DATE: 5/20/2022

FOR DISCUSSION ONLY

1 

Commodity Futures Trading Commission

Staff Roundtable Discussion on Non-intermediation 

Wednesday, 25 May 2022

Washington, DC

STYLIZED FACTS FOR DISCUSSION

The Commodity Futures Trading Commission (“CFTC” or “Commission”) has received a request

by LedgerX, LLC, d.b.a. FTX U.S. Derivatives (“FTX-US”) for an amended order of registration as 

a Derivatives Clearing Organization (“DCO”) that would permit FTX-US to offer clearing services 

for certain margined products to market participants on a direct, non-intermediated basis, 

utilizing a highly automated, near real-time risk and default management system. CFTC 

Request for Comment (2022).

*

For purposes of the discussion, roundtable participants will be asked to consider how a 

hypothetical clearinghouse (“DM-DCO”) that faces its participants directly, without 

intermediation by a Futures Commission Merchant (“FCM”), might operate if approved to do so 

by the Commission. This feature (non-intermediation) is useful as a starting point – together 

with other operational and risk management attributes – for distinguishing the clearing service 

for margined products that DM-DCO would provide, if approved to do so, from clearing 

arrangements currently provided by other CFTC-regulated DCOs. 

The stylized facts relating to DM-DCO set forth below – including general descriptions of the 

financial resources available to the clearinghouse, its operational process, risk and default 

management procedures, and other features – are based on key attributes of the clearing 

service that FTX-US has described in its application for an amended order of DCO registration.

The roundtable discussion, however, is intended to give participants an opportunity to discuss 

issues that may have broad significance, extending beyond the Commission’s review of the FTXUS application. In particular, the purpose of the roundtable discussion is to consider the 

potential costs and benefits of a direct model of clearing that utilizes a highly automated, near 

real-time risk and default management system, not to focus on issues that are specific to the 

FTX-US application. The stylized facts outlined below are intended to assist in that effort.

However, it may be helpful to refer on a limited basis to certain aspects of how the FTX-US 

clearing service is intended to operate in order to illustrate certain points and facilitate a better 

understanding of the key characteristics of the hypothetical DM-DCO clearing service. 

 

*

 As noted in the CFTC’s Request for Comment, “FTX-US currently clears futures and options on futures 

contracts on a fully collateralized basis. FTX proposes to clear margined products while continuing with a nonintermediated model.” The stylized facts do not include any specific reference to the provision of such a service by 

DM-DCO.
DATE: 5/20/2022

FOR DISCUSSION ONLY

2 

In addition, the stylized facts may be supplemented or revised during the course of the 

discussion as may be considered desirable, depending on how the roundtable discussion 

proceeds. 

It may also be helpful to refer to certain requirements of U.S. law relating to market and 

customer protection in the provision of clearing services for margined products during the 

roundtable discussion. Nevertheless, roundtable participants should bear in mind that the 

purpose of the roundtable meeting is to consider broad policy, risk management, and legal 

issues, not to reach any conclusion regarding the Commission’s review of the FTX-US 

application or to determine how statutory and regulatory requirements currently in effect 

might apply to that application. 

* * * * *

Stylized Facts

• General Background/Assumptions

DM-DCO is a legal person under U.S. law (or other applicable law) and subject to regulation by 

the Commission and to registration as a DCO.

Like traditional DCOs, DM-DCO is generally expected to make adequate provision for both 

market and end-user (or customer) protection, as required under applicable law.*

DM-DCO also is assumed to have sufficient capital and liquidity to operate responsibly and 

satisfy relevant regulatory reporting requirements. The amount of capital and liquidity that 

might be sufficient to meet applicable legal and regulatory requirements may be subject to 

discussion by roundtable participants.

DM-DCO intends to interact with its users on a non-recourse basis. What this means, in the 

context of the proposed clearing service, may be subject to discussion by participants in the 

roundtable discussion.

• Counterparty Substitution 

DM-DCO becomes a direct counterparty to all trades submitted for clearing by its users,

eliminating bilateral credit exposure between pairs of users. As a result, DM-DCO faces each of 

its users on a principal-to-principal basis, without intermediation. 

 

*

 Because DM-DCO intends to face its market participants directly, without intermediation by a FCM, the 

use of the term “customer” in this context presents some interpretative challenges that are not considered in the 

stylized facts. In particular, there appear to be important issues concerning the treatment of customer property 

(e.g., segregation requirements) in the context of the clearing service to be provided by DM-DCO.
DATE: 5/20/2022

FOR DISCUSSION ONLY

3 

• Continuous Risk and Default Management Operations

DM-DCO plans to operate on a continuous basis (24x7x365) in global markets for certain 

products. This necessitates continuous monitoring of market conditions and the ability to react 

to those conditions on a near real-time market basis.

To mitigate credit risk associated with the clearing service provided by DM-DCO, the 

clearinghouse will implement a collateral-based (or strongly “defaulter-pays”) risk management 

system that automatically recalculates margin requirements at high frequency as market prices 

change. 

Unlike traditional clearinghouses for margined products, DM-DCO does not propose to issue 

calls for additional funding on the basis of mark-to-market changes. DM-DCO will, instead, rely 

on collateral deposited by and held on behalf of any participant to cover mark-to-market losses

incurred in that participant’s account. 

DM-DCO proposes to maintain a hierarchy of three levels of margin requirements for a given 

risk position:

• The level required at position initiation (initial margin); 

• A lower level, below which automatic de-risking is triggered (maintenance margin); and

• A still lower level, below which full account termination and assignment to a third party 

is triggered, (auto-close margin). 

Users of the DM-DCO clearing service may choose to deposit collateral in an amount that 

exceeds DM-DCO’s minimum margin requirements to mitigate against incurring losses that may 

trigger default management processes.*

The default management process, like the margining system to be implemented by DM-DCO, 

will be highly automated. In particular, if margin falls below the maintenance requirement in a 

user account, DM-DCO will immediately begin liquidating a portion of a defaulting user’s 

positions (or “de-risking”) in order to bring the account back into compliance with the 

clearinghouse’s minimum maintenance margin requirements. The liquidation process may 

continue in stages until the amount of collateral available to support open positions for a 

particular account exceeds the applicable maintenance margin requirement. 

Any resulting losses, either from the de-risking process or from further mark-to-market losses, 

will be marked to the defaulting user’s account and be offset by collateral held by DM-DCO for 

the user. Among other things, roundtable participants may wish to consider how this process 

may interact with market pricing in the relevant market(s). As noted above, defaulting users will 

 

*

 As noted above, DM-DCO intends to monitor credit risk on a continuous basis and automatically 

recalculate margin requirements and unrealized profit and loss as market prices change. In this context, “default” 

is defined as an under-margined condition.
DATE: 5/20/2022

FOR DISCUSSION ONLY

4 

not face any additional liability to the clearinghouse beyond the amount of collateral held by 

DM-DCO.

DM-DCO also will engage certain Backup Liquidity Providers (“BLPs”) to support the liquidation 

process. This arrangement is intended to provide additional resources for default management 

in case market conditions in the relevant market(s) are illiquid and user positions cannot be 

quickly liquidated in accordance with the clearinghouse’s auto-liquidation process. In particular, 

accounts are allocated to BLPs if collateral in the account falls below auto-close margin, 

including during the de-risking process.

How this feature of the DM-DCO proposal interacts with other risk management components,

what qualifications BLPs should possess, and how they should be compensated, among other 

issues, may be subject to discussion by participants in the roundtable discussion.

• Loss Allocation and Guarantee Fund

DM-DCO will establish a guarantee fund funded solely by its own capital in an amount that is 

considered adequate to provide a source of financial resilience for the clearinghouse. Users of 

the DM-DCO clearing service will not contribute to the guarantee fund. 

DM-DCO proposes to fund the guarantee fund in an amount intended to cover 10% of total 

margin held by the clearinghouse and will be recalculated periodically. Roundtable participants 

may wish to discuss whether this approach is adequate and, in particular, whether it provides 

satisfactory assurances of clearinghouse resilience in “extreme, but plausible, circumstances.” 

The guarantee fund is intended to cover these extreme contingencies, in part because DMDCO’s recourse is limited to assets posted to DM-DCO as collateral. Therefore, if losses 

assigned to an account exceed the amount of available collateral, any excess losses will be 

absorbed by the guarantee fund. In addition, positions may be allocated to the BLPs, if 

necessary, at a discount. This discount is funded by the guarantee fund.

• Mutualization of Losses/End of Waterfall Procedures

The primary BLP process described above continues until one of the following two events 

occurs: 1) aggregate BLP risk thresholds have been hit or 2) funds in the guarantee fund have 

been fully exhausted. Each of these individual events leads to unique adjustments in the 

position liquidation process outlined above.

As part of the process of becoming a BLP, the BLP is assigned a maximum level of risk that it can 

receive through the auto-liquidation process. Once this limit is reached, no further portfolio risk 

can be transferred to that BLP. As a result, auto-liquidation volume could become so high as to 

exceed the risk capacity of all available BLPs. In this event, DM-DCO will turn to the secondary 

BLP system, represented by the largest market participants with offsetting positions to the 

liquidated accounts (e.g. largest shorts if liquidated accounts are long). Positions will be 
DATE: 5/20/2022

FOR DISCUSSION ONLY

5 

assigned to these secondary BLPs on a pro-rata basis until no further position liquidation is 

needed (theoretically up to the full open interest of the product).

If the guarantee fund is exhausted, no further funds are available, at least temporarily, to offset 

additional account losses prior to position transfer (whether through the primary or secondary 

BLP system). In this event, those with unrealized gains will be subject to adjustment (which 

may be called “variation margin gains haircutting”), in proportion to their gains, up to the point 

where all accounts have been transferred and no unrealized, uncovered losses remain. At the 

point where the guarantee fund has been exhausted, DM-DCO would either need to replenish 

the guarantee fund or, in extreme circumstances, move to full tear-up. 

* * * * *

* * * * *
DATE: 5/20/2022

FOR DISCUSSION ONLY

6 

REFERENCES

U.S. Commodity Futures Trading Commission, 2022, Request for Comment on FTX Request for 

Amended DCO Registration Order (11 March), available at: 

https://www.cftc.gov/media/7031/CommentFTXAmendedOrder/download

* * * * *

* * * * *