September 21, 2023 

Christopher J. Kirkpatrick 

Secretary

Commodity Futures Trading Commission 

Three Lafayette Centre

1155 21st Street, N.W. 

Washington, D.C. 20581 

 

Re: Cboe Clear Digital, LLC Rule Certification

Submission Number CCD-2023-03C 

Dear Mr. Kirkpatrick:

Cboe Clear Digital, LLC (“CCD” or “Clearinghouse”), a registered derivatives clearing 

organization (“DCO”) under the Commodity Exchange Act, as amended (“CEA” or the “Act”), 

hereby submits, pursuant to §40.6(a) of the regulations promulgated by the Commodity Futures 

Trading Commission (“CFTC” or “Commission”) its Futures Market Risk Models, which 

includes CCD’s Margin Model (i.e., margin methodology) and CCD’s Stress Model, for 

margined futures contracts on bitcoin and ether (“Products”). As part of the Commission’s review 

of CCD’s application to amend its DCO order of registration to clear margin future products,1 the 

Commission reviewed a draft of the Futures Market Risk Models, and that draft is unchanged from 

the Commission’s review. CCD’s Futures Market Risk Models is set forth in a segregated 

confidential Exhibit A to this submission. 

The proposed rule change to adopt the Futures Market Risk Model (“Rule Change”) will become 

effective on or after October 2, 2023, on an implementation date to be announced by the 

Clearinghouse through the issuance of a Clearing notice (“Effective Date”). 

Overview of the Futures Market Risk Models 

The Futures Market Risk Models includes both CCD’s Margin Model and Stress Model (and 

therefore, “Futures Market Risk Models”, collectively). CCD will use its Margin Model to set 

initial margin requirements for its Clearing Members approved to clear the Products. CCD will 

use its Stress Model to calibrate and test stress scenarios in connection with its credit exposure to 

Clearing Members under stressed market conditions, from which CCD calculates size of its 

Default Financial Resource Requirement.2 

1 CCD’s amended DCO order of registration was approved by the Commission on June 5, 2023.

2 CCD’s Default Financial Resource Requirement is the total required amount of funds to meet or exceed CCD’s 

Daily Cover 2 Requirement, which is the sum of the two largest Clearing Member Groups where any stress test 

gains from one Clearing Member Group will not be allowed to offset the stress test losses from another Clearing 

Member Group. 
The Futures Risk Models are based on an analysis of the risk faced by the Clearinghouse due to 

potential futures price movements between collection of variation margin and an estimated time 

period in which a Clearing Member’s open positions can be liquidated in the event of a default. 

Parameters in the Futures Market Risk Models are calibrated using at least five years (or longest 

available) historical spot digital asset and futures market data to reflect the risk of each Product to 

ensure that the margin requirements and stress exposure measurement captures the risk 

characteristics of each Product (and spread, if applicable).

Margin Model

Section 5 of the Futures Market Risk Models sets forth the Margin Model methodology for each 

Product. The Margin Model is based on a filtered historical simulation method for implementing 

value-at-risk (“FHS VaR”) using a lookback period of five years3 (or longest available), a risk 

coverage period4 of two-day market return,

5 and 99th percentile confidence level6 (0.5 percent for 

each tail of the distribution) risk coverage. The FHS VaR approach uses historical changes in spot 

Bitcoin and Ether price returns to generate historical distribution and does not rely on any 

assumptions regarding distributional shape or distributional parameters. To prevent tail risk 

measurements—meaning the measure of the amount of market price movement risk—from falling 

too low during extended periods of low volatility, a Historical Value-at-Risk (“HVaR”) model is 

used to establish floors to the VaR calculations performed by the FHS VaR. As such, the FHS VaR 

model adjusts for short-term price volatility allowing the Margin Requirements to adjust to 

changing market conditions while the HVaR model prevents the Margin Requirement from falling 

below the long-term estimate of tail risk during extended periods of low market volatility.

A lookback period of 5 years is generally considered appropriate for a full economic cycle to 

manifest while also capturing changes to the underlying market risk characteristics. The risk 

coverage period of two business days is intended to give Cboe Clear Digital sufficient time to 

invoke its Default Management Plan7 for managing market risk exposure from a defaulting 

Clearing Member’s portfolio, and is above the minimum time requirement set forth in CFTC Rule 

39.13(g)(2). Further, the 99th percentile confidence level complies with the confidence level 

3 The FHS VaR model uses 5.5 years of data for calibration. The first 6 months (0.5 years) is used to produce a 

stable measurement of historical short term volatility using an Exponential Moving Average (“EWMA”) model. The 

remaining 5 years of data is used to calculate the FHS VaR.

4 Pursuant to the Futures Market Risk Models, “Risk Coverage Period”, “Holding Period” or “Liquidation Period” 

means the length of time that the Clearinghouse believes is sufficient for it to manage exposure arising from open 

positions of a defaulting Clearing Member though transferring, closing or hedging those positions. 5 Pursuant to the Futures Market Risk Models, the choice of the Risk Coverage Period of 2 days requires the 

estimation of 2 days risk statistics using historical data that is typically snapshot at least daily.

6 Pursuant to the Futures Market Risk Models, “Confidence Level” means Probability with which the estimation of 

the location of a statistical parameter (e.g. an arithmetic mean) in a sample survey is also true for the population.

7 In the event a Clearing Member of CCD is in Default, CCD will invoke its Default Management Plan (“DMP”) 

and follow its procedures to handle such an event. The DMP delineates the roles and responsibilities of CCD’s 

management team, Board of Directors, Risk Management committee, and Default Management Committee, and 

ensures that CCD takes timely action to contain losses and liquidity pressures, and continuing meeting obligations. 

The DMP will be submitted to the CFTC for self-certification in a separate filing.
requirements in CFTC Rule 39.13(g)(2)(ii)(A). Further, the FHS VaR model scales all historical 

returns by a ratio of the most recent estimate of short-term volatility to the estimate of short-term 

volatility at the time the return was observed (i.e., filtered returns). The Margin Model uses the 

same volatility estimation methodology and parameters for both the most recent and historical 

short term volatility estimation, resulting in the most recent returns having a volatility scaling 

factor of approximately one. As such, past returns from different volatility regimes are adjusted 

appropriately while recent returns incorporate only slight adjustment, which allows the FHS VaR 

to be responsive to short term volatility clustering while not being extremely volatile due to daily 

price fluctuations. See Section 5.2 (Volatility Scaling and EWMA) of the Futures Market Risk 

Models (Exhibit A) for the detailed volatility estimates computation. 

There is no historical data pertaining to the new margin eligible contracts on Bitcoin (BTC) and 

Ether (ETH), but CCD’s Margin Model uses comparable CME Group (“CME”) BTC and ETH 

historical data8 to study the risk characteristics of the futures market for these commodities. CCD 

also uses pricing data from the underlying spot commodities market to study the Cash Basis Risk,9

and offers the advantage of providing longer time series for better tail risk10 calibration.

The tail risk measurement calculated by the Margin Model is the maximum absolute value of eight 

tail statistics for each product. Of the eight, four are calculated using the HVaR model and the 

other four are calculated using the FHS VaR model.

Pursuant to Sections 6 of the Futures Market Risk Models, CCD reviews results from Backtesting

the CCD Margin Model based on parameter configurations of the Model. Backtest results are 

presented using CoinDesk Indices11 spot index data and CME Futures front month data. The HVaR 

Model was reviewed by an independent third party, and such review included a review of the data 

that was used for Backtesting and the Backtesting results. As more data becomes available, the 

Model will pick up new data points, which allows for continual improvement of the Model.

Backtesting indicates CCD risk within the mandated confidence level, while also limiting dramatic 

fluctuation due to sudden changes in market conditions.

Section 7 of the Futures Market Risk Models presents results from analysis of Cash Basis Risk12

between underlying spot commodities indices, CoinDesk Indices bitcoin price index (“XBX”) and 

Ether price index (“ETX”), and the CME front month futures. It also presents results from analysis 

8 CME Bitcoin futures were launched in December 2017; CME’s Ether futures were launched in February 2021. 9 Cash Basis Risk is the risk characteristics of a portfolio containing equal and opposite notional exposure form a 

futures contract and the underlying spot commodity.

10 Tail Risk is the measure of the amount of market price movement risk based on historical data and Clearinghouse 

requirements for Lookback Period, Risk Coverage Period and Confidence Level.

11 CoinDesk indices is a third party provider of trading technology and data which calculates and disseminates price 

index data on a large number of cryptocurrencies

12 Cash Basis Risk: The risk characteristics of a portfolio containing equal and opposite notional exposure from a 

futures contract and the underlying spot commodity.
of Calendar Spread13 risk between CME futures on the same product but different contract months.

The results indicate that the risk is in line with acceptable standards.

Section 8 of the Futures Market Risk Models provides the Margin Model Basis Risk Parameters.

These parameters include a risk adjustment for longer dated futures, and configuration of the 

Margin Model pertaining to calendar spreads to charge higher amounts to prevent excessively 

leveraged spread portfolios. 

Section 9 of the Futures Market Risk Models details CCD’s publication of an Initial Margin 

Multiplier (“IMM”) which is multiplied by the Maintenance Margin Requirement (“MMR”) to 

calculate the Initial Margin Requirement (“IMR”). The IMM requirement for BTC and ETH is 

determined based on an analysis of intraday (hourly snapshot) of spot price data. The analysis is 

based on CoinDesk Indices. CCD has calibrated the IMM to be in the range of the 95th percentile 

risk using a five-year lookback for the absolute close-to-high to close-to-low returns.

Section 10 of the Futures Market Risk Models discusses the Maintenance Margin Calculation and 

explains the steps for calculating the MMR for Outright Positions14 and Spread Positions. 

Section 11 of the Futures Market Risk Models discusses Concentration Add-On charges, which 

are a means of managing the liquidity risk of large positions. CCD examines the spot market for 

Bitcoin and Ether and CME BTC and ETH futures contracts, which are indicative of interest in 

derivative contracts on Bitcoin and Ether and provide means of hedging risk. 

Stress Model

Section 12 of the Futures Market Risk Models sets forth the Stress Model, which leverages the 

same data and analytics from the calibration and Backtesting of the Margin Model. Similar to the 

Margin Model, the Stress Model uses a lookback period of five years15 (or longest available), and 

a risk coverage period16 of two-day market return.

17 The Stress Model has a 99.8 percent 

confidence level18 (0.1 percent for each tail of the distribution) risk coverage. 

13 Calendar Spread: A portfolio containing positions in exactly two different futures contracts on the same 

commodity that expire on different dates. To qualify as Calendar Spread positions, the positions in the two contracts 

need to be in opposite directions (long and short) and matched in quantity units i.e. same number of contracts in long 

and short direction. 

14 Outright Positions are futures contracts that are not part of a Spread Portfolio. 15 The FHS VaR model uses 5.5 years of data for calibration. The first 6 months (0.5 years) is used to produce a 

stable measurement of historical short term volatility using an Exponential Moving Average (“EWMA”) model. The 

remaining 5 years of data is used to calculate the FHS VaR.

16 Pursuant to the Futures Market Risk Models, “Risk Coverage Period”, “Holding Period” or “Liquidation Period” 

means the length of time that the Clearinghouse believes is sufficient for it to manage exposure arising from open 

positions of a defaulting Clearing Member though transferring, closing or hedging those positions.

17 Pursuant to the Futures Market Risk Models, the choice of the Risk Coverage Period of 2 days requires the 

estimation of 2 days risk statistics using historical data that is typically snapshot at least daily.

18 Pursuant to the Futures Market Risk Models, “Confidence Level” means Probability with which the estimation of 

the location of a statistical parameter (e.g. an arithmetic mean) in a sample survey is also true for the population.
The Stress Model uses historical stress market moves (maximum, minimum, and .999 market 

move on both the left and right tails); ETH-BTC historical basis risk over a two-day period; and 

calendar spread/curve stress risk using spot price and first tenor, and longer-dated tenors, as the 

basis.

Core Principle Compliance 

CCD believes that its Futures Market Risk Models are consistent with the DCO Core Principles as 

set forth in the CEA and has identified the following DCO Core Principles as potentially being 

relevant to the above amendments: 

• DCO Core Principle D – Risk Management: By developing and utilizing these models in 

line with acceptable market standards, CCD ensures that it possesses the ability to manage 

the risks associated with discharging its responsibilities through the use of appropriate, 

tailored tools and procedures. This includes measurement of exposure, limitation of 

exposure to potential losses from defaults, margin requirements, and requirements 

regarding models and parameters. The Futures Market Risk Models measures the credit 

exposure on an intraday basis and limits exposure to potential losses from defaults through 

specific margin requirements and other risk control mechanisms so that the operations of 

CCD will not be disrupted in the case of a default. Further, nondefaulting participants will 

not be exposed to losses connected with margin trading on Cboe Digital’s platform that 

they cannot anticipate or control. Margin requirements are sufficient to cover potential 

exposures in normal market conditions, and the models are risk-based and will be reviewed 

on a regular basis; and

• DCO Core Principle L – Public Information: To ensure that market participants have 

sufficient information enable them to identify and evaluate accurately risks and costs of 

engagement with CCD, cash margin for each Product is computed on a daily basis and 

posted daily on the Cboe Digital website. Additionally, the margin requirements for the 

Products are published daily on the Cboe Digital website, along with the CME SPAN 

compatible risk parameter files that may be used by market participants for portfolio 

margin calculations.19

Public Information

A notice and copy of this submission has been concurrently posted on Cboe Digital’s website at 

https://www.cboedigital.com/regulation/exchange-notices/ under “CFTC Submissions.” 

Opposing Views 

CCD is not aware of any opposing views expressed regarding this Rule Change. 

19 With this and other disclosures, CCD is ensuring that it meets the requirements of § 39.21 of the regulations 

promulgated by the Commission.
Certification

CCD hereby certifies to the Commission, pursuant to the procedures set forth in Commission 

regulation §40.6, that this submission complies with the CEA, as amended, and the regulations 

promulgated thereunder. 

Please contact me if you have any questions or wish to discuss this matter further. 

Sincerely, 

/s/ Katherine Kirkpatrick

Katherine Kirkpatrick

Chief Legal Officer, Cboe Digital

kkirkpatrick@cboe.com