
            a default 
                among all participants, and will fund a default fund 
            with its own capital. 
                Does the non-mutualized aspect of the proposed clearing 
            model present 
                any unique risks to the DCO?

  (4)  FTX's proposal limits its participants' financial and 
            operational obligations to ensuring adequate initial margin 
            is on deposit prior to entering an order. Does FTX's 
            approach, when considered in light of its proposed 
            methodology for liquidating participant portfolios, 
            adequately protect the integrity of the DCO?

  (5)  Regulation 39.12(a) also requires a DCO to establish minimum 
            capital requirements for clearing members. Given that FTX 
            participants would have no obligations to FTX other than 
            posting initial margin, does this requirement serve a risk 
            management purpose in this context?
FCM rules
  (6)  What potential market structure issues may arise from the 
            establishment of a non-intermediated model for retail 
            participants in which transactions are not fully 
            collateralized? What potential impacts, if any, would these 
            issues have on FCMs or on existing markets with FCM 
            intermediation?

  (7)  Due to the absence of FCMs, the participants' collateral in a 
            non-intermediated model is not required to be segregated 
            under section 4d of the CEA.\8\ The orders of registration 
            for DCOs offering a non-intermediated model require the DCO 
            to hold funds of its participants as member property, as 
            that term is defined by the Bankruptcy Code.\9\ Is this 
            protection sufficient for participants' funds if a DCO 
            begins to offer margined products?
---------------------------------------------------------------------------
    \8\ 7 U.S.C.  6d.
    \9\ 11 U.S.C.  761(16).

  (8)  Commission regulations require FCMs to ensure that customers 
            receive certain protections when they participate in the 
            futures markets. Should participants in a non-intermediated 
            model be afforded the same or similar customer protections? 
            Which customer protections should the DCO be required to 
---------------------------------------------------------------------------
            provide to participants?

      (a)  Should a DCO offering a non-intermediated model be required 
            to provide 
                participants with the standard customer risk 
            disclosures statements con-
                tained in Regulation 1.55? If so, should the standard 
            customer risk disclo-
                sure statement be modified in light of the trading and 
            clearing structure?

      (b)  For FTX's proposal, are different modifications needed due 
            to its process 
                and rules regarding the liquidation of participant 
            accounts? If so, how 
                should the standard risk disclosure statement be 
            revised?

      (c)  Should a DCO offering a non-intermediated market be required 
            to make 
                certain financial information publicly available on its 
            website consistent 
                with Regulation 1.55 so that current and prospective 
            participants have 
                information regarding the firm? If so, which 
            information should be pub-
                licly available?

      (d)  Should a DCO offering a non-intermediated model be required 
            to provide 
                participants with daily trade confirmations and monthly 
            account state-
                ments in the form and manner specified in Regula-
                tion 1.33?

      (e)  Should a DCO offering a non-intermediated model investment 
            of partici-
                pant funds be subject to the list of permitted 
            investments under Regula-
                tion 1.25?

      (f)  Should a DCO offering a non-intermediated model be subject 
            to limita-
                tions on the use of participant funds in a manner 
            consistent with the re-
                strictions that Regulation 1.20 places on FCMs?

      (g)  Should a DCO offering a non-intermediated model be subject 
            to regu-
                latory notice provisions in a manner similar to 
            Regulation 1.12? If so, 
                what notice provisions should apply to FTX?

      (h)  Should a DCO offering a non-intermediated model be subject 
            to daily re-
                porting of the holding of participant funds in a manner 
            similar to Regula-
                tion 1.32?

  (9)  Should a DCO offering a non-intermediated model be subject to 
            the capital requirements applied to FCMs in addition to, or 
            as an alternative to, DCO and DCM financial resources 
            requirements?

      (a)  Would the Commission's risk-based capital requirement for 
            FCMs in 
                Regulation 1.17 be the most appropriate financial 
            resources requirement 
                for a DCO offering a non-intermediated model if it is 
            approved to be a 
                DCO that directly clears margined products for retail 
            participants with-
                out an FCM guarantee? \10\
---------------------------------------------------------------------------
    \10\ 17 CFR  1.17.

      (b)  If a DCO offering a non-intermediated model is subject to a 
            risk-based 
                capital requirement based on the risk margin amount of 
            its participants' 
                accounts, should the percentage be higher than eight 
            percent to reflect 
                that the DCO will only hold margin for its listed 
            products and not diverse 
---------------------------------------------------------------------------
                positions across multiple exchanges?

      (c)  Regulation 1.17 requires FCMs to maintain a sufficient 
            amount of 
                unencumbered liquid assets (after application of 
            haircuts) that are in the 
                possession or control of the FCM to cover each dollar 
            of the FCM's obliga-
                tions. If this type of financial resources requirement 
            is applied to a DCO 
                offering a non-intermediated model, should that 
            requirement also con-
                sider the composition of the DCO's capital?

      (d)  For FTX's proposal, if a risk margin amount threshold is 
            applied to 
                FTX's minimum financial resources requirement, should 
            the percentage 
                of risk margin required be set at a higher percentage 
            than eight percent, 
                given that FTX's participants would not be required to 
            contribute finan-
                cial resources to the DCO beyond their required initial 
            or maintenance 
                margin amounts?

  (10) FTX's current order of registration requires it to comply with 
            anti-money laundering laws and regulations as if it were a 
            covered ``financial institution'' under applicable law.\11\ 
            Do FTX's proposed changes present any additional risks that 
            would require additional anti-money laundering 
            requirements?
---------------------------------------------------------------------------
    \11\ Specifically it must comply with the Bank Secrecy Act (31 
U.S.C.  5311 et seq.), the International Emergency Economic Powers Act 
(50 U.S.C.  1701 et seq.), the Trading with the Enemy Act (50 U.S.C.  
4301 et seq.), and the executive orders and regulations issued pursuant 
thereto, including the regulations issued by the U.S. Department of the 
Treasury and, as applicable, the Commission, as if [FTX) were a covered 
``financial institution'' within the meaning of 31 CFR  1010 et seq.

  (11) Are there any FCM requirements not already discussed that a DCO 
            offering a non-intermediated model should be required to 
            meet?
FTX proposals
  (12) When a participant's margin on deposit falls below the 
            maintenance margin level, FTX is proposing to have an 
            automated system immediately liquidate the participant's 
            portfolio to the extent necessary to come into compliance 
            with margin requirements. FTX's system will check margin 
            levels, and when necessary liquidate positions, on a 24 
            hours a day/7 days a week basis.

      (a)  Does liquidating positions without requesting additional 
            funds from the 
                participant present risks or concerns in a regulated 
            market?

      (b)  Given the real-time liquidation, are participant protections 
            necessary be-
                yond disclosures regarding the rules and liquidation 
            process employed by 
                FTX? If so, what other protections should be required?

      (c)  Are there risks to a model that is designed to result in 
            more frequent, 
                but smaller, defaults than traditionally occur in 
            cleared markets?

      (d)  Are there concerns about an automated system's ability to 
            liquidate a 
                portfolio fairly and effectively? Are there additional 
            concerns if multiple 
                participants are liquidated at the same time, or if the 
            automated liquida-
                tion results in price moves that result in a cascading 
            effect of participants 
                becoming under-margined and subject to automated 
            liquidation?

      (e)  Are there concerns about whether there will be adequate 
            liquidity for po-
                sition liquidation on a 24 hours a day/7 days a week 
            basis?

      (f)  What metrics or data should the Commission use to evaluate 
            whether 
                there is likely to be sufficient liquidity across a 
            broad set of market condi-
                tions?

  (13) If a portfolio's initial margin falls below the full liquidation 
            threshold, FTX will liquidate the full portfolio by 
            assigning the positions to predetermined backstop liquidity 
            providers.

      (a)  How should FTX determine the amount of capacity it needs 
            from its 
                backstop liquidity providers?

      (b)  How should FTX determine the level of liquidation risk an 
            individual 
                backstop liquidity provider can take on?

      (c)  What types of standards should FTX have for its backstop 
            liquidity pro-
                viders?

      (d)  What risks are associated with a system that is dependent on 
            outside li-
                quidity providers in this way?
Market impact
  (14) By reducing the number of people/entities involved in a 
            transaction, does a non-intermediated model have an effect, 
            positive or negative, on price discovery and efficiency?

  (15) By potentially expanding the number of people able to 
            participate in derivatives markets, does a non-
            intermediated model have an effect, positive or negative, 
            on price discovery and efficiency?
                                 ______
                                 
   Submitted Comment Letter by Hon. David Scott, a Representative in 
   Congress from Georgia; on Behalf of, and Authored by, Michael J. 
Seyfert, President and Chief Executive Officer, National Grain and Feed 

                              Association
May 11, 2022

  Christopher Kirkpatrick,
  Secretary of the Commission,
  U.S. Commodity Futures Trading Commission,
  Washington, D.C.

  RE: FTX Request for Amended DCO Registration Order

    Dear Mr. Kirkpatrick:

    The National Grain and Feed Association (NGFA) submits these 
comments in response to the Commodity Futures Trading Commission's 
(CFTC or Commission) request for input on the FTX US Derivatives (FTX) 
proposal to clear margined products while continuing with a non-
intermediated model. Presently, FTX is licensed as a [Derivatives] 
Clearing Organization (DCO) by CFTC, but with the stipulation that 
trades under its non-intermediated model are 100 percent 
collateralized.
    The NGFA consists of more than 1,000 grain, feed, processing, 
exporting and other grain-related companies operating more than 8,000 
facilities. Its membership includes grain elevators; feed and feed 
ingredient manufacturers; biofuels companies; grain and oilseed 
processors and millers; exporters; livestock and poultry integrators; 
and associated firms that provide goods and services to the nation's 
grain, feed, and processing industry.
    The NGFA commends the CFTC for undertaking a public comment process 
and for facilitating a roundtable discussion for a broad group of 
industry experts to help in its evaluation of FTX's proposal. Further, 
the NGFA appreciates the additional 30 days the CFTC provided to review 
and comment on FTX's proposal.
    FTX's proposal is for two cryptocurrency products and the NGFA 
understands the distinction between the marketplace for cryptocurrency 
products versus agricultural products and that FTX's proposal will not 
have an immediate impact on agricultural markets. However, if FTX's 
proposal is approved, NGFA is concerned that a precedent will have been 
set that could allow other exchanges to expand the higher-risk 
cryptocurrency trading model to agricultural products, potentially 
undermining the well-functioning futures markets that our members rely 
on to manage risk. The portions of the FTX proposal that are concerning 
to NGFA are the elimination of futures commission merchants (FCM) from 
the buying and selling process and the automatic liquidation of 
positions when they become under margined.
    FCMs enhance risk management by serving the valuable purpose of 
monitoring accounts' margin requirements and balances, helping 
customers to understand complex market regulations, identifying 
potential problems before they pose a risk to the market and its other 
participants and by stepping in and paying margin calls when their 
customers are slow to pay or default. In addition, NGFA believes FTX 
fails to consider the deep regulatory expertise that would be lost 
without introducing brokers and FCMs. Further, NGFA is concerned that 
FTX avoids the important risk management role that FCMs provide of 
temporarily covering margin calls and instead proposes to automatically 
liquidate positions that become under margined.
    NGFA believes FTX's proposal to auto-liquidate positions has the 
potential to undermine risk management protection for commercial 
participants. Commercial participants use futures contracts to hedge 
against an underlying position and they cannot run the risk of having 
their hedges automatically liquidated by an exchange because of fast-
moving price changes that lead to under margining. To avoid the risk of 
auto-liquidation, commercial participants would be forced to place 
inordinately large sums of money in margin accounts, and this would 
significantly increase their hedging costs. Inevitably these costs 
would be passed to the customers for whom our members are hedging--
largely North American producers of grains and oilseeds.
    The NGFA is concerned the FTX proposal would exacerbate market 
stress during periods of extreme disruption, particularly during 
systemic events. The NGFA also is not confident market participants 
could rely on FTX's proposed liquidation-based, operational model to 
continue functioning and providing hedging protection during prolonged 
periods of limit up and limit down moves. Furthermore, NGFA is 
concerned that volatility from auto-liquidations may lead to additional 
volatility in similar products on different exchanges, e.g., auto-
liquidations in an FTX soybean product that could lead to volatility in 
CBOT soybean products. NGFA also is worried the proposal could allow 
FTX to tear up trades resulting in unnecessary risk exposure and loss 
for hedgers.
    The robust risk management controls that are required under the 
current intermediated mode creates necessary costs to offering futures 
contracts. The NGFA is concerned the FTX's proposal may lead other DCOs 
to adopt higher-risk models with fewer risk management controls to 
remain cost competitive. While the NGFA is in favor finding more 
efficient ways to deliver services, we believe the FTX proposal creates 
too much risk and we recommend not approving it. If the Commission 
decides to continue consideration of the FTX proposal, the NGFA 
recommends a formal notice and comment process. Thank you for 
considering our comments.
            Sincerely,
            
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
            
Michael J. Seyfert,
President and Chief Executive Officer,
National Grain and Feed Association.
[email protected]
(202) 289-0873
                                 ______
                                 
 Submitted Article by Hon. Ann M. Kuster, a Representative in Congress 
                           from New Hampshire
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

[https://www.forbes.com/sites/billybambrough/2022/05/12/1-trillion-
crypto-meltdown-huge-crash-wipes-out-the-price-of-bitcoin-ethereum-bnb-
xrp-cardano-solana-terras-luna-and-avalanche/?sh=32301e645fd1]
$1 Trillion Crypto Meltdown-Huge Crash Wipes Out The Price Of Bitcoin, 
        Ethereum, BNB, XRP, Cardano, Solana, Terra's Luna And Avalanche
Forbes Digital Assets \1\
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    \1\ https://www.forbes.com/digital-assets.

Billy Bambrough,\2\ Senior Contributor
---------------------------------------------------------------------------
    \2\ https://www.forbes.com/sites/billybambrough/.

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May 12, 2022,01:50 a.m. EDT

    Bitcoin and cryptocurrencies have crashed further overnight, 
dropping to levels not seen since the crypto market began surging in 
late 2020 and wiping away almost $1 trillion worth of value in a month 
as a serious ``ripple'' warning comes into effect.\3\
---------------------------------------------------------------------------
    \3\ https://www.forbes.com/sites/billybambrough/2022/05/09/serious-
ripple-warning-after-massive-400-billion-crypto-crash-suddenly-plunges-
bitcoin-ethereum-bnb-xrp-solana-cardano-terras-luna-and-avalanche-into-
free-fall/?sh=7a38e38e1359.
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    The bitcoin price has dropped to around $27,000 per bitcoin, down 
12% on the last 24 hours, and dragging down the wider crypto market 
with other top ten coins ethereum, BNB BNB \4\ ^1.7%, \5\ XRP XRP\6\ 
^2.1%,\7\ solana, cardano, and avalanche recording even steeper loses. 
Ethereum has crashed 22% since this time yesterday, with BNB, XRP, 
solana, cardano and avalanche all [losing] between 25% and 33%.
---------------------------------------------------------------------------
    \4\ https://www.forbes.com/digital-assets/assets/binance-coin-bnb/.
    \5\ https://www.forbes.com/digital-assets/assets/binance-coin-bnb/
    \6\ https://www.forbes.com/digital-assets/assets/ripple-xrp/.
    \7\ https://www.forbes.com/digital-assets/assets/ripple-xrp/.
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    The sell-off comes after the $18 billion algorithmic stablecoin 
terraUSD (UST) lost its peg to the U.S. dollar, wiping out the price of 
its support coin luna which has now lost almost 99% of its value--and 
risks dragging the bitcoin and crypto market even lower.\8\
---------------------------------------------------------------------------
    \8\ https://www.forbes.com/sites/billybambrough/2022/05/11/going-
to-zero-panic-is-sweeping-crypto-markets-hitting-the-price-of-bitcoin-
ethereum-bnb-xrp-cardano-solana-terras-luna-and-avalanche/

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          The bitcoin price has crashed to levels not seen since late 
        2020 with ethereum, BNB, XRP, solana, cardano, avalanche, and 
---------------------------------------------------------------------------
        Terra's luna tanking. Getty Images.

    ``Bitcoin continued to slide and closed below $30,000 for the first 
time since last July, although the fall did not trigger a large sell 
off and the price is trying to recover $30,000 in the Thursday Tokyo 
session,'' Yuya Hasegawa, a crypto market analyst at Bitbank, wrote in 
an emailed note.
    ``The price of bitcoin, however, could still fall due to the UST 
situation and worsening technical sentiment, but if the U.S. inflation 
continues to slow down, the macro environment will likely improve and 
the price will bottom out.''
    On Wednesday, markets were broadly hit by the latest U.S. inflation 
data that showed the consumer price index continued to run hot in 
April.
    ``U.S. CPI was a mixed result: even though it exceeded market 
expectations, it showed a sign of slowing down thanks to lower energy 
prices,'' wrote Hasegawa.
    ``The result was not enough to completely wipe out the possibility 
of faster monetary tightening, but it was also not enough to strengthen 
that possibility as well. The market inclines to sell on that kind of 
uncertainty and that is why stocks and crypto fell, but there is also a 
hope that inflation in the U.S. will continue to alleviate.''

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          The bitcoin price has lost over 30% of its value in a week, 
        crashing alongside the price of ethereum, BNB, XRP, solana, 
        cardano, avalanche and Terra's luna. CoinBase.

    The tech-heavy Nasdaq led markets lower on Wednesday, recording a 
3.2% decline, with iPhone-maker Apple dethroned as the world's most 
valuable publicly traded company by oil major Saudi Aramco.
    ``The past week has seen turmoil has spread across markets globally 
as the reality of hawkish central bank policy and widespread inflation 
is realised,'' Will Hamilton, head of trading and research at asset 
management and technology company Trovio, said in emailed comments.
    ``Market drawdowns led by the tech heavy NASDAQ NDAQ \9\ ^2.1% \10\ 
spread across digital asset markets as investors continue their 
withdrawal from risk assets.''
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    \9\ https://www.forbes.com/companies/nasdaq.
    \10\ https://www.forbes.com/companies/nasdaq.
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                                 ______
                                 
   Supplementary Material Submitted by Hon. Walter L. Lukken, J.D., 
  President and Chief Executive Officer, Futures Industry Association
May 11, 2022

  Christopher Kirkpatrick,
  Secretary,
  Commodity Futures Trading Commission,
  Washington, D.C.

    Dear Mr. Kirkpatrick,

    The Futures Industry Association (``FIA'') welcomes the opportunity 
afforded by the Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') to provide comments on the proposal by FTX US Derivatives 
(``FTX'') \1\ to amend its revised order of registration as a 
derivatives clearing organization dated September 2, 2020 (the 
``Order'') to authorize it to clear margined derivative products for 
its participants on a non-intermediated basis (``FTX Proposal'' or the 
``Proposal'').
---------------------------------------------------------------------------
    \1\ Officially LedgerX, LLC d/b/a FTX.
---------------------------------------------------------------------------
    FIA has a long history of supporting innovation in the derivatives 
industry and we believe the FTX Proposal has prompted a healthy 
dialogue within the industry. However, there remain significant open 
questions and a lack of critical public information on the model set 
forth in the FTX Proposal that make it difficult to analyze fully 
whether the Proposal, if adopted, would negatively impact the customer 
protections and the clearing process that lie at the heart of our 
futures markets.
    Specifically, we are unclear whether various key principles of the 
derivatives regulatory oversight structure are adequately addressed by 
the FTX Proposal. These include principles of segregation of customer 
funds, conflicts of interest of those entrusted with market operations 
and customer funds, financial resourcing and capitalization of market 
operators, appropriately planned and sized default resources, and 
safeguards of key market operations. We urge the Commission to seek 
additional clarity from FTX on how these key principles are satisfied 
and to continue the public dialogue on this important, and possibly 
transformative, Proposal.
    FTX's Proposal draws on existing features employed in the 
derivatives industry today--including margined futures, as well as 
frequent, intra-day assessment of clients' margin sufficiency and auto-
liquidation of clients with inadequate margin coverage. However, FTX 
would uniquely combine all these features and deploy them in an 
integrated designated contract market (``DCM'') and derivatives 
clearing organization (``DCO'') without the benefit of futures 
commission merchants (``FCMs'') underwriting the risk of clients in any 
traditional manner. The combination of these features represents a 
material change from FTX's current authorization that permits it to 
only clear futures, options on futures and swaps on a fully 
collateralized basis. Although the Order does not currently allow 
intermediation, we note that FTX's rulebook references the 
participation of FCMs, although how they would participate remains 
unclear.\2\
---------------------------------------------------------------------------
    \2\ Under the Order, FTX may ``not permit any FCM participant to 
clear on behalf of any customer.'' FTX is permitted to accept FCM 
participants to clear on behalf of customers only if FTX first submits 
``all rules applicable to customer clearing to the Commission pursuant 
to Commission Regulation 40.5 or 40.6.'' In private sessions with 
members of FIA, FTX has suggested that FCMs could fund their customers' 
accounts at FTX; however, this Proposal may raise issues under CFTC 
Rule 1.30 prohibiting the loaning of funds by FCMs to customers on an 
unsecured basis.
---------------------------------------------------------------------------
    Furthermore, although FTX's existing offering is based on digital 
assets and cryptocurrencies for retail traders, the clearing model as 
proposed by FTX would permit trading in derivatives on any underlying 
asset class transacted by any type of customer, including commercial 
hedgers. This requires us to view this Proposal with an eye towards the 
potential impact upon the core users of the derivatives markets: 
farmers, producers, refiners, pension funds, and the range of 
commercial participants who depend upon futures and related products to 
hedge price risk in the real economy.
    We analyze this unique Proposal recognizing the CFTC's long history 
of supporting innovation in the derivatives markets. In fact, the 
Commodity Exchange Act (``CEA'') explicitly states in the findings and 
purpose \3\ of the Act that the Commission should ``promote responsible 
innovation and fair competition'' among market participants. In 
promulgating the Commission's purpose and mission, Congress was careful 
to ensure innovation was advanced responsibly and did not jeopardize 
the integrity or financial stability of the markets or the protections 
afforded to customers. The CFTC's mission is structured around certain 
core tenets: In addition to the promotion of responsible and fair 
competition, the CFTC is charged with the protection of customer 
assets, ensuring the financial integrity of transactions, avoidance of 
systemic risk, and the prevention of manipulation.\4\ Congress's 
insistence on promoting ``fair competition'' also suggests the CFTC 
needs to create a level playing field for market participants, which 
imposes a uniform regulatory framework upon similar activity with 
similar risks. FIA believes that these principles from the CFTC's 
mission should drive the Commission's analysis of the Proposal before 
us.
---------------------------------------------------------------------------
    \3\ In the Findings and Purpose of the CEA, the statute reads: ``It 
is the purpose of this chapter to serve the public interests described 
in subsection (a) through a system of effective self-regulation of 
trading facilities, clearing systems, market participants and market 
professionals under the oversight of the Commission. To foster these 
public interests, it is further the purpose of this chapter to deter 
and prevent price manipulation or any other disruptions to market 
integrity; to ensure the financial integrity of all transactions 
subject to this chapter and the avoidance of systemic risk; to protect 
all market participants from fraudulent or other abusive sales 
practices and misuses of customer assets; and to promote responsible 
innovation and fair competition among boards of trade, other markets 
and market participants.'' 7 U.S.C.  5(b).
    \4\ 7 U.S.C.  5(b).
---------------------------------------------------------------------------
    This letter further explores some preliminary issues and questions 
based upon FIA's review of the material available along with the FTX 
Proposal. These issues include:

   FTX's proposed elimination of FCMs from the clearing model 
        does not remove the need for the important customer protections 
        and risk management functions that FCM clearing members 
        currently provide. As agents for their customers, FCMs hold 
        various regulatory responsibilities including vetting customers 
        on the appropriateness of these leveraged products, policing 
        clients for money laundering, segregating customer funds, 
        guaranteeing customer trades, holding significant regulatory 
        capital against those trades, contributing their own skin in 
        the game capital to the central counterparty (``CCP'') default 
        fund, and agreeing to further assessments should the CCP 
        default fund need replenishment. Many of these responsibilities 
        have been further strengthened post-financial crisis to provide 
        important redundancies and checks in the clearing process to 
        avoid not only a clearinghouse failure, but also losses to the 
        customer asset pool.

   The FTX Proposal indicates that many of these FCM-provided 
        protections could be satisfied through the DCO core principles 
        or may no longer be needed due to the model. However, it is not 
        clear that this hybrid DCO model provides the same level of 
        customer and market protections through a DCO registration, 
        given FTX seeks to take on many of the same functions and 
        activities of FCMs without FCM registration and the detailed 
        regulatory requirements that ensue from registering.

   FIA also believes there needs to be further analysis of the 
        viability and adequacy of FTX capital as the default resource 
        and appropriateness of tools (such as variation margin gains 
        haircutting (VMGH)) proposed in the FTX risk model in extreme 
        but plausible scenarios, especially for large commercial 
        participants in other asset classes beyond retail digital 
        currencies. Given the model relies on continuous liquid markets 
        that are open 24/7/365, questions remain around the market 
        impact of the auto-liquidation feature for the close-out of 
        large positions in less liquid markets that are not 
        continuously traded. Furthermore, more transparency is needed 
        on the Backstop Liquidity Providers (``BLPs''), and how BLPs 
        and other default resources are employed and governed during 
        market distress while avoiding self-dealing.

    We understand that the CFTC Request for Information is a first step 
in gaining more details on this unique market structure proposal that 
will help address some of the issues we have raised herein. We welcome 
FTX's openness to engage with the industry on the merits and substance 
of the Proposal. We support FTX's efforts to advance real-time risk 
management in clearing and bring greater competition to our markets. 
However, we do not believe there is sufficient information and analysis 
on the Proposal at this time to conclude that it should be approved by 
the Commission and, if so, under what conditions.
I. Relevant Background
A. FIA and its Members
    FIA is the leading global trade organization for the futures, 
options, and centrally cleared derivatives markets. FIA's mission is to 
support open, transparent, and competitive markets; protect and enhance 
the integrity of the financial system; and promote high standards of 
professional conduct. FIA's membership includes clearing firms, 
exchanges, clearinghouses, trading firms and commodities specialists 
from more than 48 countries, as well as technology vendors, lawyers and 
other professionals serving the industry. FIA's governance consists of 
firms that operate as clearing members in global derivatives markets, 
including firms registered with the CFTC as FCMs, and this letter 
principally represents their views.
    Throughout its history, FIA has deployed its collective member 
expertise to provide comment and feedback on a range of suggestions and 
improvements to the derivatives clearing system, ensuring that the 
mission of the CEA is fulfilled. In evaluating innovative offerings, we 
bring several decades of experience managing well-functioning markets 
for the important risk management and price discovery purposes for 
which they were designed. We are pleased to work with the CFTC and with 
other regulators regularly to strengthen the clearing system, through 
embracing improvements and evolving rules to yield greater efficiencies 
for market participants and for customers. We provide these comments in 
the same spirit.
B. The FTX Proposal
    We understand the FTX Proposal expands upon certain elements of 
existing direct clearing models in innovative ways: specifically, the 
efforts to incorporate more frequent margin adequacy assessments and to 
distribute low-cost or no-cost market data could yield enormous 
benefits to participants in our industry. We seek to better understand 
how the innovations that FTX has developed for the global cash and 
derivatives crypto markets could contribute to the evolution of the 
U.S. cleared derivatives market.
    FTX's Proposal seeks modification not only to an existing DCO 
order, but also to the fundamental paradigm of how the futures industry 
has historically operated, by relying primarily on the financial 
strength of FCM clearing members to buttress the financial solvency of 
clearing organizations who in turn ensure the performance of every 
cleared futures contract, option on a futures contract, and swap. 
Although the technical changes sought to the Order may not appear 
monumental on their face, we strongly believe that the changes could 
bring lasting effects, creating new sets of rules for certain 
participants, and therefore deserve detailed and thoughtful review.
    Moreover, given the transformative changes that could potentially 
flow from the proposed amendment to the Order, we believe the CFTC must 
also carefully consider the public interest in potentially eliminating 
the traditional and essential buffer provided by FCMs in connection 
with margined products. This buffer serves not only as an integral part 
of the DCO waterfall in intermediated markets, but also as a critical 
front line in evaluating customer sophistication; ensuring customer 
education and suitability, customer protection, market integrity and 
operational efficiencies; and supplementing or enhancing the self-
regulatory roles of DCMs and swap execution facilities. Additionally, 
the Commission must carefully assess the adequacy of the current DCO 
risk management rules if applied in the context of the proposed 
framework. It also must evaluate whether any of its existing rules 
should be formally amended prior to approving FTX's proposed margined-
products disintermediated model. Indeed, it may be preferred that the 
CFTC consider FTX's Proposal through a formal rulemaking process that 
would necessarily include, among other things, a holistic cost-benefit 
analysis.
    We understand that retail disintermediated models already exist 
under the CEA structure but in a more limited way.\5\ We recognize that 
the FTX Proposal is innovative in its combination of disintermediation 
and margining of derivative products for retail participants, including 
how it proposes to substitute an alternative form of waterfall compared 
to the historic model backstopped by FCMs, relying on a 24/7/365 real-
time margining system coupled with automatic liquidation of under-
margined accounts, BLPs, and a guaranty fund from FTX's own capital 
that apparently will be no less than $250 million. Although FTX's 
Proposal draws on many existing features of the derivatives 
marketplace,\6\ it focuses solely on those offered by a stand-alone 
DCM/DCO and discards the symbiotic relationship that ensures checks and 
balances in the clearing system, which would be lost by eliminating 
FCMs in FTX's proposed margined products disintermediated model.
---------------------------------------------------------------------------
    \5\ For example, Kalshi is also a disintermediated retail model 
that does not have FCMs, but it offers only fully-collateralized binary 
options. NGX is also a disintermediated model, but its niche market has 
requirements that effectively preclude retail participation and is 
limited to commercial market participants and other institutional 
counterparties that are required to have the capability to make and 
take delivery of the underlying energy commodities.
    \6\ For example. FCMs frequently examine CCP margin sufficiency and 
also can provide quick identification of clearing house errors and 
system problems. These functions help keep the entire system in check.
---------------------------------------------------------------------------
    Thus, because of the potential disruptive impact of FTX's margined, 
disintermediated model on the traditional clearing and customer 
protection model, we urge the Commission to carefully consider whether 
FTX's Proposal, for itself and for likely subsequent adopters of a 
similar model, adequately ensures:

   the financial stability of cleared derivatives markets;

   the financial integrity of clearinghouses;

   that participants of DCOs receive the same level of customer 
        protection as they currently do as customers at FCMs; and

   market integrity.

    We have invested significant time in reviewing this potentially 
transformative Proposal. We have reviewed the documents made public on 
the CFTC website in connection with this solicitation of comments and 
have also had several conversations with the FTX team and other market 
participants. Particularly from those conversations, we gather that FTX 
continues to evolve its offering and seeks feedback on how it can be 
improved. We note that the FTX Rulebook continues to list certain 
product specifications that would likely be removed upon approval. We 
have also focused on other discrepancies between the rulebook made 
available by the CFTC and other documents and conversations detailing 
the model. We urge the Commission to review the Rulebook carefully to 
ensure the model is reflected as described. To that end, we highlight 
in this comment letter certain areas that we believe merit specific 
focus.
    We understand that FTX engaged in conversations with FCMs and 
others to broaden the offering to institutional and other clients and 
we expect the platform will seek to list--as its Order currently 
permits--products outside of the current cryptocurrency and digital 
asset space. We, therefore, have analyzed both the current Proposal and 
the implications of expansion beyond the current Proposal. We urge the 
Commission to also consider the current Proposal with an eye towards a 
potential expansion into some or all of the markets under its 
regulatory authority. We believe that important commercial markets may 
be impacted and those hedging in these markets may be disadvantaged by 
certain features of the Proposal. Therefore, we suggest that the CFTC 
should not limit its review at this time to only certain users or 
participants. We look forward to working with the Commission as it 
evaluates the Proposal and its implications.
II. Analysis of the FTX Proposal in the Context of the Existing 
        Regulatory Architecture
    In considering the role that FTX seeks to fulfill by the FTX 
Proposal, it is important to note the longstanding regulatory framework 
in which it seeks to operate.
A. The Function and Role of Regulated FCMs
    Some version of what is now known as an FCM has existed for 
centuries. Factor merchants were originally charged with interacting 
with customers directly. Since the passage of the Commodity Exchange 
Act in 1936, FCMs have been required to segregate customer funds, and 
their interactions with customers have been heavily regulated to ensure 
various customer and market protections. Although the regulatory 
structure has evolved significantly, these core protections remain 
entrusted to FCMs.
    Currently, FCMs discharge several key functions independent of 
those discharged by DCOs. The clearing structure involves different, 
interdependent entities, each responsible for executing important and 
sometimes intentionally redundant system protections. Today, heavily 
regulated FCMs ensure that critical protections are met in the system, 
including those relating to customer protection, robust disclosures of 
risks, capital resources, and credit and collateral management. FCMs 
also provide a valuable buffer to ameliorate operational errors by DCOs 
on behalf of their customers.
    FCMs are registered with the CFTC and are members of the National 
Futures Association (``NFA''). They assume obligations under the CEA, 
CFTC and NFA rules, and rules of any exchange or clearinghouse of which 
they are a member or on which they facilitate trading. If FCMs maintain 
a presence or an activity in a foreign jurisdiction, they may also 
incur obligations under other foreign laws and regulations. In the 
United States, FCMs are regulated principally by the CFTC and their 
designated self-regulatory organization (``DSRO''), as well as 
episodically by their other self-regulatory organizations (``SROs''). 
Moreover, FCMs are obligated through an express rule (CFTC Reg.  
166.3) to ensure all customer accounts are supervised directly and 
indirectly through a robust oversight system.
    These varied oversight sources contribute to a complex regulatory 
framework, including myriad requirements, designed to protect 
customers, customer funds, DCOs, and the financial system. We set forth 
below a number of these requirements, and highlight certain conceptual 
issues with the FTX Proposal to which we would direct CFTC's attention:

   Minimum capital requirements. The minimum amount of capital 
        that an FCM must have readily available is defined by rule, but 
        constantly fluctuates. Generally, it is the greater of a number 
        of amounts, including: $1 million; 8% of the margin requirement 
        (as defined in CFTC Rule 1.17(b)(8)) for positions carried by 
        the FCMs in customer accounts and noncustomer accounts; or the 
        highest amount required by the SEC (for combined broker-dealers 
        and FCMs) or any self-regulatory organization. Moreover, this 
        defined amount is subject to certain caveats, including capital 
        ``haircuts,'' or reductions, for no or late margin call 
        satisfaction; and ongoing risk-reducing measures to help ensure 
        capital is not impaired. FCMs risk-manage customers tick-by-
        tick as markets move, and may make margin calls intraday and in 
        excess of DCM margins as a result, which would then impact 
        regulatory capital requirement calculations. Due to regular 
        fluctuations in the capital amounts required and regulatory 
        penalties associated with capital deficits, FCMs typically 
        maintain capital equal to at least 110% of the required 
        amounts. FCMs are required to stand behind and guaranty 100% of 
        customer trading. These capital requirements ensure that 
        funding is available to backstop the trading of FCM customers 
        and house accounts.

     Note Regarding FTX Proposal. As it is not registered 
            as an FCM, FTX is not subject to the same robust capital 
            requirements. Moreover, given the lack of intermediation in 
            its model, the FCMs' capital and calculated buffers are not 
            requirements in the FTX Proposal and, instead, the Proposal 
            intends to liquidate rather than rely upon FCMs to evaluate 
            and ensure adequate margin. We question whether the 
            Proposal is robust enough in this respect.

   Guaranty fund. In addition to this capital buffer, the 
        traditional DCO model allows the DCO to require FCM 
        contributions to a guaranty fund and allows the DCO to require 
        additional assessments from FCMs to shore up the guaranty fund 
        if circumstances require.

     Note Regarding FTX Proposal. It is not clear how the 
            $250 million single-source ``guaranty fund'' that FTX 
            proposes to satisfy capital shortfalls may be increased, or 
            will be replenished if drawn down.

   Customer funds protection and segregation. At an FCM, funds 
        belonging to customers must be kept legally segregated from 
        proprietary assets of the FCM. Customer funds are also 
        protected by a robust FCM bankruptcy regime under Part 190 
        which, broadly speaking, ensures that funds of customers of a 
        bankrupt FCM are directed back to the customer immediately. 
        They do not pass through the bankruptcy estate and are, by 
        statute, not subject to any claim by the FCM's creditors.

     Note Regarding FTX Proposal. Member funds at a DCO are 
            not considered to be customer accounts and are not subject 
            to legal segregation under the CEA or CFTC rules. 
            Therefore, separation of funds by a DCO between clearing 
            members and proprietary funds is not the same as legal 
            segregation. Internal policies may not have the effect of 
            offering the same level of protection imposed by statute 
            and rule.

   Prohibition of Guaranteeing Against Loss. FCMs are 
        prohibited by Rule from guaranteeing against or limiting 
        customer loss (or even making such representations). See CFTC 
        Reg.  .56. In approving this rule, the CFTC sought to avoid 
        FCMs becoming undercapitalized and to minimize the opportunity 
        for the misuse of other customers' funds. See 46 FR 62842 (Dec. 
        29, 1981). This rule then serves to ensure proper 
        capitalization of the FCMs and to make sure customer funds are 
        fully segregated.

     Note Regarding the FTX Proposal. In Questions 4 and 5 
            of the RFI, the CFTC indicates its understanding that FTX 
            limits its participants' financial obligations and that 
            participants will have no obligations to FTX other than 
            posting initial margin. We read the FTX Rulebook to 
            indicate that participants are obligated for losses beyond 
            posted margin, and consequent attorney fees. See, e.g., 
            LedgerX Rulebook Rules 14.2.B and 14.3.B. However, should 
            FTX continue to maintain that participants have no 
            obligations to FTX other than posting initial margin, and 
            its Rulebook is updated to reflect this, we urge the 
            Commission to consider why the principles of Rule 1.56 
            would not apply here to prohibit such a practice.

   ``Know Your Customer'' obligations. Among other things, the 
        Bank Secrecy Act (``BSA'') requires that ``financial 
        institutions'' (including FCMs) engage in standardized due 
        diligence procedures to verify customer identity and assess and 
        monitor potential, new, and existing customer risk. These Anti-
        Money Laundering screening requirements are essential duties 
        performed by FCMs.

     Note Regarding FTX Proposal. FTX has undertaken to 
            adopt and follow certain BSA-related obligations. We note 
            that this undertaking to comply, as required by the CFTC, 
            may not have the same force and effect of being required to 
            comply under the BSA as a regulated ``financial 
            institution'' thereunder.\7\ Already, principals of a firm, 
            charged by the CFTC for allegedly acting as an FCM and not 
            complying with the BSA, challenged a criminal complaint 
            brought by the Department of Justice through a Motion to 
            Dismiss, claiming that its activities were like those of a 
            disintermediated DCO, and thus it had no BSA 
            obligations.\8\
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    \7\ That is, in addition to the myriad regulatory requirements that 
FCMs are subject to, their status as a ``financial institution'' under 
the BSA requires them to be subject to the BSA regulations, with severe 
penalties for violations thereof.
    \8\ See Memorandum of Law in Support of Defendants' Motion to 
Dismiss, United States of America v. Arthur Hayes, Benjamin Delo, 
Samuel Reed and Gregory Dwyer, (USDC, SDNY (JGK)), filed December 21, 
2021.

   FCM customer-related obligations. Registered FCMs must 
        comply with numerous other obligations designed to protect 
        customers and the markets in which they operate. These include, 
---------------------------------------------------------------------------
        but are not limited to:

    b Firm-specific disclosures with ongoing obligations to refresh and 
            update information to enable members of the investing 
            public to select the FCM with which they do business.

    b Privacy notices that FCMs, as ``financial institutions,'' must 
            provide.

    b Examination, registration, and disclosure requirements for 
            public-facing FCM associates, including Associated Persons 
            and Branch Office Managers.

    b Ethics examinations and other obligations for public-facing FCM 
            associates who engage with customers.

    b As noted previously, significant requirements (which the CFTC has 
            applied broadly) to adequately supervise all persons 
            directly or indirectly handling customer interest accounts, 
            with significant penalties for failure to do so. Adequate 
            supervision includes the robust monitoring of customer 
            accounts to help ensure market integrity, compliance with 
            position limits, and other requirements imposed upon 
            customers.

       Note Regarding FTX Proposal. Arguably, these 
            important protections may 
              not apply to DCMs/DCOs. That is, participants and members 
            of these orga-
              nizations are not traditionally viewed as ``customers'' 
            with all the obliga-
              tions that such a designation entails vis a vis an FCM.

   Other FCM obligations. FCMs are subject to other 
        requirements that are designed to ensure market integrity. FCMs 
        must comply with significant requirements to prepare, maintain, 
        and retain appropriate books and records concerning their 
        business, including recordings of certain telephone 
        conversations. They are required to file daily segregation 
        reports, periodic financial and risk reports, and a CCO Annual 
        Report and certification.

     Note Regarding FTX Proposal. Attention should be given 
            to ensure that a DCO functioning like an FCM is subject to 
            similar recordkeeping and certification requirements.

   NFA Membership. FCMs are required to be members of the NFA, 
        be subject to NFA audit, and comply with numerous NFA rules 
        designed for customer protection. Their public-facing employees 
        must also be members and pass requisite examinations, be 
        fingerprinted and remain subject to background checks.

     Note Regarding FTX Proposal. Disintermediated DCMs and 
            DCOs do not have an entity in their system required to be a 
            member of the NFA. Accordingly, these vetting and diligence 
            requirements are never applied as they are to customer-
            facing FCM employees. Therefore, attention should be given 
            to the role that NFA plays, and whether adequate assurances 
            otherwise exist in the absence of NFA membership.

    In short, this wide array of rules underscores the FCM's important 
role as ``gatekeeper'' and one that supports market stability. We 
review the FTX Proposal with the understanding that the role of FCMs, 
and the consequent protective function entrusted to the FCM by the CEA 
and its regulations, are key to the proper functioning of the clearing 
system.
B. The Interdependent Existing Regulatory Framework Applicable to the 
        Derivatives Clearing Business
    As previously noted, the CFTC's rules were written around a 
framework that separates key functions into different entities, or 
registration categories. Merely collapsing various entities into a 
single entity does not necessarily mean that the rules applicable to 
the surviving entity satisfy the wide range of protections embedded 
throughout the preexisting, multi-entity structure. The existing FTX 
DCO is certainly subject to numerous regulatory requirements. Having 
said that, the CFTC rule set governing DCOs and DCMs was written with 
the understanding that an FCM would inevitably discharge certain key 
functions within the DCO/DCM framework. This presupposition means that, 
even if a DCM observes all its requirements, it cannot be said that all 
necessary protections, presumably to be fulfilled by an FCM, will be in 
place. By way of example, the DCM rules (CFTC Reg.  38.1101) require 
that a DCM that is also a DCO have ``adequate financial resources.'' 
However, this requirement does not include a methodology to determine 
what constitutes ``adequate financial resources'' for a DCM and a DCO 
that would also maintain responsibilities typically discharged by an 
FCM. Moreover, FCMs supplement many protections today provided by DCMs 
and DCOs; they also act as a buffer for customers if DCMs and DCOs 
experience certain operational errors (e.g., by recognizing application 
of an incorrect risk array in computing firm margin requirements).
    DCOs and DCMs frequently rely upon customer protection rules 
applicable to, and discharged by, FCMs. Indeed, a primary purpose of 
the FCM in the clearing system is to provide critical protections to 
customers. As the entities licensed to solicit directly from customers, 
FCMs are best positioned to provide a range of protections that are 
tailored to the customer in many instances. In addition to governing 
conduct involving direct interactions with the customers, FCM 
regulatory requirements are designed to protect the customer further 
from fraud, systemic failures, and malfeasance. To give just one 
example, NFA Rule 2-29 addresses FCM communications with the public and 
FCM promotional materials. The rule provides specific limitations on 
what FCMs may say about their business, about the future prospects of 
the business, or what could happen to customer funds designated for 
trading. These rules enhance customer awareness of the risks of trading 
and the limits of the markets. Such rules do not apply to a DCM or a 
DCO. In the absence of an FCM in the model set forth in the FTX 
Proposal, we urge the Commission to carefully analyze whether all of 
these important protections can be accommodated.
    Today, the CFTC and DCMs expect FCM members to monitor trading and 
other activity by their customers, and routinely bring disciplinary 
actions against them when they believe they have not sufficiently 
safeguarded against improper conduct under certain facts and 
circumstances.\9\ FCMs are also subject to guidance regarding the 
handling of customer accounts and other financial matters by the Joint 
Audit Committee (``JAC''). Exchanges, such as CME Group, impose similar 
supervisory obligations upon their clearing members.\10\
---------------------------------------------------------------------------
    \9\ See, e.g., In the Matter of Advantage Futures LLC, et al., CFTC 
Docket No. 16-29 (2016).
    \10\ See, e.g., CME Rule 950 (a clearing member must ``adopt and 
enforce written supervisory procedures pursuant to which it will 
supervise in accordance with the requirements of [CME] Rules and the 
CEA and CFTC Regulations thereunder, each customer's account(s)'').
---------------------------------------------------------------------------
    Given the presumed interdependence of entities functioning within 
the clearing ecosystem, we urge the Commission to review carefully the 
protections presumed and subsumed within the existing clearing model 
and to ensure that these protections are also incorporated, where 
necessary, into the proposed FTX model.
C. Unique DCO Risk Issues Raised by the FTX Proposal
    We note that certain existing DCOs already operate without an FCM 
structure. Having said that, they are different from the FTX Proposal 
in key respects--most particularly, with regard to FTX's unique 
combination of retail participation, the auto-liquidation mechanism and 
leveraged margin trading. Thus, we submit that the FTX Proposal 
requires a thorough analysis by the Commission, to the extent that the 
model might lack and thereby do away with certain of the protective 
elements built into the system. At a minimum, we submit that any 
approved model should provide at least the status quo level of customer 
protections and market integrity protections as exist in the 
traditional clearing model, and may very well warrant a heightened 
level of protections, given both its unique market design and the 
likely participants in the market.\11\ We take this opportunity to 
consider some of these unique risk management features of the FTX 
Proposal and the FTX business model, to identify certain issues that we 
believe merit closer consideration.
---------------------------------------------------------------------------
    \11\ As noted by Chair (then-Commissioner) Behnam at the March 11, 
2021 GMAC meeting: ``But certainly, as a general matter, whether it is 
clearinghouse risk or margin issues, and certainly today's discussion 
around retail trading, these are the most ripe and important issues 
that I think we all care about in our market.'' See https://
www.cftc.gov/sites/default/files/2021/04/1618338631/
gmac_transcript031121.pdf.
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1. Rulebook and Other Document Descriptions of FTX Default Procedures
    Chapter 14 of the LedgerX Rulebook captures many of the unique 
features of the FTX model in its description of default procedures. 
First, Rules 14.1 and 14.2 define a default on the platform and 
authorize FTX to liquidate, terminate or suspend the open contracts of 
a participant meeting that definition of default. The Rule provides for 
liquidation except in certain cases, such as a participant-to-
participant transfer, FTX auction, or if the Risk Management Committee 
determines that liquidation is not required to protect the financial 
integrity of FTX. It is not clear from the Rulebook or from discussions 
with FTX under what circumstances a liquidation would be avoided for 
these reasons. We note that in the event the company decides not to 
liquidate a position, it is permitted to enter into hedging 
transactions to reduce the risk to FTX of not liquidating.
    Second, should the liquidation determination be made under 14.2, 
FTX has, at its discretion, several options to close out the position 
pursuant to Rule 14.3. As a first step, Rule 14.3.A permits the company 
to liquidate into the central limit order book. However, if the company 
determines that it is not ``practicable or advisable under the 
circumstances in light of liquidity, open interest, market conditions, 
or other relevant factors'' three options are available for close out:

   transfer of the positions to a BLP (Rule 14.3.B)

   partial tear up of positions of participants not in default, 
        also referred to as the Secondary BLP (Rule 14.3.C)

   auctions pursuant to default auction rules in place at the 
        time, or pursuant to other ``alternative auction'' rules 
        determined appropriate by FTX.

    The choice among these options appears to be entirely up to FTX.
    Only if and after these four options (auto-liquidation and then the 
other three back up choices of transfer, partial tear up or auction) 
are determined to be ``not practicable or advisable under the 
circumstances in light of liquidity, open interest, market conditions 
or other relevant factors,'' can the company turn to the default 
resource of the FTX guaranty fund. (Rule 14.3.E). After exhausting the 
guaranty fund, FTX may elect, in the following order, Variation Gains 
Margin Haircuts and Full Tear Up. Finally, the rules make clear that 
regardless of which method of closeout is utilized, the company may 
demand from the closed-out customer full payment for all losses, 
liabilities and expenses incurred in these steps. (Rule 14.4).\12\
---------------------------------------------------------------------------
    \12\ As noted on pages 8-9 above, the CFTC indicates in RFI 
questions 4 and 5 that it understands FTX to be limiting participant 
financial obligations to margin posted. The Rulebook indicates, on the 
contrary, that participants are obligated for losses beyond posted 
margin, and consequent attorney fees. See, e.g., LedgerX Rulebook Rule 
14.2.B and Rule 14.3.B.
---------------------------------------------------------------------------
    FTX has also filed with the CFTC an ``Exhibit G: Default Rules and 
Procedures.'' The materials do not appear completely aligned with these 
Rule 14 steps. For example, Chapter 14 includes the use of auctions in 
the default process but Exhibit G does not. We assume the Rulebook will 
be updated to reflect the statements in Exhibit G and until we have 
clarity on the sequence of default procedures, it is difficult for us 
to fully assess the adequacy of the default process.
    Nevertheless, we provide a few preliminary comments on the 
Rulebook. First, one of the key purported benefits of the FTX Proposal 
is that ``FTX does not propose to mutualize losses among its 
participants in its default waterfall.'' (See CFTC Request for Comment 
on FTX Request for Amended DCO Registration Order, March 10, 2022, at 
2) (emphasis added). However, Variation Margin Gains Haircutting 
(``VMGH'') is listed as a default resource in both DCO Exhibit G and 
Rule 14.3.F. This tool conflicts with FTX's assertion that it does not 
mutualize loss, insofar as VMGH is a form of loss mutualization. 
Further, we question the appropriateness of a tool like VMGH in the 
context of clearing for less sophisticated retail customers, who may 
not comprehend how it operates. Although traditional CCP rulebooks may 
include these tools, they reserve VMGH as the final step in recovery 
and there are guard rails around the use of these tools. For example, 
when VMGH is permitted, it is subject to regulatory oversight and 
strict limitations upon both the duration it may be used and/or the 
maximum dollar value of losses that can be imposed.
    Furthermore, the use of Partial Tear Ups in Rule 14.3.C--also a 
loss mutualization tool--is ahead of the use of the FTX Guaranty Fund 
in the waterfall.\13\ That non-defaulting participants could be subject 
to Partial Tear Ups does not seem compatible with the FTX assertion 
that it does not mutualize losses. At the very least, participants 
should be made aware and rules on application of this tool should be 
further disclosed. Moreover, it is unclear whether FTX expects retail 
users to participate in the auctions, and whether such participants 
would require different procedures for a successful auction.
---------------------------------------------------------------------------
    \13\ One possible reading of Rule 14.3.C is that only Secondary 
Backstop Liquidity Providers, presumably parties who have executed 
Liquidity Provider Agreements, would be eligible non-defaulting 
participants for partial tear up. We submit that this is not clear in 
the rules and not referred to in Exhibit G. If this is the way the 
tool's use is envisioned, the Rulebook and Exhibit G should be updated 
to reflect that.
---------------------------------------------------------------------------
    Given the business model and category of market participants 
targeted by FTX, we would strongly urge the CFTC to consider whether 
these tools are appropriately placed in the waterfall and whether they 
are appropriate at all for this model.
2. Auto-Liquidation
    FTX rests its model on the risk management benefits of its auto-
liquidation feature. At the outset, we note that the FTX Rulebook makes 
clear that auto-liquidation is only one of the options available to FTX 
in dealing with a customer with insufficient margin. As detailed above, 
Rule 14.2 would permit FTX to decide whether to conduct an auction, or 
to maintain defaulted accounts on its own book and to enter into 
additional transactions on its platform to hedge its own risk in those 
positions. Given that FTX may make its own determination as to whether 
or not to liquidate, we urge the Commission to seek more information on 
threshold circumstances that could result in risk being held by FTX 
itself.
    Should FTX decide to proceed with a liquidation, FTX proposes to 
auto-liquidate the participant if there is insufficient Initial, 
Maintenance or Variation Margin. As we know, multiple defaults often 
happen during volatile markets. Although FTX has asserted that its 
offshore entities has successfully handled multiple defaults on 
volatile days, the model has not been tested with large institutional 
market participants.
    The notion of auto-liquidation presumes a willing and able 
counterparty and thereby itself depends on sufficient liquidity. Even 
if an auto-liquidation model can operate effectively, it is not clear 
that the ten percent auto-liquidation model would be appropriate in all 
market liquidity scenarios. Thus, we submit that FTX should justify the 
decision to liquidate ten percent of a position automatically, as 
opposed to some other number based on market conditions.
    As the Commission is well aware, there are both products and 
certain time periods when liquidity ebbs, sometimes significantly. 
Volatility in the markets can also exacerbate liquidity crunches. The 
24/7/365 nature of the FTX model only heightens these concerns, as this 
will increase the probability that auto-liquidation will be triggered 
at times of low liquidity (such as nights, weekends and extended 
holiday periods). Amplifying these concerns about liquidity are the 
potential limitations on the ability to ``top up'' margin in accounts 
during off hours. Meeting a margin call in fiat currency requires banks 
to be open, notwithstanding that the market is open 24/7. This is not 
the world we live in today.
    Furthermore, during market turbulence, immediately liquidating a 
large participant during cascading markets can be pro-cyclical, add to 
market volatility and may cause further defaults. In other words, a 
directional market subject to an auto-liquidation model has a tendency 
to be very pro-cyclical and, thereby, this model could exacerbate 
financial instability in a time of heightened market volatility. This 
impact could very well be worse in the retail context, in which retail 
participants often move in packs and the effect of liquidating hundreds 
of retail accounts at once could be enormous. For all these reasons 
(and others), an FCM and a DCO have a duty to consider market 
conditions before liquidations. The current clearing model requires 
establishment of a clearly defined default management strategy with 
provisions for hedging and portfolio splitting prior to liquidation to 
ensure that close-out happens at the best possible price. Expert 
judgment is relied upon with the default management group or DCO risk 
management staff in some cases implicitly evaluating market conditions 
prior to taking action to liquidate positions. This second line of 
defense may be even more important in the context of crypto products, 
which have shown significant intraday and overnight volatility. This 
would impact size of losses depending on when positions are closed. In 
contrast, in an objective, algo-driven automatic liquidating model, no 
such consideration can be given. Without this subjective requirement, a 
wholly automated function could in fact exacerbate market turbulence 
and create systemic risk.
    Moreover, FTX's model--which marks-to-market every 30 seconds and 
uses real-time auto-liquidation if a participant does not maintain 
sufficient margin--raises additional questions regarding possible 
unintended consequences. FIA recognizes that maintaining required 
margin on deposit with FTX along with an auto-liquidation mechanism can 
limit FTX's exposure to client default risk, but submits that this 
structure interjects different risks that should be fully evaluated to 
ensure that market integrity is not compromised. For example, does 
auto-liquidation pose different or additional risks for market 
manipulation that are not present outside of this proposed model? Given 
the retail participation in the digital assets markets, we suggest that 
the CFTC should consider whether market manipulators will be able to 
trade on directional information affecting such assets and the expected 
retail reaction. Recognizing that other intermediated exchanges or 
those that allow only fully collateralized contracts currently list 
cryptocurrency futures, we suggest further that the CFTC should 
consider whether approving this disintermediated, margined model might 
create unwanted arbitrage, information asymmetry, market manipulation 
or instability scenarios with respect to those other markets.
    For all these reasons and others, we submit that the CFTC should 
consider whether FTX's proposed auto-liquidation feature would 
potentially cause market disruption not found in other models. SROs 
have sanctioned members for issues raised by similar auto-liquidation 
models:

   Saxo Bank: https://www.cmegroup.com/notices/disciplinary/
        2017/03/CME-15-0158-BC-SAXO-BANK-AS.html

   Interactive Brokers: https://www.cmegroup.com/notices/
        disciplinary/2020/09/CME-15-0303-BC-INTERACTIVE-BROKERS-
        LLC.html

    We suggest that FTX explain how its model can be distinguished from 
these cases, and how it would enforce its own rules prohibiting conduct 
by participants that constitutes a ``disruptive trading practice.'' See 
Rule 8.3(N).
    We also note that the model relies heavily upon the execution of 
algorithms. From the information provided, we are unclear what controls 
exist with respect to automated algorithms integral to the risk 
management program of the FTX Proposal. Given the algorithm's 
importance, we believe the CFTC should provide guidelines and resources 
to assess its dependability.\14\
---------------------------------------------------------------------------
    \14\ For example, after years of market review and debate on how 
best to address risks associates with electronic trading, the CFTC 
adopted CFTC Rule 38.251 as part of its Electronic Trading Risk 
Principles, which requires DCMs to implement rules to prevent, detect 
and mitigate market disruptions associated with market participants' 
electronic trading as well as to subject all electronic orders to the 
exchange's pre-trade risk controls. This rule, and the intense market 
discussions leading up to it, did not contemplate where, as proposed by 
FTX, the electronic trading is being done by the DCO's own auto 
liquidator.
---------------------------------------------------------------------------
    The efficacy of FTX's risk management framework hinges on its 
ability to automatically liquidate under-margined customer positions. 
We believe that the CFTC should consider whether the auto-liquidation 
feature warrants additional disclosures so that participants, 
particularly retail participants, understand the risks involved with 
participating at FTX as a member. We submit that, among others, the 
risks about which member/retail participants should be made clearly 
aware are:

   Upsetting planned risk management, hedging, or arbitrages if 
        positions are closed out unexpectedly and without warning.

   Effect of delay in providing additional maintenance margin 
        because of banking closures (normal weekend, or even extended 
        holiday period considering the 24/7/365 nature of operations, 
        for example) or delays in transmittal, including those not the 
        fault of the customer.

   Effect of failure to pay maintenance margin.

   Possible adverse results of a forced auto-liquidation, 
        including responsibility for any losses resulting from auto-
        liquidation, and liability for resultant legal fees.

   Possible irreversible auto-liquidation prompted by an FTX 
        operational error caused either by FTX or due to a fat finger 
        error entered by a market participant.
3. Liquidity Providers
    FTX also contemplates the use of a BLP Program to provide 
flexibility to close out customer positions that are under-margined. 
The FTX Rulebook defines a Liquidity Provider as one who enters the 
Liquidity Provider Agreement, a document which is not provided for 
review with this RFI. Rule 4.3 makes clear that Liquidity Providers may 
receive incentives and benefits, but it is not clear what the Liquidity 
Provider is obligated to do in exchange for those benefits.
    The Close-Out Rules provide further explanation about the Liquidity 
Providers and divide them into two types: ``Backstop Liquidity 
Providers'' and ``Secondary Backstop Liquidity Providers.'' It appears 
from the Rulebook that both types of Liquidity Providers will enter 
into a participant agreement. We gather generally from the rules that 
BLPs are those that accept customer defaulted positions through 
transfer and Secondary BLPs are those that agree to partial tear up of 
offsetting positions.\15\
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    \15\ However, it is not clear to us from the Rulebook that Partial 
Tear Ups would be limited to those parties who have signed a Liquidity 
Provider Agreement. We note that Partial Tear Ups are used in Rule 
14.3.C with reference to Secondary Backstop Liquidity Providers, 
suggesting possibly that only those parties would be eligible for a 
non-defaulting position tear up; but the rule does not explicitly limit 
the tool to those parties.
---------------------------------------------------------------------------
    We lack information we consider necessary to an adequate assessment 
of the effectiveness of the Liquidity Provider program. The terms of 
the agreements with the BLPs are highly relevant to an effective 
determination of key matters, including: the conditions under which 
these back-up providers would act; the volumes that they would be able 
to support and whether there are explicit limits on size of positions 
that they would liquidate; and the price at which liquidation will be 
undertaken, i.e., whether it is a price determined by the BLPs based on 
their perception of market conditions and positions to be absorbed, or 
whether it would be a price determined by FTX itself and the incentives 
in place to ensure the BLPs would act in the best interests of the 
market.
    Furthermore, neither Chapter 4 nor Chapter 14 of the FTX Rulebook 
seem to adequately address the process for assigning positions to BLPs. 
At the very least, we would expect transparency on the minimum number 
of BLPs necessary; the minimum requirements to become a BLP; and 
whether the BLPs are obligated to accept positions. Furthermore, it is 
not clear from the public documents how FTX will ensure at all times 
that BLPs are available and have committed resources sufficient to 
support the model. Additionally, BLPs are allotted positions based on 
margin on deposit. What ensures that BLPs won't remove margin or reduce 
it just during the time the DCOs may need to assign positions of a 
defaulted member, when liquidity is needed most? Further, while it 
appears that FTX may require the BLPs to accept trades at a haircut to 
current market price, this raises the concern that liquidation of large 
volumes at a discount to the market price could itself lead to a 
further downward spiral of prices such that the liquidation process 
would effectively only stop when the participant is fully liquidated.
    Finally, we understand that at least one entity owned by FTX would 
participate in the Liquidity Provider Program. The Commission should 
carefully consider whether to permit an entity owned by FTX to serve as 
a BLP, which could create the potential for wrong-way risk and 
conflicts of interest.
    We lack the clarity on the Liquidity Provider Program to evaluate 
whether it can mitigate the shortcomings of an algorithmically-driven 
auto-liquidation program. We urge the Commission to seek additional 
information on the use of the Liquidity Provider Program before it 
concludes that the close-out procedures envisioned sufficiently protect 
customers and the market itself.
4. Financial Integrity of the FTX Clearinghouse
    As noted above, critical to the functioning of futures markets is 
the financial integrity of the clearing house. Most DCOs have their own 
financial requirements and, when a clearinghouse processes margined 
products, the DCO's capital is ``backstopped'' in waterfalls by its FCM 
clearing members. These backstops may include guaranty fund 
contributions and special assessments levied upon the FCMs. These 
financial resources are designed to comply with the Principles for 
Financial Market Infrastructure, (``PFMIs'') jointly issued by the 
Committee on Payments and Market Infrastructure (``CPMI'') and the 
International Organization of Securities Commissions (``IOSCO''), which 
require (in relevant part) ``rules and procedures [ensuring] that FMI's 
. . . replenish any financial resources that the FMI may employ during 
a stress event, so that the FMI can continue to operate in a safe and 
sound manner.'' See Principles for Financial Market Infrastructure, 
April 2012 at 37, Principle 4, Key Consideration 7.
    In its Proposal, FTX submits that its combination of automatic 
liquidations, BLPs, conservative margin requirements (for the initial 
referenced products, derivatives based on BTC and ETH), and a $250 
million minimum self-funded guaranty fund provides an adequate and 
appropriate substitute for the financial requirements set forth in the 
traditional clearing model (See CFTC Reg.  39.11). The CFTC either 
should disclose details about this to the public, or conduct its own 
analysis to satisfy itself that the relevant math supports this 
proposition. We submit that the chart and accompanying explanation in 
the February 8, 2022 FTX letter to DCR Director Clark Hutchison and the 
April 15, 2022 article posted on FTX's website, https://
www.ftxpolicy.com, entitled ``Understanding FTX's Guaranty Fund 
Sizing'' (``FTX Letter'') does not provide sufficient quantitative 
analysis, including assumptions behind such analysis, to verify the 
proposition.
    Although FTX, in the FTX Letter, suggests that it will increase its 
guaranty fund over time, there is no requirement that it do so, and the 
formula pursuant to which this would presumably occur is not clear. 
Thus, while FTX has stated privately it will restore its guaranty fund 
if it decreases below $250 million, we ask the Commission to consider 
how FTX's commitments can be mandated, if at all, by the CFTC, whether 
FTX should be required to maintain segregated resources to support such 
replenishment, and if so, how large these segregated resources should 
be. Furthermore, the guaranty fund is placed ahead of VMGH, a loss 
mutualization tool and, finally, full tear up, in the default 
waterfall. In light of the representations made by FTX that it has 
funds sufficient to support a clearing model without loss mutualization 
tools, we query why the guaranty fund is limited to $250 million. We 
urge the Commission to carefully consider the appropriate levels of 
capitalizations for FTX to ensure it has the ability to continue to 
operate in a safe and sound manner.
    We also seek clarity on the capitalization for the higher risk of 
non-default losses (``NDLs'') at FTX. The algorithmic manner in which 
positions are proposed to be liquidated suggests high technological 
reliance and potential vulnerability to cyber-attacks. It is therefore 
imperative that FTX provides greater disclosures around the framework 
to manage technology and cyber risk and its approach to mitigating risk 
related to NDLs.\16\ More broadly, the framework suggests a need for 
significantly higher levels of CCP capitalization levels to address 
default and non-default losses--in the absence of robust capitalization 
levels, there is a significantly higher risk that FTX may run out of 
resources. We would urge the CFTC to require a meaningful capital 
framework that aligns incentives and ensures adequate capitalization to 
address all aspects of both default and non-default losses.
---------------------------------------------------------------------------
    \16\ FTX is well aware of the potential of crypto trading platforms 
to be hacked. In August 2021, Liquid Group Inc. (``Liquid''), a crypto 
trading platform, announced that FTX Trading Ltd. ([``]FTX Trading'') 
would provide $120 million in debt financing after Liquid was reported 
to have sustained a $100 million hack; this deal apparently closed in 
April 2021: https://blog.liquid.com/liquid-ftx-dept-financing. In 
February 2022, Liquid announced FTX Trading would acquire Liquid and 
all of its operating subsidiaries: https://blog.liquid.com/acquisition-
liquid-ftx.
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5. Traditional DCO Default Resources
    The proposed model is distinctly different in its scoping of 
default resources than the current DCO models that exist. Accordingly, 
analysis of the default resources requires more than just a 
straightforward calculation, and instead merits close consideration of 
the size and the purpose of resources available. As compared to 
currently existing DCO models, the proposed model is more concentrated 
and built on certain assumptions that are thus far untested in the 
United States. We urge the Commission to evaluate whether the proposed 
model includes the necessary protective layers for margined derivatives 
contracts. More broadly, we note that the PMFIs require that ``[a]n FMI 
should establish explicit rules and procedures that address fully any 
credit losses it may face as a result of any individual or combined 
default among its participants with respect to any of their obligations 
to the FMI.'' Principles for Financial Market Infrastructure, April 
2012 at 37, Principle 4, Key Consideration 7 (emphasis added). 
Therefore, the standard for default resources should not just be to 
check for a sufficient default fund in comparison to the traditional 
model, but should holistically evaluate the adequacy of resources to 
cover tail risk.
    Whereas FTX is proposing to fund all of the available default 
resources itself, existing DCOs rely on several independent and diverse 
sources. Consistent with the regulatory approach of distributed 
responsibility, the default resources are also built on a framework of 
distributed responsibility for loss absorption and deflection. We urge 
the Commission to fully consider the implications of the concentration 
risk created by FTX's unique approach.
    Traditional DCOs include several layers of resources, namely, 
contributions to the default fund and limited assessments for 
replenishment, that appear not to be accounted for in the proposed 
model.
    With respect to the sizing of its default fund, the Proposal raises 
several questions. First, FTX has proposed to size its default fund to 
cover a default by up to three participants (Cover-3) that create the 
largest exposure for the DCO if Cover-1 or Cover-2 does not 
collectively account for 10% of the initial margin on deposit. Its 
Guaranty Fund will be funded by $250 million of its own capital, and 
purportedly would cover any losses incurred on positions beyond those 
accepted by BLPs and to reimburse those providers if necessary. 
However, the proposed framework does not set a minimum coverage 
requirement as a percentage of the cleared market share.
    We note that in the traditional model, the default resources are 
not limited to the contributions of the clearinghouse itself. That 
amount is supplemented by contributions by the clearing members. In 
fact, the member contributions far outweigh the so-called ``skin in the 
game'' money contributed by clearinghouses. For example, CME's ``base'' 
service which covers all of its futures and options, has three layers 
of protections: $100 million in skin in the game, $5.9 billion in 
member contributions and we estimate $25 billion available through 
members assessments. Even smaller exchanges with more concentrated 
product ranges have amounts that dwarf the FTX Proposal: Nodal Clear 
has $20 million in skin in the game, $204 million in members 
contributions, and we estimate $838 million via assessment 
authority.\17\
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    \17\ FIA estimated the assessment amounts based upon a worst-case 
scenario in which two of the five largest members defaulted at the same 
time and the losses were so large that the clearinghouses applied the 
maximum assessments to replenish the default fund. In such a scenario, 
the assessment powers would be applied only to the surviving members of 
the clearinghouse, and the amount would be capped at a multiple of the 
pre-default contributions of those surviving members. That multiple is 
5.5 at both CME and Nodal Clear.
---------------------------------------------------------------------------
6. FTX Default Resources
    We understand that FTX's proposed model is extrapolated from CFTC 
Reg.  39.11(a)(1)'s requirements for sizing obligations, based upon 
the traditional default scenarios used by DCOs that have clearing 
members carrying customer business, suggesting a large size for a 
defaulting ``member.'' To account for the possibility that its members 
may be smaller in size, FTX would size its resources using a similar 
scenario that purports to be more conservative. From the materials 
provided, it is not clear that the derived formula pursuant to which 
FTX would size its resources is adequate.
    Under Rule 39.11, sizing a Cover-1 default includes the largest 
clearing member including all of its house business and customer 
business. This proxy of the largest one or two clearing members 
defaulting in a traditional CCP is not comparable to the largest one or 
two direct participants failing. The Cover-1 or -2 model was not 
developed for the failure of single clients or retail participants but 
is designed for the failure of FCMs (including the required close out 
of their clients). Effectively, the sizing of the default resources in 
a non-intermediated retail market based on loss of its largest three 
participants will be significantly smaller. In contrast, the 
assumptions around the default of an FCM, generally including its house 
and its client positions, yields a significantly higher loss that must 
be absorbed by the resources of the CCP. We therefore worry that 
covering only one or two defaulting participants in the FTX scenario 
would be woefully inadequate.
    Furthermore, the entities considered in this Cover-1 or Cover-2 
default scenario are purposefully well funded and highly regulated. In 
other words, the current system is built to prevent a default in the 
first place given the capital requirements imposed on the clearing 
members. Most FCMs are required to hold capital equal to 8% of the 
total risk margin requirement for positions it and its customers carry. 
As of December 2021, FCM capital held amounted to $175 billion.\18\ We 
urge the Commission to consider the embedded protections in the current 
model that ensure well capitalized participating clearing members in 
the first place in determining whether the Cover-1, Cover-2 or Cover-3 
default arrangements are even relevant to the FTX model which assumes 
very different direct participants.
---------------------------------------------------------------------------
    \18\ This includes FCMs Adjusted New Capital and Excess Net Capital 
reported on the CFTC's Financial Data for FCMs report for the end of 
December 2021. See infra, discussion of FCM capital requirements at p. 
6. CFTC Reg.  1.17(a)(1) requires the higher of: $1 million (or $20 
million for an FCM swap dealer); 8% of its risk margin requirements 
(plus 2% of its uncleared swap margin, if the FCM is a swap dealer); 
net capital required by any registered futures association; or, for 
FCMs that are securities broker/dealers, the net capital required by 
SEC Rule 15c3-1(a).
---------------------------------------------------------------------------
    In markets where positions are highly correlated, we believe that 
failures may have a cascading effect that should be assumed in market 
design. The effect of underestimating this potential cascading effect 
is that the modeling is neither extreme nor plausible. ``Cover-3'' is 
based on an assessment that the default of the three largest clearing 
members is highly unlikely. What analysis exists to determine how many 
retail FTX participants are likely to default simultaneously during a 
catastrophe? We urge the Commission to consider whether the proposed 
reference to covering up to three participants in the proposed model is 
really a plausible proxy for the types of losses that could be 
incurred.
    We further invite the Commission to make public several additional 
pieces of information to help the market understand the appropriateness 
of the Proposal, including:

   How often will the size of FTX's Guaranty Fund contribution 
        be recalibrated?

   How does FTX intend to replenish its resources in case the 
        Guaranty Fund has been used in part, and according to what 
        schedule?

   Does FTX maintain a reserve fund ensuring additional and 
        dedicated funding, assuming any replenishment would come from 
        FTX's own capital?

   Given the lack of ability to make assessments, what other 
        resources are available in the FTX waterfall should the Cover-3 
        resources be insufficient?

   How will FTX monitor the use of the Default Resources across 
        closeout providers to ensure the default resources are not 
        exceeded while performing the closeout(s)?

    The CFTC has spent years of time, attention, and thought upon CCP 
resilience, recovery, and resolution since the enactment of the Dodd-
Frank Act. So have other U.S. financial regulators, and the 
international financial regulatory community through the CPMI-IOSCO and 
FSB. They have established principles and guidance, by which even many 
non-systemically important U.S. DCOs voluntarily abide. We ask the CFTC 
to ensure these principles are applied to this Proposal.
    Given the interconnectedness of global markets, and the fact that 
products covered by the FTX Proposal can potentially be extended to 
other, more traditional asset classes cleared at other CCPs, what 
happens on one DCO (or CCP) is often not limited to that particular 
clearinghouse, and can have broader financial stability consequences. 
See Sklar, Federal Reserve Bank of Chicago, Systemic Implications of 
Access to Central Bank Accounts for CCP (found at https://
www.chicagofed.org//media/publications/working-papers/2020/wp2020-21-
pdf.pdf). Thus, the underlying principles governing application of law 
and policy to derivatives clearinghouses are of widespread, fundamental 
importance to the markets.
7. Margin Calculations and Handling
    Although FTX indicates it will use a VAR model with a minimum 1-day 
margin period of risk (MPOR), there is no modeling available for 
review. The regulatory minimum for margin requirements is a model that 
covers risk with a confidence interval of 99% based on a one day MPOR. 
We note that the information available on the FTX margin framework is 
fairly limited with no discussion of concentration margin and how it is 
charged. Furthermore, the Proposal does not state whether FTX would 
maintain position limits or charge additional margin to prevent 
positions from becoming outsized, or provide detail on the efficacy of 
the anti-pro-cyclicality tools used by FTX. Considering the volatility 
of crypto products, anti-procyclicality tools are critical to ensure 
the integrity of the marketplace. We therefore submit that the CFTC 
should carefully consider FTX's margin modeling with these questions in 
mind.
    It is also worth considering that today, FCMs often challenge the 
adequacy of margin rates assessed by DCOs. When FCM proprietary models 
indicate that DCO margin rates inadequately cover potential market 
moves, FCMs may charge premiums to DCO margin rates, protecting 
themselves from a potential default by their customers and, thereby, 
also protecting the customer asset pool and the DCO. It is not clear 
who will similarly evaluate and mitigate against potential under-
margining by FTX.
    Finally, we note concerns about using customer's margin to fund 
FTX's business needs. The proposed FTX Rulebook includes a provision in 
Rule 7.G.5. that permits FTX to use participant initial margin and 
maintenance margin for meeting the Cover-1 liquidity needs of FTX. It 
is not clear how this rule is compatible with requirements that the DCO 
segregate customer funds from its own funds, and it merits closer 
consideration. Given the lack of margin calls, we expect that 
participants may want to overfund accounts in order to avoid 
liquidation. We believe it is crucial for the CFTC to make clear that 
excess participant funds are to be segregated at all times from the 
DCO's funds.
8. Event of Bankruptcy
    FIA notes that it is also not clear what would happen should FTX go 
bankrupt. For instance, pursuant to Subpart C of applicable bankruptcy 
rules (CFTC Reg.  190.11 et seq.), all property in this model is 
member property. Thus, if there is a shortfall in the member account, 
all Kalshi collateral (100% collateralized products cleared by FTX) and 
all FTX leveraged products will be in the same class. The impact of the 
single member account class in the Part 190 Regulations is that fully 
collateralized Kalshi customers would subsidize the losses of FTX 
margined customers in an FTX bankruptcy.\19\
---------------------------------------------------------------------------
    \19\ The CFTC Bankruptcy Regulations have different subparts for an 
FCM bankruptcy (Part 190, Subpart B) and a DCO bankruptcy (Part 190, 
Subpart C). Various parts of the CFTC Bankruptcy Rules have different 
definitions for FCMs and DCOs. For example, the definition of ``non-
public customer,'' ``public customer,'' and ``customer'' all differ 
between an FCM and a DCO. Thus, being a customer of an FCM versus being 
a direct member of a DCO may have important implications in a 
bankruptcy scenario. The Commission should investigate and fully 
understand these potential implications of the FTX model.
---------------------------------------------------------------------------
    Given that participants would likely wish to overfund the account 
to avoid auto-liquidation, we question what would happen to those funds 
in a bankruptcy. With these apparent gaps and potential issues, we urge 
the Commission to consider whether the Part 190 Regulations fit and 
accommodate the proposed expansion of the DCO offering pursuant to the 
FTX Proposal.
9. Issues in the Proposed Governance Framework
    The FTX Proposal raises a fundamental concern about governance. As 
the CFTC knows, the cleared market is intentionally set up with checks 
and balances within the system. The DCOs have an oversight function of 
the FCMs; the FCMs participate in checking the risk management of the 
DCOs; regulatory authorities take feedback from both on proper risk 
management of the system as a whole; and a comprehensive, principled 
regulatory regime emerges and functions. Given the expected initial 
makeup of its member base (i.e., primarily retail participation), we 
would recommend greater clarity on how FTX expects to obtain meaningful 
input on its risk management, legal and operational practices, and 
governance from its market participants. Further, we query how FTX will 
avail itself of market expertise which, at intermediated models, is 
often provided through default management committees represented by 
FCMs/brokers.
    FIA believes that the oversight plans for the proposed model also 
need more clarity. For example, it is not clear which entity or 
entities at FTX will act as the Self-Regulatory Organization (``SRO''). 
The Rulebook defines SRO as ``includ[ing] a DCO,'' but DCOs are not 
themselves SROs, see CFTC Reg.  1.3. We urge the Commission to further 
consider whether FTX could effectively and fairly perform all the 
functions of an SRO, including whether it could audit its own entity, 
and whether it would adhere to and participate in the Joint Audit 
Committee and its standards.
    A related concern is the frequency of defaults of participants, and 
FTX's subsequent market activity in its own market. In all likelihood, 
both the average number of defaults, and the average number of 
simultaneous defaults, will be higher than under a traditional clearing 
model. The resulting position liquidations, whether algo-driven or not, 
will cause FTX itself to become a substantial market player in the 
market it operates. This level of active market participation by the 
CCP would be unseen not only with respect to CCPs under the traditional 
market, but also with respect to any traditional broker/retail 
aggregator. This raises concerns with regard to the market structure.
    One of the primary sources of transparency for CCPs is the PFMI's 
Public Quantitative and Qualitative Disclosures. We strongly encourage 
FTX to issue Public Quantitative Disclosures as set forth in IOSCO's 
PFMIs. This might seem a logical step in ensuring the integrity of the 
FTX market.
10. Ownership
    FTX shares common ownership with large trading firms doing business 
in the cryptocurrency markets. This is not unique to FTX. In fact, many 
trading venues are partly owned by market participants that have a 
direct interest in helping the venue grow. There are, however, some 
potential conflicts of interest in these arrangements and it is 
important to establish protections to ensure a level playing field. 
There is a lack of transparency into how the firms with common 
ownership with FTX participate in the markets that it operates and what 
advantages they might receive relative to other trading firms that do 
not share common ownership. There is also a lack of information into 
how these firms participate in the liquidation process and the backstop 
liquidity program.
    As the CFTC considers this issue, we urge the Commission to look to 
the precedents set in the agency's implementation of the Dodd-Frank 
Act. During that process, the CFTC devoted entire sets of rules to both 
internal and external risk management with respect to entities that 
participate within the clearing portion of the business on the one 
hand, and within the dealing portion of the business on the other. At a 
minimum, we would expect that similar protections be required to ensure 
that the model does not create embedded advantages for certain 
participants. Additionally, the CFTC may want to consider conditions 
that prevent conflicts.
11. Impact on Non-Crypto Markets
    As noted above, the FTX model as submitted to the Commission could 
apply to any type of future, option, or centrally cleared derivatives 
product. The simultaneous availability of both the existing DCM/DCO 
model and the proposed model for the same products could create unique 
issues that we urge the Commission to evaluate. For example, the 24/7/
365 nature of the FTX model, compared to the current model of regular 
trading hours during weekdays, creates the potential for disparities 
among the exchanges and potential impacts to price formations, trading 
behaviors, including disruptive trading behaviors. In addition, the FTX 
model contemplates liquidating positions in a manner different from 
other models which could have wider market impacts. This could create 
opportunities for unwanted and possibly disruptive arbitrage between an 
auto-liquidated market and traditional markets listing the same 
products. The Commission should consider what consequences the 
simultaneous running of these different models could have on the system 
as a whole.
III. Conclusion
    We appreciate the opportunity to provide the foregoing comments on 
the FTX Proposal. We hope it is clear from this letter that FIA 
strongly believes in the fundamental regulatory principle,: same 
business, same risks, same rules, used most recently in President 
Biden's Executive Order on digital assets and cryptocurrencies. FIA 
believes that that principle is appropriate here and its implementation 
will lead to ensuring a level playing field to those providing services 
in the market, and will protect customers by ensuring they receive all 
the components of a robust regulatory framework.
    Thank you again for the opportunity to comment. Please contact 
Allison Lurton, Senior Vice President and General Counsel, at 202-466-
5460, if you have any questions about this letter.
            Sincerely,
            
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
            
Allison Lurton,
General Counsel and Chief Legal Officer.
                                 ______
                                 
   Supplementary Material Submitted by Christopher S. Edmonds, Chief 
          Development Officer, Intercontinental Exchange, Inc.
          Mrs. Cammack. Well, thank you. I have only got about 30 
        seconds left and, Mr. Edmonds, I have a very lengthy question 
        for you, so I am going to have to submit it for the record.
          * * * * *
          Mrs. Cammack. Well, thank you, Representative Spanberger. I 
        appreciate you yielding your time.
          This is a little bit in the weeds so bear with me here, all 
        right? Mr. Edmonds, you noted that, quote, ``FTX participants 
        lose their positions when markets move against them, and they 
        are liquidated at adverse prices,'' end quote. But some market 
        participants in volatile markets, especially agriculture 
        markets, have noted a similar effect occurs with exchange 
        circuit breakers when trading is halted for the day if prices 
        move too much. In traditional markets, significant volatility 
        plus a halt in trading can result in large unaffordable margin 
        calls at the end of the day. If a participant cannot make their 
        margin call, their position is liquidated and their initial 
        margin is taken up to make up the difference, both closing out 
        a potential hedge and costing the participant their initial 
        margin. But the real kicker comes when the market reopens and 
        the volatile price swings back the other way, returning the now 
        liquidated position to profitability. How different is that 
        scenario under traditional markets from the scenario that you 
        laid out in your testimony? In both cases, the hedger is out of 
        a hedge and collateral.
          Mr. Edmonds. Right, but in the----
          Mrs. Cammack. Sorry, I know that was a mouthful.
          Mr. Edmonds. I will try to be as brief as possible. In the 
        traditional marketplace, you have the FCM in most cases 
        intermediating that relationship. They may be in certain 
        circumstances extending you credit based on their knowledge of 
        your known physical position. And they see that and that is a 
        relationship you have and that is a credit relationship you 
        have with that intermediary. There is no chance for that in the 
        case here.
          I would also say as to the point of volatility, the price in 
        the morning can be very against your position and a few hours 
        later that position before the market session closes can come 
        back into your position. In this case without a liquidation you 
        have already lost that. In the other case you are going to have 
        that position on an overnight when the market closes and the 
        price is set and you are going to determine whether you pay for 
        that or not, and that is going to be between you and the 
        relationship you have with your FCM.
          Mrs. Cammack. Well, and I know I just ran out of time. I 
        would love to get your rebut to that as well just so that all 
        of us can really understand all sides of this.

    Congresswoman Cammack, thank you for your question inquiring 
between the difference in liquidating an agricultural market 
participant hedge and liquidating a transaction under the 
disintermediated model. As I mentioned during the hearing, commercial 
participants have relationships with FCMs who often provide credit and 
other services beyond intermediating the position with the 
clearinghouse. FCMs have discretion to allow, in some cases, commercial 
participants to maintain positions during times of significant 
volatility. For example, in the case of intra-day price volatility, 
there could be significant gains and losses during a trading session, 
however the position may end up being flat at the close. The FCM has 
the discretion to maintain the position and call for additional 
collateral or extend credit to the commercial participant as opposed to 
automatically closing out the position.
    It is also important to note that commercial participants cannot 
have hedges disappear overnight. There is no automatic liquidation in 
an intermediated model. The FCM has a relationship with the customer 
and understands the importance of these positions to the market 
participants hedging their risk. These hedges are too important for 
both for the firm and overall ag economy because, ultimately, these 
hedge transactions can impact consumer price stability. If volatility 
creates untenable margin calls for participants, they may have options 
through FCMs which both preserve positions and avoid putting 
clearinghouses at risk. Under the disintermediated model, a commercial 
participant is faced with two options in a time of stress: (1) Round 
the clock monitoring of a position with remaining risk for liquidation 
depending on capital and speed of price volatility or (2) stranded 
capital and increased costs (all the way to the consumer) for the type 
of cushion necessary to prevent harmful liquidations. This is not a 
positive choice for commercial agriculture hedgers.
    If you need further detail, I am happy to discuss with you or your 
staff personal. I appreciate the question and interest in this 
important matter.
                                 ______
                                 
                           Submitted Question
Question Submitted by Hon. Jahana Hayes, a Representative in Congress 
        from Connecticut
Response from Hon. Terrence A. Duffy, Chairman and Chief Executive 
        Officer, CME Group
    Question. On February 9, 2022, CFTC Chairman Rostin Behnam told the 
Senate Committee on Agriculture that his agency would need a budget 
increase of at least $100 million to take on an expanded role 
overseeing cryptocurrency. Do you believe that the CFTC has adequate 
resources to properly oversee trades and protect consumers as it is 
proposed in the FTX model? If this model were to be adopted, and the 
CFTC not receive a significant budget increase, what do you think the 
outcome would be?
    Answer. The FTX model is a proposal to change market structure that 
would affect the entire industry including the CFTC's duties and its 
allocation of resources. Because the FTX proposal avoids so many of the 
regulatory guardrails, capital requirements, risk monitoring, customer 
protections, and rules against conflicts of interest, it would likely 
place a much greater burden on the CFTC's resources with regard to the 
systemic risks that the application injects into markets as well as the 
customer protection deficiencies in the proposed model. For instance, 
the proposal's reliance on an algorithm to perform auto-liquidations 
that functions 24/7, would likely require CFTC staff to monitor markets 
24/7 in real-time, have experts prepared to step in at a moment's 
notice to protect customer interests, and face the impossible task of 
preventing a nearly instantaneous market event that has the potential 
to spread into broader capital markets. In addition, the Commission 
would lose the efficiencies that the National Futures Association (NFA) 
and the exchanges provide by serving as front line regulators 
monitoring FCM activities. The Commission would likely need additional 
staffing resources to monitor FTX's compliance with any FCM-like 
conditions the Commission may impose, and the multitude of regulatory 
exemptions that would be required for FTX to operate in the manner 
proposed, to assure that FTX is subject to effective oversight of its 
activities and the conflicts of interest embedded in its model.

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