`~~oExctt~~~ UNITED STATES

~°~ SECURITIES AND EXCHAhlGE COMMISSION

S WASHINGTON, DC 20549

~'!~ `~MXX~ 

•2

DIVISION OF

TRADING AND MARKETS

October 28, 2019

Charles G. Cascarilla &Daniel M. Burstein

Pa~os Trust Company, LLC

c/o Andrew Blake, Partner

Sidley Austin LLP

1501 K Street, NW

Washington, DC 20005

Re: Clearing Agency Registration Under Section 17A(b)(1) of the Securities

Exchange Act of 1934

Dear Mr. Cascarilla and Mr. Burstein:

In your letter dated October 25, 2019 (the "Request"),' on behalf of Paxos Trust

Company, LLC ("Paxos"), you request that the Division of Trading and Markets (the "Staff') not

recommend that the Securities and ExchangeCommission (the "Commission") take enforcement

action against Paxos under Section 17A(b)(1) of the Securities Exchange Act of 1934

("Exchange Act")2if Paxos fails to register with the Commission as a clearing agency in

connection with its operation of a securities settlement system referred to in the Request as the

"Paxos Settlement Service."

Based on the Request, we understand the facts to be as follows:3

Paxos is a New York limited purpose trust company that is regulated by the New York

State Department of Financial Services and is a participant of The Depository Trust

Company ("DTC").

Paxos states that the Paxos Settlement Service is a private and permissioned distributed

ledger system that records changes in ownership of securities and cash resulting from

settlement of securities transactions between participants of the Paxos Settlement Service.

In so doing, the Paxos Settlement Service is designed to conduct simultaneous delivery

versus payment settlement of securities and cash for trades submitted to the Paxos

Settlement Service for clearance and settlement.

A copy of the Request is attached.

15 U.S.C. § 78q-1(b)(1).

This list is not intended to capture or describe every aspect of the Request but rather highlight key aspects

of the Request.
Each participant may hold cash and securities in its Paxos Settlement Service account

("PSS account"). A participant will deposit an eligible security into its PSS account by

using free of payment delivery instructions through DTC to transfer the security from the

participant's DTC account to Paxos's DTC account. Upon receipt of a security into

Paxos's DTC account, Paxos will create a digitized security entitlement, which is a

digital representation of the security deposited into Paxos's DTC account. This security

entitlement will be credited to the participant in its PSS account on the Paxos ledger.

Similarly, a participant will deposit funds in U.S. dollars by initiating a wire transfer from

its bank account to the specified Paxos bank account. Upon receipt of cash into a Paxos

bank account, Paxos will create a digitized security entitlement representing U.S. dollars

credited to the participant in its PSS account on the Paxos ledger.

• To meet its settlement obligations, each participant must have the required securities or

operating cash in its PSS account by each trade's settlement date; however each

participant is not required to fund its securities or operating cash in advance of

settlement. In accordance with instructions from the participant and provided that each

participant has sufficient operating cash and securities in its PSS account, the Paxos

Settlement Service will automatically settle the obligations on the settlement date,

between two participants by causing the security entitlements to the cash and securities,

as applicable, to be simultaneously transferred between the relevant participants' PSS

accounts on the Paxos ledger. All trades submitted to the Paxos Settlement Service,

regardless of the settlement cycle with which each trade is submitted, will be settled

bilaterally on a gross trade-by-trade basis without any netting of the gross trades.

• To manage the risk of financial loss associated with replacing a transaction scheduled for

settlement in the event that a participant fails to meet its settlement obligations, the Paxos

Settlement Service will calculate amark-to-market margin on each business day and

require the funding of a sufficient margin cash balance in the PSS account of each

participant to meet the greater of daily margin or the highest calculated daily margin over

a ninety day look back period. Daily margin will be assessed for each unique pair of

participants settling trades against one another in the Paxos Settlement Service.

• As the operator of the Paxos Settlement Service, Paxos believes that it will be acting as a

clearing agency under the definition of such in Section 3(a)(23) of the Exchange Act

because Paxos will be an intermediary in making payments or deliveries or both in

connection with transactions in securities and will also be providing facilities for

comparison of data respecting the terms of settlement of securities transactions 4 Section

17A(b)(1) of the Exchange Act states in relevant part that it shall be unlawful for any

clearing agency, unless registered in accordance with this subsection, directly or

indirectly, to make use of the mails or any means. or instrumentality of interstate

commerce to perform the functions of a clearing agency with respect to any security.

• At present, Paxos has not been registered as a clearing agency nor granted an exemption

from registration as a clearing agency. To evaluate the potential benefits of the Paxos

Settlement Service, Paxos plans, for a limited period of twenty-four months, to operate

4 IS U.S.C. § 78c(a)(23).

2
the Paxos Settlement Service in a production environment for the clearance and

settlement of listed U.S. equity securities trades, without being registered as a clearing

agency (the "Feasibility Study No-Action Phase").

Response:

Based on the facts and circumstances described in the Request, and without necessarily

concurring with your conclusions and analysis, the Staff would not recommend enforcement

action to the Commission against Paxos if Paxos engages in the proposed activities described in

your Request without registering with the Commission as a clearing agency pursuant to Section

17A(b)(1) of the Exchange Act.

In taking this position, staff notes that the Paxos Settlement Service will be: (i) operated

during the Feasibility Study No-Action Phase only for a limited period of time, and (ii)

reasonably designed to ensure that activity remains de minimis through operating parameters

designed to limit the scope of operations and manage financial and settlement risk using, among

other things, participation requirements and limits, securities eligibility criteria, margin

collection, volume limits, ongoing monitoring, and regular reporting to the Staff.

In particular, staff notes that:

• The Feasibility Study No-Action Phase will be conducted in a "de minimis" manner with

"well-defined" parameters and limits on the volume of shares settled through the Paxos

Settlement Service, including as follows:

o No more than seven (7) participants will be eligible to use the Pesos Settlement

Service for clearance and settlement and the participants will be required to satisfy

the criteria for participation, as described more fully in the Request.

o Securities eligible for settlement on the Paxos Settlement Service will include only

publicly traded equity securities that are registered pursuant to Section 6 of the

Securities Act of 1933, as amended, and Section 12 of the Exchange Act and that

remain eligible at all times for listing and trading on a national securities exchange

registered under Section 6 of the Exchange Act.

o Securities eligible for the Paxos Settlement Service must satisfy the eligibility criteria,

as described in the Request, and must be one of the securities listed in Exhibit B of

the Request. In addition to the eligibility requirements, in order for a security to

become active for submission to the Paxos Settlement Service, the security must have

an average daily volume of not more than 300 trades executed between each potential

counterparty pair on approved trading venues.

o To avoid exceeding a de minimis level of aggregate share volume settling on the

Paxos Settlement Service during the Feasibility Study No-Action Phase, Paxos will

utilize the following volume limits as daily targets for the share volume submitted to

Paxos Settlement Service: (i) less than 100,000 shares per security, per counterparty

pair; and (ii) aggregate shares per security across all counterparty pairs of less than

1% of the total average daily trading volume of the respective security.
• Paxos will establish and implement procedures that are reasonably designed to monitor

and maintain ongoing compliance with the operating parameters for the Feasibility Study

No-Action Phase. As described more fully in the Request, this includes the monitoring of

(i) compliance with participation criteria; (ii) securities eligibility; and (iii) volume limits.

As described more fully in the Request, Paxos has also established processes for:

stopping the submission of trades for settlement, replacing "ceased" securities, and

reinstating "ceased" securities.

• For the duration of the Feasibility Study No-Action Phase, Paxos will provide Staff with

prior and same day notifications of certain events as specified in the Request, as well as

quarterly and ad hoc reporting, to ensure that the operation of the Paxos Settlement

Service is transparent to Staff during the Feasibility Study No-Action Phase and to

document findings related to the objectives of the Feasibility Study No-Action Phase.

• No later than the twenty-third month, Pa~cos will promptly wind-down the Feasibility

Study No-Action Phase within not more than thirty business days by ceasing to accept

trades for settlement and settling all outstanding obligations of the Paxos Settlement

Service in an orderly manner. Once all outstanding obligations are settled, participants

will withdraw all cash and securities from the Paxos Settlement Service.

The position of the Staff is based strictly on the facts and circumstances discussed in the

Request, and any different facts or circumstances might require a different response.

Furthermore, this response expresses the Staff's position on enforcement action only and does

not purport to express any legal conclusions on the questions presented. The Staff expresses no

view with respect to any other questions that the proposed activities may raise, including the

applicability of any other federal or state laws, or self-regulatory organization rules. This

position is subject to modification or revocation by the Staff at any time.

If you have any questions regarding this letter, please call me at (202) 551-5712

or Matthew Lee at (202) 551-5794.

Sincerely,

.Mooney

Associate Director

Attachment

4
• -• •

October 25, 2019

VIA ELECTRONIC MAIL

Mr. Jeffrey Mooney

Associate Director

Office of Clearance and Settlement

Division of Trading and Markets

U.S. Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549

RE: Request for No-Action Relief from Clearin~Agencv Registration Under Section

17A(~(11 of the Securities Exchange Act of 1934

Dear Mr. Mooney:

We are requesting that the staff of the Division of Trading and Markets ("Division") of

the U.S. Securities and Exchange Commission ("Commission") confirm that it will not

recommend that the Commission take enforcement action against Paxos Trust Company, LLC

("Paxos") for violation of Section 17A(b)(1)' of the Securities Exchange Act of 1934, as

amended ("Exchange Act") in connection with Paxos's operation of a securities settlement

system (herein, "Paxos Settlement Service") as described below.

Page 1
I. Background and Intent to Conduct Feasibility Study

Currently, Paxos is a New York limited purpose trust company that is regulated by the

New York State Department of Financial Services ("NYDFS") and it is a participant of The

2

Dep~sitciy Trust ~~mpa~:;~ ("DTC") .

The Paxos Settlement Service is a private and permissioned distributed ledger system

developed by Paxos. The Paxos Settlement Service software maintains a distributed ledger

("Paxos Ledger") to record changes in ownership of securities and cash resulting from settlement

of securities transactions between participants ("Participants") of the Paxos Settlement Service.

Paxos believes that the Paxos Settlement Service technology and data processing techniques

have the potential to provide unique advancements in the clearance and settlement of securities

transactions including facilitation of more efficient settlement, immediacy of access to settlement

proceeds, greater data ac:,uracy ar~ci transparency, acivancec! Se~uT'li~~, and ir~cr~ased levels of

availability and operational efficiency. Therefore, Paxos believes that operation of the Paxos

Settlement Service will advance Congress' finding in adopting Section 17A of the Exchange Act

that "[n]ew data processing and communications techniques create the opportunity for more

efficient, effective, and safe procedures for clearance and settlement."3. The potential benefits of

the Paxos Settlement Service are more fully described in Section II., below.

To evaluate the potential benefits of the Paxos Settlement Service, Paxos is requesting

no-action relief for a limited period of twenty-four (24) months to operate the Paxos Settlement

Service in a production environment for the clearance and settlement of listed U.S. equity

securities trades, without being registered as a clearing agency (the "Feasibility Study No-Action

Phase"). To guard against the potential for any negative disruption of the underlying U.S.

securities markets, the Feasibilit;~ Study No-Action Phase will ~e conducted in a de minimis

manner with well-defined parameters and limits on the volume of shares settled through the

Paxos Settlement Service and the associated exposures between Participants. These operating

parameters and limits are set out in Section IV., below. Paxos believes the Feasibility Study

No-Action Phase will significantly enhance its ability to evaluate whether the Paxos Settlement

Service functions as intended to facilitate prompt and accurate clearance and settlement of

securities transactions and to achieve the benefits outlined in Section II., prior to the prospective

deployment of the Paxos Settlement Service on a broader scale, if authorized following the

submission of a Form CA-1 that is subsequently reviewed and appr~v~d by the Commission.

z DTC is a registered clearing agency with the Commission that operates as a securities depository as that teen is

defined in Section 3(a)(23)(A) of the Exchange Act.

3 15 U.S.C. § 78a-:~z)(1)(~)•

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II. Paxos Settlement Service Benefits

Paxos believes that the Paxos Settlement Service represents an opportunity to provide

market participants with the potential clearance and settlement benefits more fully described

below.

A. Access to Shorter Settlement Cvcles

The Paxos Settlement Service is designed in a manner to facilitate more efficient

settlement by expanding access to shorter settlement cycles in addition to the current standard

settlement cycle of the second business day after the trade date (i.e., T+2} prescribed by

Exchange Act Rule 15c6-14. The Paxos Settlement Service will offer Participants the option to

settle any trade on T+0 or T+l, in addition to T+2, with agreement between counterparties.

Although T+0 settlement is available through existing clearing agencies, the ability to achieve

this is limited to trades submitted prior to an 11:30 a.m.5 cut-off time or by handling through

non-standard exception processing. In contrast, as a standard service, the Paxos Settlement

Service offers the ability to achieve T+0 settlement for all trades submitted throughout the day,

up to the Paxos Settlement Service's daily settlement cut-off time of 4:15 p.m.

Expanded access to shortened settlement cycles mitigates the risk of financial losses due

to either party becoming unable to meet the financial obligations of the agreed-upon trade due to

intervening causes between the trade date and settlement date, and provide market participants

more efficient access to securities and cash proceeds.

B. Immediate Access to Settlement Proceeds

Regardless of the trade's settlement cycle, trade settlement through the Paxos Settlement

Service and the resulting transfer of ownership of the securities and cash is designed to occur

through a simultaneous delivery versus payment process. Thus, trade settlement on the Paxos

Settlement Service is irrevocable and unconditional, which the Bank for International

Settlements has defined to mean "final settlement"6. This increases a Participant's intraday

liquidity by providing Participants with immediate access to securities and cash proceeds as

settlements occur throughout the day, rather than being limited to a single end of the day cash

settlement process.'

'17 C.F.R. § 240.15c6-1.

S Unless otherwise specified, all times used throughout this document are Eastern Time (Eastern Standard or

Daylight Time, as applicable).

6A glossary of terms used in payments and settlement systems, Bank for International Settlements (2003),

https://www.bis.orQ/c mi/ ~1ossary 030301.pdf.

The Paxos Settlement Service provides each Participant with immediate access to its cash proceeds from each

settled trade, at the time that settlement happens, which enables each Participant to withdraw its securities or cash

from the Paxos Settlement Service, throughout the day, for use in funding liquidity or other obligations external to

the Paxos Settlement Service. Each Participant can also deposit securities or cash to the Paxos Settlement Service

throughout the day to satisfy its settlement obligations on the Paxos Settlement Service. The process for a

Participant to deposit or withdraw securities or cash from the Paxos Settlement Service is described in Section III.A.

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C. Data Accuracy and Visibility

The Paxos Ledger is made up of distinct, sequential, and time-stamped records of asset

ownership resulting from settlement ("Blocks"). The underlying distributed ledger technology of

the Paxos Settlement Service enforces the accuracy of each new Block in relation to 'ooth the

settling transactions and the previous Block. This technologically enforced sequential

recordkeeping provides certainty that settlements recorded on the t axos i,edger are accurate anti

independently confirmed in real time by the Participants of the Paxos Settlement Service.

Paxos is responsi'oie for upda~ing she Paxos Ledger through the addi~ion of new Blocks,

the conients of which can be reviewed by Participants upon distribution in real time. For each

Participant, the copy of the Paxos Ledger provides data regarding the clearance and settlement

status of its transactions and resulting securities and cash positions. Over time, this would allow

~~ch P~,r1.i~ip~~t t~ usP the P~xos Leger in ~i~~~ of maintaining a cPp~r~,te ~nt~rn~l l~~loPr, which

has the potential to eliminate the need to reconcile differences in settlement records, either with

trading counterparties or with the omnibus position in its account at the central securities

depository.

Additionally, each Participant could allow its customers (including the end investors) to

have direct and individually permissioned access to the Paxos Ledger, providing the potential for

enhanced investor protectian as it would allow investors to independently confirm their

ownership and possession of assets recorded to the Paxos Ledger. This data visibility and

accuracy could also be extended to regulators for the fair and consistent enforcement of market

rules and regulations.

D. ~ecurity and Availability

The underlying technology of the Paxos Settlement Service is highly secure, available,

and resilient which minimizes disruptions to clearance and settlement that could be caused by

hardware malfunctions or unauthorized access or actions.

To achieve a nigh level or availaniiiry and resiliency, redundant copies of the Paxos

Settlement Service software are run in multiple data centers with concurrently replicated data

across different geographic locations and power grids. Should any component of the Paxos

Settlement Service's technology experience a malfunction or an externally caused disruption,

this redundancy allows for the immediate transition of processing to another location with little

to no disruption of service to Participants.

As a private and permissioned distributed ledger system, the Paxos Settlement Service is

comprised of known, trusted, and verified Participants, each of which must be approved and

onboarded to the Paxos Settlement Service by Paxos and maintain their compliance with the

standards outlined in Section IV.A. Each Participant can only access the Paxos Settlement

Service and its copy of the Paxos Ledger over encrypted, direct communication channels. This

ensures that no unauthorized parties can access the Paxos Settlement Service and provides

Participants with a robust level of security. Additionally, the technology that enforces the

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accuracy of Blocks described in Section II.C., makes the Blocks immutable, which prevents any

unauthorized alteration of the Paxos Ledger.

E. Operational EfficiencX

The Paxos Settlement Service is built using modern technological systems and practices

that have lower operating costs and thus deliver cost efficiencies to market participants and

investors. It is anticipated that over time this modern clearance and settlement infrastructure will

enable financial services firms to modernize their own internal technologies to realize even

greater operational savings. For example, each Participant would have the opportunity to replace

its legacy, siloed, on-site recordkeeping systems with the records of the Paxos Ledger and

reorganize its systems and processes around the shared ledger for the achievement of further

efficiency gains.

In these ways, Paxos believes that the Paxos Settlement Service represents capabilities

that are consistent with Congress' finding in adopting Exchange Act Section 17A(a)(1)(C) that

new data processing techniques create the opportunity for more efficient, effective and safe

procedures for clearance and settlement.$

III. General Description of the Operation of the Paxos Settlement Service During the

Feasibility Study No-Action Phase

The Paxos Settlement Service is designed to conduct simultaneous delivery versus

payment settlement of securities and cash for trades submitted to the Paxos Settlement Service

for clearance and settlement between Participants. The general description in this Section III.

describes how the Paxos Settlement Service will operate during the Feasibility Study No-Action

Phase.

While Paxos is requesting the Feasibility Study No-Action Phase be approved for a

period of twenty-four (24) months, the initial stage of the Feasibility Study No-Action Phase will

be a period of twelve (12) calendar months from the date this request for no action relief is

approved ("Initial Stage"). Certain functionalities of the Paxos Settlement Service will be

implemented incrementally during either the Initial Stage or the remainder of the Feasibility

Study No-Action Phase, all cases of which are further described in this Section III., below.

A. Participant Accounts

A Participant will operate a fully segregated account on the Paxos Settlement Service that

performs the role that fulfills its specific responsibilities in the clearance and settlement of

securities trades on the Paxos Settlement Service ("PSS Account"). Each Participant may hold

$ See supra note 3 and accompanying text.

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cash and securities in its PSS Account, the ownership of which is recorded on the Paxos Ledger

by Paxos, acting as a securities intPrmPdiary9.

A Participant will deposit an eligible security, as described in Section IV.B., into its PSS

Account by using free of payment delivery instructions through DTC to transfer the security

from the Participant's DTC account to Paxos's DTC account. Upon receipt of a security into

raxos's ETC account, Paxos wiii create a digitized security entitiement10, which is a digiiai

representation of the security deposited into Paxos's DTC account. This security entitlement will

be credited to the Participant in its PSS Account on the Paxos Ledger. This process is referred to

as securities digitization ("Securities Digitization"). In accordance with instructions from a

Participant, Paxos supports the withdrawal of a security from a Participant's PSS Account by

removing the digitized security entitlement credited to the Participant in its PSS Account on the

Paxos Ledger and initiating a free of payment delivery instruction through DTC to remove the

SeCUTl~ it~~(i ~r aX05 S ~ i ~ 3000iii3i ail e~ive~ Si1Ci► ScCuii~,v t0 l Z rQ1L1C1UQIll J Ll1. awOiiiit.

Paxos maintains two separate omnibus cash custody accounts that have been established

for the benefit of Participants ("Paxos Bank Accounts") at a chartered U.S. national bank that is

supervised by the Office of the Comptroller of the Currency. The Paxos Bank Accounts are used

to hold funds deposited by Participants for two different purposes: the first account is used for

funds deposited by Participants to settle obligations to other Participants ("Operating Cash") and

the second is used for fiends deposited by Participants to fulfill margin requirements ("Margin

Cash"). A Participant will deposit funds in U.S. dollars by initiating a wire transfer from its bank

account to the specified Paxos Bank Account for the intended purpose of the funds, either

Operating Cash or Margin Cash. Upon receipt of cash into a Paxos Bank Account, Paxos will

create a digitized security entitlement (this time, representing U.S. dollars) credited to the

P~.rti~ip?nt in ;ts PAC Arro,~nt on the Paxos T ~r~g~r. T}~~S process is r~ferr~d to as cash

digitization ("Cash Digitization"). In accordance with instructions from a Participant, Paxos

supports the withdrawal of cash" from a Participant's PSS Account by removing the digitized

security entitlement of cash credited to the Participant in its PSS Account on the Paxos Ledger

and initiating a wire transfer from the relevant Paxos Bank Account to a bank account designated

by the Participant.

B. Trade Submission for Settlement

Purchase and sale transactions that are eligible for settlemen~ on the Paxos Settlement

Service will be limited to trades between Participants, as described in Section IV.A., of an

eligible security, as described in Section IV.B., and that are executed on an OTC basis or on a

9 Paxos would be a "securities intermediary" as defined in Section 8-102(a)(i4) of the Uniform Commercial Code

("UCC").

10 The tQ~-n, °°secur;ry ~nt;tlPm~nt" _s defne~ in Section 8-102(x)(17) of the UCC as "thy rights and property interest

of an entitlement holder with respect to a financial asset specified in Part 5 [of Article 8 of the UCC]." In turn, the

term "entitlement holder" is defined in UCC Section 8-102(x)(7) as "a person identified in the records of a securities

intermediary as the person having a security entitlement against the securities intermediary".

" The Paxos Settlement Service will allow a Participant to withdraw Margin Cash from its PSS Account that is in

excess of the Participant's current :e~iui:e~ margin as describe" sn Secticn II:.E.

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trading venue (e.g., alternative trading system, or ATS) that is duly notice registered with the

Commission and approved by Paxos ("Trading Venue"). A trade that has been determined by the

trade counterparties to be settled on the Paxos Settlement Service will be submitted to the Paxos

Settlement Service in near real-time according to the terms of the operating procedures of the

Trading Venue or other agreement between the trade counterparties. The trade submission will

contain the contractually executed trade details, including the transacted security, quantity of

shares, price per share, net amount of money to be settled, buying trade counterparty, selling

trade counterparty, trade date, and settlement date. The Paxos Settlement Service will use the

trade details provided in the trade submission without any modification to such details. A trade

submitted to the Paxos Settlement Service may be cancelled at any time by the Trading Venue12

if it is deemed by the Trading Venue to fall under its policy definition of a clearly erroneous

trade, or in the case of an OTC trade, cancellation can occur with the consent of both trading

counterparties up until the Paxos Settlement Service's OTC trade cancellation cut-off time of

4:00 p.m. on the day before settlement date .

C. Settlement

To meet its settlement obligations, each Participant must, through Cash Digitization and

Securities Digitization, have the required securities or Operating Cash in its PSS Account by

each trade's settlement date, however, each Participant is not required to fund its securities or

Operating Cash in advance of settlement date13. In accordance with instructions from a

Participant and provided that each Participant has sufficient Operating Cash and securities in its

PSS Account, the Paxos Settlement Service will automatically settle the obligations, on the

settlement date, between two Participants by causing the security entitlements to the cash and

securities, as applicable, to be simultaneously transferred between the relevant Participants' PSS

Accounts on the Paxos Ledger. During the Feasibility Study No-Action Phase all trades

submitted to the Paxos Settlement Service, regardless of the settlement cycle with which each

trade is submitted, will be settled bilaterally on a gross trade-by-trade basis without any netting

of the gross trades.

In the event a Participant fails to make sufficient Operating Cash or securities available in

its PSS Account on a settlement date to settle any of its obligations on the Paxos Settlement

Service by the daily settlement cut-off time at 4:15 p.m., such failure will constitute a settlement

failure ("Settlement Failure"). The Paxos Settlement Service will continue to attempt to settle

any outstanding Settlement Failure using Operating Cash or securities that become available in

the Participant's PSS Account until the trade has been settled or closed out through abuy-in or

sell-out, as applicable and as described immediately below, under the time frames required by

Paxos.

The Paxos Settlement Service buy-in and sell-out procedures are designed to allow

Participants to manage and promptly close Settlement Failures. To ensure promptness, Paxos

will mandate that a Participant that is failing to deliver securities closes each Settlement Failure

•`Z Timing of trade cancellations are subject to the operating rules of each Trading Venue.

13 Additionally, each Participant is permitted to withdraw its securities or cash from the Paxos Settlement Service at

any time, subject to the limitations outlined in Section III.E.

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on a timeline that is consistent with the timing found in Rule 204 of the Commission's

Regulation SHO14. Additionally, a Participant that is failing to receive securities or cash

("non-defaulting Participant') will have the right, but not the obligation, to resolve the

Settlement Failure by either buying-in or selling-out the relevant security after the point of

Settlement Failure and prior to the Paxos mandated close out times.15 Upon Paxos receiving

notice of the buy-in or sell-out execution from anon-defaulting Participant, the Paxos Settlement

Service will create a cash settlement obligation ("Liability Obligation") due for settlement on the

next business day requiring the Participant responsible for the Settlement Failure to pay the

difference, if any, beiween the net money value of the Settlement Failure and the nee money

value of the buy-in or sell-out tr~de.16

In the event that a Participant has unsettled Liability Obligations, the Paxos Settlement

Service will systematically prioritize the use of the Participant's available Operating Cash to

settle tl~e Lia'uiii~y ~~i~i~aiiOtiS urior to any Oii7~i' Sci~ieiiiGi"li ~bligaiioris ~ha~ wiii ~eyuii-e

Operating Cash. In the event of a Settlement Failure of a Liability Obligation, that Participant

will be considered to be in a state of default" and Paxos shall have the immediate right to and

would, without exception, utilize that Participant's Margin Cash to settle any Liability

Obligations outstanding and due.

D. Corporate Actions

When the Feasibility Study No-Action Phase begins, the Paxos Settlement Service will

not provide corporate actions processing functionality, such as dividend payment processing or

voluntary elections. To avoid impacting the corporate actions processing of Participants'

securities and alleviate the need for Paxos to manually process any corporate actions that might

occur while securities are in the Paxos DTC account, each Participant will be obligated to

transfer all securities from its PSS Account to its DTC account, as described in Section III.A.,

each day prior to DTC's cut-off for recording ownership positions (e.g., record date). This will

allow for corporate actions processing at ~ 1 C to occur as it normally does in the Participants'

DTC accounts. Each day at 5:30 p.m., while the Paxos Settlement Service is not providing

eorparate actions processing functionality, if a Participant has nat instructed the t:a:~sf~r of its

securities from its PSS Account to its DTC account, Paxos will have authorization from each

Participant to withdraw all of its securities from the Paxos Settlement Service each day no later

than 6:00 p.m., regardless of whether there are pending corporate action events for such

securities.

14 17 C.F.R. § 242.204.

1 5 A buy-in or sell-out by anon-defaulting Participant will not be required to settle through the Paxos Settlement

Service.

16 Fach trade has a net money value which is calct~latPd as the executed price pPr share of the security m~~lt~p1_ie~1 b~

the share quantity of the trade plus or minus any execution costs or fees. The value of a Liability Obligation is the

difference between the net money value of the buy-in or sell-out trade and the net money value of the Settlement

Failure, which is the total monetary difference between the two trades.

"Default, as it pertains to the Paxos Settlement Service, is defined as a Participant's failure to fulfill its Liability

rJbligation by its settlement date or its f ilure t~ fard the R~aaireti Margin by its ~~ad.:n~.

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Paxos will begin implementing corporate actions processing functionality on the Paxos

Settlement Service in an iterative manner such that a Participant will be able to, at its discretion,

keep certain securities in its PSS Account overnight rather than transferring such securities to its

DTC account each night. When Paxos implements corporate actions processing functionality it

will, without delay, automatically pass through any rights and obligations associated with any

corporate actions that occur for securities that are eligible to be held and are held overnight by

each Participant in its PSS Account to the entitled Participant ("Automated Corporate Actions

Processing"). In performing Automated Corporate Actions Processing, Paxos takes on such

responsibilities acting as a securities intermediary18.

The Automated Corporate Actions Processing will be implemented in the following

sequence, however, Paxos will collaborate with Participants on the exact timing of the

implementation,including testing,and release to production ofsuch functionality.

i. Build functionality that allows the Paxos Settlement Service to automatically

source corporate action events data from DTC and other required sources,

including key dates.

ii. Build functionality that allows the Paxos Settlement Service to read the sourced

corporate action events data to determine if securities are eligible to be held in a

Participant's PSS Account overnight because either there is no pending corporate

action event or because Automated Corporate Actions Processing is implemented

for the pending corporate action event type as described in Sections III.D.iii.,

III.D.iv., and III.D.v., below.For those securities that are not eligible to be held in

Participant's PSS Account overnight for one of the aforementioned reasons,

Paxos will communicate to each impacted Participant by 4:15 p.m. each day the

securities that are not eligible to be held overnight in its PSS Account and that are

required to be transferred to its DTC account no later than 6:00 p.m.

iii. Build Automated Corporate Actions Processing functionality on the Paxos

Settlement Service to process the most frequently occurring mandatory corporate

action event types(e.g., cash dividends,stock dividends,stock splits, etc.).

iv. Build Automated Corporate Actions Processing functionality on the Paxos

Settlement Service to process the most frequently occurring voluntary corporate

action event types(e.g., tender offers, rights subscriptions, etc.).

v. Build Automated Corporate Actions Processing functionality on the Paxos

Settlement Service to process less frequently occurring mandatory and voluntary

corporate action event types (e.g., scheme of arrangement, bankruptcy, etc.).

Paxos anticipates that the Automated Corporate Actions Processing for many of

the less frequently occurring corporate action eventtypes will not be implemented

during the Feasibility Study No-Action Phase.

'$ See supra note 9.

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In the event that a corporate action event is processed incorrectly on the Paxos Settlement

Service,Paxos mill:

i. take the necessary actions to promptly correct any such incorrect processing,and

ii. should Paxos be ll~e cause of an incorrectly processed corpo:~te action event,

Paxos ~,~~i!! c~mp~::sate :mpa~~e~ pzrticipa:-~ts for any resulting ?oss.

E. Mark-to-Market Margin

To manage the risk of financial loss19 associated with replacing a transaction scheduled

for settlement in the event that a Participant fails to meet its settlement obligations, the Paxos

~~~i~.aiiti.uL ~i`vi~~ vJiii ic`~i~uia v u iTiain-w-iiiaint,~ iitai~lii vii ~.aCii ~i1.1S1iii.S~ C~~`y' ~ t~ait~%

Margin") and require the funding of a sufficient Margin Cash balance in the PSS Account of

each Participant ("Required Margin") to meet the greater of the Daily Margin or the highest

calculated Daily Margin over a ninety (90)day lookback period ("Margin High Water Mark").

The eligible transactions for inclusion in the Daily Margin calculation are all open unsettled

tra~Ps,failed or othPrNise,excluding Liability Obligat:ons20("Eligibly Margin Transactions").

Daily Margin will be assessed for each unique pair of two Participants settling trades

against one another on the Paxos Settlement Service("Counterparty Pair")and each Participant's

Required Margin will be calculated by the Paxos Settlement Service using the following

procedure.

i. For each Eligible Margin Transaction, after the market close ofeach trading day,

Daily Margin will be calculated at the trade-level as 105% of the difference

between each trade's execution price and the current day's closing price at 4:00

p.m.onthesecurit=y's primary exc'riacig~`~'iTradelevel I~ai~y Ii~laegin"j.

ii. For each Counterparty Pair, each Trade-level Daily Margin(calculated in Section

IsI.E.~. above)Dili X32 Sii1133712ti ~O CiEtEi7s71i3E a Sii3~i~ Ddiiy ~2Tglfi ai"iiviaYii Gi%Y2(~

by one Participant in each Counterparty Pair.

iii. For each Participant, any Daily Margin amounts owed will be s~.~mmed to

calculate the Participant's current day total amountowed("Total Daily Margin"j.

`~ Ifa replacement trade's price is unfavorablecompared to the original execution price ofthe trade,the Participant

executing the replacementtrade will incur a loss equal to the difference in price multiplied by the number ofshares,

plus any additional costs associated with replacing the trade. For instance, ifthe price has increased since the

original trade was executed then the buyer will incur a financial loss should the original trade need to be replaced by

the buyer.

20 Liability Obligations are cash only and therefore are not applicable to the Daily Margin calculation on the Paxos

S~ff~.A..^,:~::~ J.A.;~~:~~.

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iv. Each Participant's Required Margin will be calculated as the greater ofits current

day Total Daily Margin amount (calculated in Section III.E.iii. above) or its

Margin High Water Mark.

Each Participant's Required Margin amount will be calculated and communicated to each

Participantby the Paxos Settlement Service to each Participant no later than 6:00 p.m. each

business day. Each Participant will be required to fund its Required Margin amount by having

the Participant's Margin Cash credit balance be greater than or equal to its Required Margin no

later than 9:00 a.m.the following business day.

A Participant's Margin Cash will be held by Paxos on behalf of the Participant and is

only made accessible to the Participant's counterparties in the event ofthe Participant's default21.

Initially, in light ofthe de minimis nature ofthe Feasibility Study No-Action Phase and to reduce

operational burden on Participants, instead of each Participant directly funding the Required

Margin, Paxos will pledge $100,000 of its own cash to fund Required Margin across all

Participants. Paxos will be calculating the daily Required Margin as described above and should

the balance of$100,000 not be sufficient for any reason prior to the time when each.Participant

begins directly funding its own Required Margin, Paxos will be responsible for the additional

funding required to fulfill the aggregate Required Margin across all Participants in accordance

with the 9:00 a.m. deadline. Paxos expects to require each Participant to fund its own Required

Margin prior to the end ofthe Initial Stage ofthe Feasibility Study No-Action Phase.2z

Once each Participant is required to fund its own Required Margin,in the event that a Participant

fails to fund its Required Margin or the Participant notifies Paxos of its insolvency, Paxos will

have a perfected lien23 on such Participant's Margin Cash to settle any liabilities owed by the

defaulting Participant to non-defaulting Participants.

IV.Feasibility Study No-Action Phase Operating Parameters

During the Feasibility Study No-Action Phase, Paxos will operate the Paxos Settlement

Service in a manner that is described above in Section III., and it will impose the following

operating parameters designed to effectively manage the risks that Paxos believes could arise

through the operation ofthe Paxos Settlement Service. These operating parameters are intended

to clearly define and limit Paxos' operation of the Paxos Settlement Service during the

Feasibility Study No-Action Phase to reasonably ensure that aggregate share volumes and

Z'See supra note 17.

ZZ Paxos will require each Participant to fund its own Required Margin no later than when the aggregate Required

Margin begins to regularly exceed the $100,000 pledged by Paxos or the number ofParticipants is greater than five

(5).

23 Participants will grant Paxos a security interest in the master services agreement for the Paxos Settlement Service,

and Paxos intends to perfect its lien on Margin Cash through control pursuant to Sections 8-106 and 9-203 ofthe

Uniform Commercial Code.

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Participant exposures will be de tninirriis in nature and will not have any negative effects on the

U.S. secarit~~s markets ar Participants' ability to settle trades in a tirn~ly and accurate manner.

A. Participants of the Feasibility Study No-Action Phase

Up to seven (7) Participants will be eligible to use the Paxos Settletrieiit Service for

c,eara;~cz and settlement. Eac, of tl~e Participants vJi~i LJ2 reyuir~d ~O Sa~iS~~ 2ii vi ilic ~OildWiil~

criteria for participation ("Participation Criteria"):

be a DTC participant and be a broker-dealer. that is registered with the

Commission and is a member of the Financial Industry Regulatory Authority

("FINRA"),

ii. have $100 million or more in excess net capita124; and

iii. meet Paxos's anti-money laundering and "know your customer" (collectively,

"AML/KYC") onboarding requirements that Paxos maintains to comply with

Bank Secrecy Act and U.S.A. Patriot Act requirements applicable to it as a

limited purpose trust company that is supervised and examined by the NYDFS25.

B. Eligible Securities

Securities eligible for settleineilt on the Paxos Settlement Service will include only

publicly traded equity securities that are registered pursuant to Section 6 of the Securities Act of

1933, as amended26, and Section 12 of the Exchange Act27 and that remain eligible at all times

for listing and trading on a national securities exchange registered with the Commission pursuant

to Section 6 of the Exchange Act28.

Each Counterparty Pair, together with Paxos, will select securities for settlement on the

Paxos Settlement ~erviee that will meet criteria ("Eligibility Crit~:ia") ~~asonably ~esigne~ t~

ensure there will be no negative effects on the U.S. securities markets or on Participants' ability

to settle trades in a timely and accurate manner. The Eligibility Criteria were determined by

Paxos based on the analysis of market data and actual trading behavior of the first Participants

over a six month look back period. Each Counterpariy Pair will select up to two (2) securities to

2a ~ 7 r.F.g. y~ 7gQ,1$r'2_l~Pl(~d~~il \rlPfr~jnba thQ term "P?{rPeS riet raYit~l" ?s the "am~~anr in Qx~Psc ~fthP ~mourt

required under paragraph (a) [of Exchange Act Rule 15c3-1]...).

ZS Paxos has implemented a Bank Secrecy Act and Anti-Money Laundering Compliance Program to comply with

applicable la~,vs and regulations relating to anti-money laundering in the United States (31 U.S.C. ~ 5311 et seq.),

including the obligation to file suspicious activity reports (SARs) (31 U.S.C. § 5318(g)), federal laws governing

Customer Identification Programs (CIP) (31 U.S.C. § 5318(1) and Section 326 of the USA Patriot Act) and New

York State anti-money laundering laws and regulations (3 N.Y.C.R.R. §~ 116 and 504).

Z6 IS U.S.C. § 77f.

' Z 15 U.S.C. § 781.

2R is trn n c oC i~ v.o.~,. y 7oi.

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be active for submission to the Paxos Settlement Service for clearance and settlement ("Active

Security") at a:~y given time, eacr. of which rr~ust satis~y all of the folla~ving Eligibility Cri~eria:

be a component of either the Dow, S&P 500 or the Russell 1000 stock indices;

ii. i;dve a share price of be~ween $5 and $15;

iii. have no more than an 18%single day share price movement in the last 365 days;

iv. have no more than a 20% aggregate, consecutive four-day share price movement

over the last 365 days;

v. have an expected average daily volume of less than 100,000 shares settling on the

Paxos Settlement Service, per Counterparty Pair; and

vi. have an expected daily volume of shares settling on the Paxos Settlement Service

across all Participants of less than 1 % of the average daily trading volume.

In addition to the above Eligibility Criteria, in order for a security to become an Active

Security, it must have an average daily volume of not more than 300 trades executed between

each potential Counterparty Pair on approved Trading Venues.

Attached in Exhibit B is the list of securities which would be eligible, as of June 12,

2019, to be selected as an Active Security during the Feasibility Study No-Action Phase. The

eligibility of securities selected for settlement on the Paxos Settlement Service may change from

time to time due to prevailing market conditions and, in such cases, Paxos and the Participants

will follow the procedures described in Sections V.D., V.E., and V.F., below.

C. Volume Limits

To avoid exceeding a de minimis level of aggregate share volume settling on the Paxos

Settlement Service during the Feasibility Study No-Action Phase, Paxos will utilize the below

outlined volume limits as daily targets for the share volume submitted to the Paxos Settlement

Service ("Volume Limits"). The specific daily Volume Limits for trades submitted to the Paxos

Settlement Service are:

less than 100,000 shares per security, per Counterparty Pair; and

ii. aggregate shares per security across all Counterparty Pairs of less than 1 °/o of the

total average daily trading volume29 of the respective security.

Paxos believes that the operating parameters outlined above will reasonably ensure that

each Counterparty Pair will maintain ds minimis daily exposures between themselves and that

the aggregate volume ~f shares on the Pars Settlement Service will remain limited. Attached in

F.xhihit A is an analvcic of the PxnPctPrl Paxnc CPttlPmPnt CPr~~ina ~inli„ma hPt~x~Pan a cinalP ~ ~_~ r~__s~ - a-y

Counterparty Pair as well as across all Participants during the Feasibility Study No-Action Phase.

Z9 Uuless otherwise specified, throughout this document the average daily trading volume is defined as the average

a a securiiy's ciaiiy Trading volume over a roiling one (i) monin period. ,

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This analysis was performed using assumptions based on six(6)months ofhistorical market data.

and trading data ofthe first Participants. The analysis oftotal expected Paxos Settlement Service

volume assumes the full allowance of seven (7) Participants and therefore a maximum of

twenty-one(21)Counterparty Pairs each settling the allowance oftwo(2)securities resulting in a

theoretical maximum of forty-two (42) Active Securities. E~chibit A shows that a possible

scenario of the expected number of shares submitted to the Paxos Settlement Service per day

across the forty-two (42) Active Securities is 1,575,000 shares which represents 0.44% of the

total average daily trading volume ofthese securities3o

D. Feasibilit~v No-Action Phase Dates

As part ofthis request for no action relief, Paxos is prepared to promptly commence the

Feasibility Study No-Action Phase with its first Participants. To allow for a sufficient

observation period that will include the on-boarding of additional Participants and the

development and implementation of certain functionalities described in Section III., the

Feasibility Study No-Action Phase will lastfor a period ofno more than twenty-four(24)months

from the date this request for no action relief is approved. The first twelve(12)months ofthe

Feasibility Study No-Action Phase will be the Initial Phase during which certain functionalities

ofthe Paxos Settlement Service will be implemented incrementally as described in Section III.

No later than the twenty-third (23rd) month, Paxos will promptly wind-down the Feasibility

Study No-Action Phase within not more than thirty (30) business days by ceasing to accept

trades for settlement and settling all outstanding obligations on the Paxos Settlement Service in

an orderly manner. Once all outstanding obligations are settled,the Participants will withdraw all

cash and securities from the Paxos Settlement Service.

V.Monitoring ofOperating Parameters

Paxos will establish and implement procedures that are reasonably designed to monitor

and maintain ongoing compliance with the operating parameters for the Feasibility Study

No-Action Phase described in Section IV.This includes the monitoring ofsecurities Eligibility

Criteria and Volume Limits, as well as, performing the subsequent actions that may need to be

taken byPaxos or the Participants as a result ofsuch monitoring,all ofwhich is further described

in Section V.,below.

A. Monitoring ofParticipation Criteria

To monitor for ongoing compliance with the Participation Criteria, Paxos will require

each Participant to do all ofthe following:

30 There are multiple scenarios where between one(1)and forty-two(42)Active Securities are settling on the Paxos

Settlement Service. Given Pa~cos' responsibility to comply with the Volume Limits across all Counterparly Pairs,

Participants choice ofsecurities to be Active Securities will be limited by Paxos to manage to the Volume Limits.

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i. certify to Paxos on a quarterly basis that it is a DTC participant, is abroker-dealer

registered with the Commission, is a member of FINRA, and continues to meet

Paxos's AML/KYC requirements;

ii. provide Paxos with a copy of Quarterly FOCUS report submissions31; and

iii. provide Paxos immediately with a copy of any report that the Participant must

give to the SEC and other regulators pursuant to Exchange Act Rule 17a-11(g)32.

Paxos will have the right to suspend or terminate any Participant based on its failure to

continually meet the Participation Criteria specified in Section IV.A. In the event that Paxos

suspends or terminates a Participant from the Paxos Settlement Service, Paxos will prohibit the

Participant from withdrawing its Operating Cash, Margin Cash and securities from the Paxos

Settlement Service until such time as all of such Participant's obligations on the Paxos

Settlement Service are settled.

B. Monitoring of Securities Eli ~i- bility Criteria

Each week, on the last business day of the week, Paxos will assess the Eligibility Criteria

of each Active Security based on weekly data up to the prior business day's market close. Paxos

will confirm each Active Security continues to meet all of the Eligibility Criteria. Should any

Active Security fail to meet any of the Eligibility Criteria, Paxos will promptly follow the

procedures to stop the submission of additional trades of the security to the Paxos Settlement

Service, as outlined in Section V.D.

C. Monitoring of Volume Limits

At predetermined intervals on each trading day, Paxos will monitor the aggregate share

volume submitted to the Paxos Settlement Service for each Active Security against the Volume

Limits using the following procedure.

Paxos will measure the intraday aggregate share volume submitted to the Paxos

Settlement Service at the following time intervals: 11:00 a.m., 1:30 p.m., 2:30

p.m.33, and following the 4 p.m. market close. (These time intervals were

determined by Paxos to be appropriate based on analysis of observed intraday

volumes in historical market data and actual trading behavior of the first

Participants over a six month look back period.)

31 Required as per 17 C.F.R. § 240.17a-5 and including any non-public information submitted along with the

FOCUS report.

'Z 17 C.F.R. § 240.17a-11.

33 Paxos will perform the 2:30 p.m. measurement of the intraday aggregate share volume submitted to the Paxos

Settlement Service for a given Active Security if i) at 1:30 p.m. the measured intraday aggregate share volume for

the Active Security exceeded 80% of the aggregate share volume allowed for the Active Security under the Volume

Limits or ii) other observed data leads Paxos to believe it should perform the 2:30 p.m. measurement in order to

minimize the probability that the given Active Security will breach the Volume Limits.

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ii. To determine the degree to which.a Volume Limit has been reached and the risk

of each Volume Timit being exceeded before the market close, Paxos will

promptly compare the data as ofeach intraday interval against the Volume Limits.

iii. Paxos will be solely responsible for the decision at each time interval to either

continue receiving trades for settlement in an Active Security or follow the

procedure to stop the submission oftrades for settlement in an Active Security. In

doing so, depending on Paxos's reasonablejudgementofthe risk ofexceeding the

Volume Limits, Paxos will consult with impacted Participants and may also

evaluate other relevant information such as, market data, historical trading

behavior, and news reports on the relevant Active Security to determine the best

course ofaction to take to comply with the Volume Limits.

Ch~iil~l Paxpc (IP.~.iCIP. to ctgr ~rP ciahmicgipn oftra~lPg t~ the P~Xlls' CPft~PYY~Pt1t CPY\/ll`P fns

settlement of an Active Security, the procedures outlined in Section V.D. will be promptly

performed with the impacted Participants.

D. Storming the Submission ofTrades for Settlement

Should Paxos' monitoring of the Eligibility Criteria or the Volume Limits outlined in

Section V.B. and Section V.C. cause Paxos to make the determination to stop the submission of

trades for clearance and settlement to the Paxos Settlement Service for an Active Security

("Ceased Security")34,Paxos and the impacted Participants will promptly follow the procedures

outlined below. In this case, any trades already submitted to the Paxos Settlement Service which

are not yet settled will continue to be settled by Participants in accordance with the procedures

described in Section III.

i. Paxos will promptly notify the impacted Participants that they should stop the

submission of trades of the Ceased Security by following procedures for stop

notification that are reasonably designed to ensure timely receipt of such

notification by the responsible individuals within the impacted Participants. Paxos

will require the Participant to provide confirmation back to Paxos ofthe receipt of

the notification to stop the submission oftrades.

ii. Paxos will require each impacted Participant to promptly make the required

technology modifications to its internal systems to step the submission of trades

ofthe Ceased Security.

iii. Upon completion of the required technology modifications referenced above,

Paxos will require each Participant to send confirmation to Paxos that it has

stopped the submission oftrades ofthe Ceased Security and note the approximate

time that such cessation was completed.

34After an Active Security becomes a Ceased Security it is no longer an Active Security unless it is reinstated, as

described in Section V.E.

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iv. Paxos will provide notification to the Division staff within the same day an Active

Security becomes a Ceased Security.

v. Paxos will provide reporting to the Division staff within five (5) business days

regarding the facts and circumstances associated with the cessation of the Ceased

Security, as further described in Section V.G.

Based on the facts and circumstances, an Active Security may become a Ceased Security

for a single Counterparty Pair or across all Counterparty Pairs. A Ceased Security will continue

to remain a Ceased Security until Paxos and the impacted Participants agree to reinstate the

Ceased Security as an Active Security per the procedures outlined in Section V.E., below.

As the Paxos Settlement Service operates on a post-trade basis and the submission of

trades to it for settlement occurs after trade execution, Paxos can only monitor the Volume

Limits after the trades have already been submitted to the Paxos Settlement Service. As such, the

procedures to monitor Volume Limits and stop the submission of trades for settlement are

designed to be prompt but not instantaneous. For these reasons, it is possible that Volume Limits

may be exceeded in the intervening time between the i) Paxos intraday Volume Limit monitoring

procedures, ii) notification to each impacted Participant to stop the submission of trades of the

Ceased Security, and iii) each impacted Participant enacting the technology modifications in its

internal systems to stop such submission.

E. Reinstatement of Ceased Securities

Ceased Securities will remain as Ceased Securities for a minimum period of at least three

(3) business days to allow Paxos and the impacted Participants a reasonable observation period

of activity regarding the Ceased Security's trading behavior to determine if it can be reinstated as

an Active Security.

If a security became a Ceased Security as a result of Volume Limits, Paxos and the

impacted Participants will observe market data and actual trading volume between these

Participants to reasonably assess the expected future volume of the Ceased Security with regards

to any Volume Limits. Based on this assessment, Paxos and the impacted Participants will either

follow the procedures to select a replacement security as an Active Security outlined in Section

V.F. or reinstate the Ceased Security as an Active Security. Paxos will provide notification to the

Division staff the same day that a Ceased Security is reinstated as an Active Security and,

through the provision of ad hoc reporting described in Section V.G., below, will provide data on

facts and circumstances leading to the reinstatement. If a security became a Ceased Security as a

result of the security Eligibility Criteria, it will continue to be a Ceased Security until all

Eligibility Criteria can be met. In this case, Paxos and the Participants will follow the procedures

to select a replacement for the Ceased Security outlined in Section V.F., below.

F. Replacement of Ceased Securities

Should a Ceased Security need to be replaced, Paxos and the impacted Participants will,

by mutual agreement, select a different security to become an Active Security, provided that, at

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the time of selection, it satisfies the Eligibility Criteria and is included in the most recent

quarterly reporting provided to the Division staff as described in Sectior. V.G., belov~.

Upon selection of a replacement Active Security, Paxos will provide notification to the

Division staff in the same day, and through the provision of ad hoc reporting described in

Section V.G., below, and will provide data substantiating the replacement security's compliance

with the Eligibility Criteria. Following this notification, Paxos and the relevant Participants will

make the required technology modifications to begin submission of trades for settlement of the

security on the Paxos Settlement Service.

G. Reporting

For the duration of the Feasibility Study No-Action Phase, in addition to the same day

notifications described in Sections V.D, V.E, and V.F., Paxos will provide the Division staff with

quarterly and ad hoc reporting to ensure that the operation of the Paxos Settlement Service is

transparent to the staff during the Feasibility Study No-Action Phase and to document findings

related to the objectives of the Feasibility Study No-Action Phase.

For each calendar Quarter, Paxos will provide a quarterly report package to the Division

staff containing the scope of Participants (including any additions, suspensions, or terminations

of Participants), the list of Active Securities, trade settlement data, Required Margin data,

Volume Limits data, and a list of the potential securities eligible to become an Active Security.

Paxos will provide the quarterly reporting no later than the third Friday following each Quarter's

end date. E~ibit C provides a sample report template which illustrates the data that will be

included in the quarterly reporting.

On an ad hoc basis, Paxos will also provide the Division staff with prior notice of any

modification to the scope of Active Securities or Participants (including any additions,

suspensions or terminations) or implementation of a material change to the operation or

functionalities35 of the Paxos Settlement Service as described in Section III. (including the

transition to Participant funding of Required Margin). Paxos will also provide the Division staff

with prompt notice of any exceedance of the Volume Limits. The reporting will include factual

detail and circumstances surrounding a triggering event and qualitative commentary regarding

the rationale f~: a change (if the went is pre-planned) or any r~media: actions taker (if the event

:s urp~anneu).

VI. Legal Discussion and Relief Request

As the operator of the Paxos Settlement Service, Paxos believes that it will be acting as a

clearing agency under the definition in Section 3(a)(23) of the Exchange Act.36 Paxos will be "an

intermediary in making payments or deliveries or both in connection with transactions in

's For the avoidance of doubt, Paxos will not make any material changes to the operations or functionality of the

Paxos Settlement Service other than those described in Section III.

36 15 U.S.C. 78c(a)(23).

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securities" and will also be providing "facilities for comparison of data respecting the terms of

settlement of securities transactions".37 Section 17A(b)(1) of the Exchange Act states in relevant

part that "it shall be unlawful for any clearing agency, unless registered in accordance with this

subsection, directly or indirectly, to make use of the mails or any means or instrumentality of

interstate commerce to perform the functions of a clearing agency with respect to any security".38

Paxos is seeking no-action relief regarding this registration requirement in connection with its

operation of the Paxos Settlement Service under the terms specified in this letter. For the reasons

that are summarized below, Paxos believes that no-action relief would be consistent with the

principles under Section 17A of the Exchange Act, including facilitating prompt and accurate

clearance and settlement.

First, as noted above in Section I, in adopting Section 17A Congress found that "[n]ew

data processing and communications techniques create the opportunity for more efficient,

effective, and safe procedures for clearance and settlement."39. Paxos believes that the Paxos

Settlement Service, as a private and permissioned distributed ledger system, has the potential to

provide new and unique advancements in the clearance and settlement of securities transactions,

increase efficiency, and that therefore the operation of the system will therefore advance

Congress's objectives.

Second, given the new technology represented by the Paxos Settlement Service, allowing

the system to operate for a limited period during the Feasibility Study No-Action Phase would

significantly enhance Paxos's ability to evaluate the Paxos Settlement Service and ensure that the

system functions as intended to facilitate prompt and accurate clearance and settlement of

securities transactions and facilitates the achievement of the benefits outlined in Section II.

Third, the operating parameters for the Feasibility Study No-Action Phase, as described

in Section IV. and Section V. and summarized below, are designed to limit the Paxos Settlement

Service's scope of operation and mitigate the risk of any negative effects on the U.S. securities

markets or Participants' ability to settle trades in a timely and accurate manner.

i. There will be a limited number of Participants, all of which will be registered

broker-dealers, FINRA members and DTC participants that are well capitalized

and have strong commercial and reputational incentives to accurately and

efficiently settle trades on the Paxos Settlement Service. In addition, each

Participant will be required to provide Paxos with a copy of its FOCUS reports

and any early warning report that it files under Exchange Act Rule 17a-11 related

to its net capital requirement.

ii. Paxos will also have the authority to suspend or terminate any Participant that no

longer is a DTC participant, abroker-dealer registered with the Commission, a

FINRA member, or in compliance with Paxos's AML/KYC requirements.

37See supra note 36

38 See supra note 1 and accompanying text.

39 See supra note 3 and accompanying text.

Page 19 w~vw.paxos.com
iii. Paxos's clearance and settlement services will only be available for equity

s~c~arities that r:~eet the Eligibility criteria and have a historically stable market

value and therefore a lower likelihood of significant changes in market value

between the trade date and the actual settlement date.

iv. Paxos will utilize daily Volume Limits reasonably designed to ensure that the

expected volume and exposures between Participants on the Paxos settlement

Service would be de minimis. As detailed in Exhibit A, the expected number of

shares submitted to the Paxos Settlement Service per day is 1,575,000 or 0.44% of

total average daily trading volume across a maximum of forty-two (42) securities.

v. Paxos will follow monitoring procedures of each Active Security's compliance

with the Eligibility Criteria and Volume Limits outlined in Section IV. and

CP~tinn V. and f~llnw prnr_.PrliirPc to gtnr~ the ciii~miccinr~ of trat~Pc ft~r c~ttlemPnt

on the Paxos Settlement Service should the Eligibility Criteria not continue to be

met or the Volume Limits be exceeded.

Fourth, the Paxos Settlement Service will calculate mark-to-market margin for each

Participant and Paxos will collect the Required Margin, as outlined in Section III., to enable each

Participant to manage its risk of loss associated with replacing a transaction scheduled for

settlement in the event that one of its counterparties fails to meet its settlement obligations.

For all of the foregoing reasons, Paxos believes that such relief is consistent with the

relevant considerations under the Exchange Act, and Paxos requests that the Division staff grant

this no-action relief request.

If you have any questions or would like to discuss this request, please contact us at (212)

551-4935 or securities~a,~axos.com or our outside counsel, Andrew Blake of Sidley Austin LLP,

at (202) 736-8977 or ablakensidley.com.

Sincerely,

r~ .r

a~~.df /

Charles ~. ~ascarilia Daniei Psi. Burs~ein

Chief Executive Officer General Counsel & Chief~~'ofnpliav~ce OfficeN

Paxos Trust Company, LLC Paxos Trusi company, LLC

cc: Andrew P. Blake, Sidley Austin LLP, Partner

r"~iiiiiufcu By: Tiiuiiid~ r. ~a~,aii, ivi~iayi3a ii3~iai3i, t11G1iQ11UG1 h. LAlll

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EXHIBIT A -Analysis of Expected Exposures During the Feasibility Studv No-Action

Phase

The following summary outlines the expected trade volumes, share volumes, and risk

exposures between Participants on the Paxos Settlement Service based on the defined scope of

the Feasibility Study. For the calculation of the gross notional exposures in this analysis, we

assume the worst case scenario where trade exposures are all going in the same direction (i.e.,

with no offsetting of buys and sells) within the population oftrades for a given Participant. This

appr~acl~ allows us to quantify the upper Uound in presenting the worst case scenario of

exposures between Participants based on expected volumes.

Exhibit A.1: Feasibility Study NoAction Phase Operating Parameters and Securities

Eligibility Criteria

Maximum number ofseven(7)Participants in total during Feasibility Study No-Action Phase,each ofwhich meet

Participation Criteria specified in Section IV.A.

Maximum number of2securities per Counterparty Pair settling on the Paxos Settlement Service

All securities must meet the Eligibility Criteria(see table below)

Volume Limits ofless than 100,000 shares per security, per Counterparty Pair; and aggregate shares per security

across all Counterparty Pairs ofless than 1%ofthe total average daily trading volume ofthe respective security

security must be a component ofeither the Dow,S&P 500 or the Russell 1000 stock indices

Each security must have a share price ofbetween $5 and $75

security must have no more than an 18% single day share price movement in the last 365 days

Each security must have no more than a 20% aggregate, consecutive four-day share price movement over the last

365 days

Each security must have an expected average daily volume of less than 100,000 shares settling on the Paxos

Settlement Service,per Counterparty Pair

Each security must have an expected daily volume of shares settling on the Paxos Settlement Service across all

Participants ofless than 1%ofthe average daily trading volume

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Exhibit A.2: Analysis of Expected Counterparty Pair Exposures during Feasibility Study

19~o Actia~a Phase

Example security Security 1°0 Security 241

Price per share42 $14.00 $15.00

Average daily trading volume43 12,000,000 11,000,000

Maximum single day price move (last 365 days) 12.00% 8.00%

Maximum four-day aggregate price move (last 365 days) 13.00% 10.00%

Expected average number of daily trades 60 50

Expected aveeage number of shares pec trade i y5 125

Expected number of shares submitted to the Paxos Settlement Service

per day

(Expected average number of daily trades *Expected average number

of shares per trade) 11,700 6,250

Percentage of total average daily trading volume

(Expected number of shares submitted to the Paxos Settlement Service

per day/Average daily trading volume) 0.10% 0.06%

Gross notional buys +sells per Counterparty Pair $163,800 $93,750

(Price *Expected number of shares submitted to the Paxos Settlement

Service per day)

Gross notional Total Daily Margin per Counterparty Pair at historical

maximum one-day 365 day volatility $19,656 $7,500

(Price *Maximum single day price move *Expected number of shares

submitted to the Paxos Settlement Service per dayj

40 For this Exhibit A, Security 1 and Security 2 are anonymized representations of the actual securities selected for

settlement between the first Participants. The related data used in this analysis is based on historical market data and

the first Participants' actual trading data, and has been rounded for the purposes of this summary table.

41 See supra note 40

4Z All share prices represented in this exhibit are as of 6/12/2019

43 Unless otherwise specified, throughout this document the average daily trading volume is defined as the average

of a security's daily trading volume over a rolling one (1) month period. All average daily trading volumes in this

exhibit are as of 6/12/2019.

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Exhibit A.3: Analysis of Expected Total Daily ExposuYe on the Paxos Settlement Service

during Feasibility Study No Action Phase

verage security pace $32.83

Average of the average daily trading volume per security 8,558,525

(Average of the average daily trading volume of each one of the 142 securities

evaluated)

Average maximum single day price move (last 365 days) 8.69%

Average maximum four-day aggregate price move (last 365 days) 12.21%

Total possible securities utilized during Feasibility Study No-Action Phase45 42

Total expected trades per security per day during Feasibility Study No-Action Phase 300

Expected average number of shares per tradeab 125

Expected number of shares submitted to the Paxos Settlement Service per day

(Total expected trades per security peg- day during Feasibility Study No-Action Phase

Expected average number of shares per trade * 42 securities) 1,575,000

Shares per day on the Paxos Settlement Service as a percentage of total average daily

trading volume

(Expected number of shares sa~bmitted to the Paxos Settlement Service per day * 42

securities) /Averaged average daily trading volume per secatrity 0.44%

Gross notional buys +sells on the Paxos Settlement Service

(Average security price *Expected number of shares submitted to the Paxos

Settlement Service per day) $51,715,014

Gross notional Total Daily Margin on the Paxos Settlement Service at historical

maximum one-day 365 day volatility

(Average security price *Average maximum single day price move *Expected number

of shares submitted to the Paxos Settlement Service per day) $4,494,035

44 The average per security values provided in this table are based on an analysis of the securities presented in

Exhibit B which meet the Eligibility Criteria at the time of this letter.

45 This analysis assumes the full allowance of seven (7) Participants and therefore a maximum of twenty-one (21)

Counterparty Pairs each settling the allowance of two (2) securities resulting in a theoretical maximum of forty-two

(42) securities settling on the Paxos Settlement Service.

ab This is based on data from the first Participants and is reflective of the estimated average number of shares in a

single trade on the eligible Trading Venues.

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EXHIBIT B -List of Eligible Securities

The belo~,v table represents the list of securities that meet the Eligibility Criteria as of June 12,

2019 for the Feasibility Study No-Action Phase and also have an average daily trading volume

greater than three million X3,000,000) shares per day.

GE General Electric Company 369604103 10.28 11.65% 17.74%

BAC Bank of America Corp 060505104 27.95 7.16% 1 130%

F Foj•d Motor Coinpa;iy 34537850 9.85 10.74% 13.13%

T AT&T lnc. 002068102 32.18 8.06% 11.20%

INTC Intel Corporation 458140100 46.32 8.99% 13.50%

SIRI Sirius XM Holdings Inc 82968B 103 5.5 10.32% 11.17%

MiJ Micron Technology, Inc. 595112103 32.96 9.87% 15.69%

PFE Pfizer Inc. 717081103 43.08 4.04% 8.23%

CSCO Cisco Systems, Inc. 172758102 55.85 6.66% 9.62%

FCX Freeport-McMoRan Inc 35671D857 10.59 13.08% 17.14%

ZNGA Zynga Inc 989867108 6.19 12.37% 11.56%

WFC Wells Fargo &, Cu 949746101 44.91 4.SGio 7.?9"!u

NLY ANNALY CAP MGMT/SH 05710409 9.04 3.40% 4.94%

CMCSA Comcast Corporation 20030N101 41.4 5.99% 7.44°io

RIG Transocean LTD H8817H100 5.5 10.68°/a 1731%

X United States Steei Corporation 912909108 13.75 17.30% 16.15%

OXY Occidental Petroleum Corporation 674599105 48.79 6.44% 12.60°/a

KMI Kinder Morgan Inc 49456B 101 2038 6.32% 6.32%

CTL Centurylink Inc 156700106 10.77 13.11% 17.40%

VZ Verizon Communications Inc. 92343V 104 5736 4.36% 7.62°/a

C Citigtoup Inc 172967424 55.81 5.22% 10.83%

BMY Bristol-Myers Squibb Co 110122108 47.63 13.94% 14.26%

un TheC~~~-r~i~~~ ioi?iFinn S~.Fa R,aa~i in.ii~i

MRO Marathon Oil Corporation 565849106 13.02 11.93% 13.17%

HAL Halliburton Company 406216101 21.07 8.10% 13.93%

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ORCL Oracle Corporation 68389X105 53.62 7.46% 8.27%

MRVL Marvell Technology Group Ltd. G5876H105 24.06 8.20% 13.33%

RF Regions Financial Corp 7591EP100 14.24 6.52% 16.20%

XOM Exxon Mobil Corporation 302316102 74.03 4.78% 9.31%

HPQ HP Inc 404~4L105 19.92 17.27% 18.50%

HPE Hewlett Packard Enterprise Co 42824C 109 14.14 8.18% 10.34%

CNC Centene Corp 15135B 101 53.69 10.27% 12.24%

CVS CVS Health Corp 126650100 53.66 8.10% 12.82%

AMAT Applied Materials, Inc. 038222105 41.5 10.23% 13.52%

JCI Johnson Controls International PLC 651502105 39.53 4.77% 10.73%

SLB Schlumberger Limited. 806857108 35.58 8.12% 8.99%

GM General Motors Company 37045V100 35.67 9.09% 10.33%

HBAN Huntington Bancshares Incorporated 446150104 13.41 5.52% 12.56%

VER VereitInc 92339V100 9.38 4.27% 8.35%

MS Morgan Stanley 617446445 42.62 6.19% 9.25%

KEY KeyCorp 493267108 17.02 6.44% 16.45%

NEM Newmont Goldcorp Corp 651639106 35.47 8.89% 11.28%

CTSH Cognizant Technology Solutions Corp 192446102 62.15 11.05% 19.24%

EBAY eBay Inc 278642103 39.02 10.12% 11.96%

MPC Marathon Petroleum Corp 56585A102 46.97 7.42% 15.39%

SYMC Symantec Corporation 871503108 19.19 1.2.59% 16.97%

ATVI Activision Blizzard, Inc. 00507V 109 45.09 1239% 17.96%

BSX Boston Scientific Corporation 101137107 40.8 6.24% 9.07%

RRC Range Resources Corp. 75281A109 6.58 10.62% 16.22%

KR Kroger Co 501044101 24.63 9.95% 15.24%

ON ON Semiconductor Corp 682189105 19.82 8.82% 15.90%

AR Antero Resources Corp 03674X 106 5.76 8.70% 16.32%

MGM MGM Resorts International 552953101 27.7 9.12% 15.97%

MO Altria Group Inc 02209S103 51.59 6.91% 8.71%

WPX WPX Energy Inc 98212B 103 10.66 10.10% 12.43%

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AES AES Corp 00130H105 16.76 6.71% 9.46%

MONDELEZ INTERNATIONAL INC

MDLZ Common Stock 609207105 54.55 5.59% 7.19%

WMB Williams Companies Inc 969457100 27.21 5.84% 8.38%

COP ConocoPhillips 208250104 58.55 7.88% 9.06%

HST Host Hotels and Resorts Inc 44107P104 18.43 6.26°~o 9.68%

GPS Gap Inc 364760108 17.83 16.18% 17.28%

Charles Schwab Corporation Common

SCHW Stock 808513105 42.1 6.04% 9.29%

FITB Fifth Third Bancorp 316773100 27.11 6.46% 15.24%

WU The Western Union Company 959802109 20.14 5.78% 7.43%

COG Cabot Oil Rc Gas Corporation 127097103 23.72 7.73% 10.65%

TJX TJX Companies Inc 872540109 52.13 5.31% 9.28%

DVN Devon Energy Corp 25179M103 25.48 8.25% 15.22%

GILD Gilead Sciences, Inc. 375558103 66.78 5.36% 8.87%

AIG American International Group Inc 026874784 52.96 9.03% 12.75%

AAL American Airlines Group Inc 023768102 31.1 9.12% 15.91%

SYN' Synchrony N'inanciai 871658103 33.79 10.73% 13.05%

NWL Newell Co 651229106 14.56 10.73% 13.05°/a

TPR Tapestry Inc 876030107 28.83 14.83% 12.68%

KSS Kohl's Corporation 500255104 47.97 12.34% 19.78%

WY Weyerhaeuser Co 962166104 25.06 8.50% 11.16%

NBL Noble Energy, Inc. 655044105 20.36 9.91% 1638%

LB L Brands Inc 501797104 21.84 17.71% 19.78%

AGNC AGNC Lnvestment Corp 00123Q104 16.75 2.77% 3.49%

MET Metlife Inc 591568108 48.42 5.41% 9.61%

CNP CenterPoint Energy, Inc. 151897107 28.98 4.05% 5.88%

GLW Corning Incorporated 219350105 31.21 1133% 14.20%

ARMK F~ramark 03852U1~b 34.93 12.37% 14.84%

WBA Walgreens Boots Alliance Inc 931427108 52.12 12.81% 15.00%

VST Vistra Energy Corp 92840M102 24.22 5.58% 13.42%

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USB U.S. Bancorp 902973304 52.69 3.79% 8.18%

MOS Mosaic Co 619450103 22.66 10.61% 14.37%

LVS Las Vegas Sands Corp. 517834107 57.04 11.82% 12.41%

PPL PPL Corp 693517106 31.16 6.64% 8.70%

NYCB New York Community Bancorp, Inc. 649445103 9.75 7.A0% q q2%

FAST Fastenal Company 311900104 32.27 10.05% 11:74%

NOV National-Oilwell Varco, Inc. 637071101 20.54 10.32% 1338%

BK Bank of New York Mellon Corp 064058100 44.1 9.52% 9.86%

IVZ Invesco Ltd. G491BT108 20.47 7.12% 11.46%

BHGE Baker Hughes A GE Co 057226100 22.3 7.51 % 13.48%

APA Apache Corporation 037411105 28.01 6.59% 13.76%

EXC Exelon Corporation 30161N101 50.45 4.49% 431%

GT Goodyear Tire &Rubber Co 382550101 14.86 13.04% 13.65%

FEYE FireEye Inc 31816Q101 14.5 12.1 I% 17.39%

SO Southern Co 842587107 55.15 4.59% 5.90%

BBT BB&T Corporation 054937107 49.59 4.65% 11.11%

DAL Delta Air Lines, Inc. 247361702 55.45 8.94% 1033%

DISCOVERY COMMUNICATIONS

DISCA INC. Common Stock 25470F104 29.23 9.03% 13.20%

KIM Kimco Realty Corp 494468109 18.38 623% 9.12%

GIS General Mills, Inc. 370334104 52.61 7.62% 7.94%

NRG NRG Energy Inc 629377508 34.5 5.13% 11.87%

INVH Invitation Homes Inc 46187W107 26.97 3.64% 6.55%

ADM Archer Daniels Midland Co 039483102 40.72 6.02% 8.84%

.f BLU JetBlue Airways Corporation 477143101 19.24 10.20% 13.40%

VIAB Viacom, Inc. Class B 92553P201 29.14 8.53% 11.50%

ARNC Arconic Inc 03965L100 22.66 15.98% 15.98%

EQH AXA Equitable Holdings Inc 054561105 21.23 6.53% 12.88%

KOS Kosmos Energy Ltd 500688106 5.69 12.88% 14.89%

CFG Citizens Financial Group Inc 174610105 34.75 5.77% 1335%

GPK Graphic Packaging Holding Company 388689101 13.94 14.04% 17.11%

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PTEN Patterson-UTI Energy, Inc. 703481101 1031 9.68% 18.54%

CCL Carnival Corp 143658300 5339 9.49% 18.95%

YLJMC Yum China Holdings Inc 98850P109 41.19 13.85% 16.45%

FE FirstEnergy Corp. 337932107 4337 4.02% 5.15%

JM'R Juniper Nctworks, Inc. 482038104 26.95 7.SS% .;837°/a

AA Alcoa Corp 013$72106 21.17 13.34% 15.17%

NRZ New Residential Investment Corp 648287201 15.42 6.50% 8.21%

DHI D. R. Horton Inc 23331A109 45.04 10.88% 10.56%

HRL Hormel Foods Corp 440452100 41.55 3.83% 5.51%

LUV Southwest Airlines Co 844741108 50.81 8.57% 17.63%

BBY Best Buy Co Inc 086516101 64.45 14.11% 13.74%

MNST Monster Beverage Corp 61174X109 64.08 8.83% 12.22%

EMR Emerson Electric Co. 291011104 62.74 5.37% 8.86%

URBN Urban Outfitters, Inc. 917047102 22.78 9.85% 12.25%

MAS Masco Corp 574599106 38.17 8.29% 13.80%

CC Chemours Co 163851108 23.58 9.50% 15.49%

A Agilent Technologies Inc 008460101 70.29 11.01% 9.09%

CPRI Capri Holdings Ltd G 1890E 107 33.12 14.62% 18.57%

LKQ LKQ Corporation 501889208 26.19 5.70% 9.59%

CAH Cazdinal Health Inc 14149Y108 44.22 6.81% 1120%

CL Colgate-Palmolive Company 194162103 73.05 6.64% 10.77%

WEN Wendys Co 95058W100 1938 4.40% 9.43%

PHM PulteGroup, Inc. 745867101 32.16 7.28% 14.05%

DISCK Discovery Inc Series C 25470F302 27.21 8.91% 12.30%

IP International Paper Co 460146103 43.52 1025% 10.15%

ALLY Ally Financial Inc 02005N100 2932 6.36% 9.89%

1VI NiSource Inc. 65473P105 28.53 11.72% 10.06%

ADT ADT Inc 00090Q103 625 13.44% 19.47%

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EXHIBIT C -Quarterly Reporting Templates

Exhibit C.1: Quarterly Scope Report

The below Quarterly Scope Report will be provided once for every quarterly report package.

4uarterly Scope Report

Reporting Quarter /Year Q# 20##

Reporting Date Range MM/DD/YY - MNI/DD/YY

Participants actively settling trades on the Paxos Settlement Service

Active Securities per Counterparty Pair

Participants pending activation of settlement on the Paxos Settlement Service

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Exhibit C:2: Quarterly Trade Data Report

The below Quarterly Trade Data Report will be provided for every Counterparty Pair in the

Quarterly Scope Report.

Trade Data

Counterparty Pair

Reporting date range

Security

Total number of trades

Shares per trade

USD notional per trade

Trades per day [count]

Shares per day [count]

USD notional per day aggregate]

Settlement Failures per day [count]

USD notional of Settlement Failures per day

[aggregate]

Settlement Failures per quarter [count]

MM/DD/YY - MM/DD/YY

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Exhibit C.3: Quarterly Required Margin Data RepoNt

The below Quarterly Required Margin Data Report repeats for every Counterparty Pair listed in

the Quarterly Scope Report.

Required Margin Data

Reporting date range MNI/DD/YY - MM/DD/YY

Participant <participant name>

Daily Margin

Daily Margin High Water Mark

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Exhibit C.4: Quarterly Volu`ne Limits Report

The below Quarterly Volume Limits Report will be provided once for every quarterly report

package. This report will list all securities utilized in the quarter across all Counterparty Pairs on

the Paxos Settlement Service.

Volume Limits Report

Reporting date range MM/DD/YY - MM/DD/YY

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Exhibit C. S: Quarterly Eligible Securities Report

The below Quarterly Eligible Securities Report will be provided once for every quarterly report

package. This report will list all securities eligible to be selected as Active Securities on the

Paxos Settlement Service.

Eligible Securities Report

Reporting date range MM/DD/YY - MM/DD/YY

Number of Securities

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