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February 8, 2022

VIA EMAIL

Mr. Clark Hutchison

Director, Division of Clearing & Risk

Commodity Futures Trading Commission 

Three Lafayette Centre

1155 21st Street, N.W.

Washington, D.C. 20581

Re: Permissibility and Benefits of Direct Clearing Model under the 

Commodity Exchange Act and CFTC Regulations

Dear Mr. Hutchison: 

LedgerX LLC, d/b/a FTX US Derivatives (“FTX”), recently submitted an application 

requesting that the Commodity Futures Trading Commission (“CFTC”) amend its Amended 

Order of Registration as a derivatives clearing organization (“DCO”), thereby allowing FTX 

to offer margin directly to customers. In support of that application, FTX offers the following 

explanation of how this approach, which would not rely on intermediation, is permitted by the 

Commodity Exchange Act (the “CEA”) and CFTC Regulations. FTX will also demonstrate 

how its proposed risk management framework is comparable to the clearing-related

requirements imposed on clearing futures commission merchants (“FCMs”).

As set forth below, FTX plans to lead futures markets in the United States into the 21st

century, without compromising traditional risk management, customer protection, or systemic 

risk mitigation expectations. With dramatic improvements in technological infrastructure over 

the past twenty years, companies such as FTX are now able to provide their customers with

direct access to exchange and clearing services, as FTX has now done for several years. FTX 

aims to build on these technological advancements by offering margin directly to its customers. 

FTX fully appreciates the risks that arise from offering margin and plans to implement 

the following risk management standards that will exceed historical expectations. First, instead 

of relying on traditional weekly margin calculations, FTX will assess its customers’ abilities to

meet their margin requirements approximately once per second. Second, by operating 24 hours 

a day, 7 days a week, 365 days a year, FTX can implement real-time market monitoring tools 

to immediately react to market changes and avoid major risks to clearinghouse stability. Third, 

FTX will remove friction, delay, and reduce operational risk in the assessment and timely derisking of accounts, as appropriate, through direct interactions with customers. Finally, to 

support the resilience of our clearinghouse, FTX will rely on backstop liquidity providers and 

the $250 million in unencumbered cash it has contributed to its Guaranty Fund — one of the 

largest self-funded cash contributions for a derivatives clearinghouse in the United States. 

While FTX understands that historical market practices envisioned an intermediated 

marketplace where brokers interfaced directly with customers, the CEA does not mandate a 

one-size fits all approach. As we look to the future of regulated derivatives markets, cryptoasset platforms and other nascent exchanges have pursued a direct-membership model where 
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investors onboard directly to the trading and clearing platforms, and not through an 

intermediary or broker.

2 The traditionally manual modes of interacting with markets, 

intermediated or not, have largely been replaced with technology that provides immediate, 

direct access. These technological developments have enabled the use of automated or 

programmed strategies for faster and more efficient trading decisions. By utilizing this 

technology, FTX and others already directly provide services to customers who do not have 

the infrastructure or relationships to support the involved clearing mechanisms other firms 

require.3 In other words, the direct-access model democratizes futures trading access. 

Having operated a direct-access exchange and clearinghouse without intermediaries for 

several years now, FTX has already developed DCO operations that often exceed or are 

comparable to key FCM duties prescribed by CFTC Regulations, including: (a) maintenance 

of adequate financial resources; (b) safeguarding customer money, securities, and other 

property; and (c) implementing appropriate eligibility access criteria.5 Additionally, other 

clearing-related functions traditionally performed by FCMs, including know your customer 

(“KYC”) and anti-money laundering (“AML”) functions,

6 are currently performed by FTX.7

 

For other clearing-related requirements, the FTX clearinghouse is also already subject to an 

enhanced set of regulations relative to an FCM, such as the CFTC’s rigorous systems 

safeguards regime related to cybersecurity and other operational risks8 and recordkeeping 

requirements.9 

With this application to amend its DCO registration, FTX seeks to build on its years of 

experience of offering direct access by offering margin directly to its customers, without 

clearing FCMs. For the benefit of the CFTC and the public, FTX provides the following 

summary of: (I) the risk management process for FTX’s non-intermediated model; (II) how 

FTX intends to perform relevant clearing functions that an FCM traditionally undertakes; and 

(III) trading-related functions that an FCM may perform that FTX believes to be outside the 

scope of this request to amend its clearing order.

2 See FTX’s Key Principles for Market Regulation of Crypto-Trading Platforms, available at 

https://blog.ftx.com/policy/ftx_key_principles/. 3 See Eris Exchange, LLC, KalshiEx LLC, and Nadex. 5 While FTX is currently seeking an amendment only to its DCO order of registration, and the focus of this 

analysis is on clearing-related duties, a comprehensive list of both clearing and exchange-related FCM duties 

and requirements prescribed by both CFTC regulations and NFA rules may be found here: NFA Regulatory 

Requirements for FCMs, IBs, CPOs, and CTAs (August 2021), https://www.nfa.futures.org/members/memberresources/files/regulatory-requirements-guide.pdf. 6 See CFTC Regulation 42.2 and NFA Interpretive Notice 9045 – NFA Compliance Rule 2-9: FCM and IB 

Anti-Money Laundering Program; NFA Interpretive Notice 9070 – NFA Compliance Rules 2-9, 2-36, and 2-49: 

Information Systems Security Programs. 

7 For example, both Eris Clearing LLC and FTX are required to comply with the Bank Secrecy Act, the 

International Emergency Powers Act, the Trading with the Enemy Act, and any Executive Orders and 

regulations issued thereto, as a condition of their DCO Orders of Registration. See Eris Clearing, LLC DCO 

Registration Order (Nov. 2, 2020) and LedgerX, LLC Amended Order of DCO Registration (September 2, 

2020). 

8 CFTC Regulation 39.18. 9 DCO Core Principle K and CFTC Regulation 39.20 set forth clearing-related recordkeeping requirements 

comparable to those imposed on FCMs through CFTC Regulation 1.36. 
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I. DCO Risk Management With A Direct-Access Business Model

Building on years of experience offering exchange and clearing services directly to 

customers, FTX now also seeks to extend margin directly to its customers. Although the 

traditional clearinghouse model has resulted in the risk of margin mutualized among DCO 

clearing members, the CEA does not require this historical business practice. Rather, the CEA 

merely requires that DCOs manage their risks appropriately. FTX aims to manage such risks 

by monitoring its customers’ positions in real-time and taking appropriate and timely action to 

de-risk accounts in default in the following manner. First, FTX will seek to liquidate a position 

on FTX’s central limit order book (“CLOB”), which remains open at all times.10 If that is not 

practicable, FTX will attempt to lay off positions with backstop liquidity providers. Finally, 

FTX will use its reserve of $250 million in unencumbered cash to cover any remaining residual 

risk to the clearinghouse or its customers. At the end of the waterfall, in the unlikely event the 

Guaranty Fund is exhausted, traditional DCO default management tools will be available. 

A. DCOs are not required to mutualize risk among intermediaries

While many DCOs mutualize losses among clearing members (typically FCMs), this 

practice is not required by the CEA. Under Section 1a(15) of the CEA, “derivatives clearing 

organization” is defined as “a clearinghouse, clearing association, clearing corporation, or 

similar entity, facility, system, or organization that, with respect to an agreement, contract, or 

transaction” that satisfies one of the following three disjunctive prongs:

(i) enables each party to the agreement, contract, or transaction 

to substitute, through novation or otherwise, the credit of the 

derivatives clearing organization for the credit of the parties;

(ii) arranges or provides, on a multilateral basis, for the 

settlement or netting of obligations resulting from such 

agreements, contracts, or transactions executed by participants 

in the derivatives clearing organization; or

(iii) otherwise provides clearing services or arrangements that 

mutualize or transfer among participants in the derivatives 

clearing organization the credit risk arising from such 

agreements, contracts, or transactions executed by the 

participants.11

Significantly, only the third prong refers to the mutualization of credit risk among clearing

members. Because a clearinghouse only needs to satisfy one of the above three disjunctive 

prongs of the DCO definition, a DCO is not required to adopt a business model that mutualizes 

10 An FCM’s or broker-dealer’s authority to liquidate a customer’s account that is in default is wellestablished under federal securities and commodities laws. See, e.g., In re MF Global Inc., 531 B.R. 424, 435-

36 (Bankr. S.D.N.Y 2015); Moss v. J.C. Bradford and Co., 337 N.C. 315, 326-27 (1994) (“In light of the fact 

that rules governing margin calls and account liquidation are for the protection of the merchant and commodities 

exchange itself, we interpret the federal regulatory scheme in the area of futures trading, including CME Rule 

827, to permit the liquidation of a customer’s account without prior demand or notice.”). 

11 CEA § 1a(15)(A) (emphasis added).
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default risks among clearing members. This is supported by the CFTC’s own statements: “The 

Commission is of the view that each DCO should be afforded an appropriate level of discretion 

in determining how to operate its business within the legal framework established by the CEA, 

as amended by the Dodd-Frank Act.”12

B. The FTX direct-access model offers an innovative means to monitor and 

manage risks more effectively

Section 5b(c)(2)(D) of the CEA, implemented through CFTC Regulation 39.13, 

requires each DCO to ensure that it possesses the ability to manage the risks associated with 

discharging the responsibilities of the DCO through the use of appropriate tools and 

procedures, including written policies, procedures, and controls that establish an appropriate 

risk management framework, and is approved by the DCO’s board of directors. At a minimum, 

the framework must clearly identify and document the range of risks to which the DCO is 

exposed, address the monitoring and management of the entirety of those risks, and provide a 

mechanism for internal audits. 

CFTC Regulation 39.13 gives DCOs discretion, within specified limits, in setting, 

modeling, validating, reviewing and back-testing margin requirements.13 In implementing the 

risk management framework, a DCO must appoint a chief risk officer to make appropriate 

recommendations to the DCO’s risk management committee or board of directors regarding 

the DCO’s risk management functions. Accordingly, “a DCO should adopt a comprehensive 

and documented risk management framework that addresses all of the various types of risks to 

which it is exposed and the manner in which they may relate to each other.”14 A sufficient risk 

management framework should include a daily assessment of the DCO’s adequacy of its initial 

margin requirements, valuation of the initial margin assets, back-testing of products that are 

experiencing significant market volatility, and conducting of stress tests with respect to each 

large trader who poses significant risk. 

Additionally, FCM risk management requirements are very similar to those imposed on 

DCOs. CFTC Regulation 1.11 requires each FCM to establish, maintain, and enforce a system 

of risk management policies and procedures designed to monitor and manage the risks 

associated with the activities of the FCM. The FCM’s risk management unit must give 

quarterly risk exposure reports to senior management and the CFTC. For FCMs that act as 

clearing members of a DCO, the CFTC adopted Regulation 1.73. Under CFTC Regulation 

1.73, a clearing FCM is required to: (i) evaluate its ability to meet initial and variation margin 

requirements at least once per week; (ii) evaluate its ability to liquidate positions in an orderly 

manner at least once per quarter; and (iii) test lines of credit once per year.

When comparing the risk management standards imposed on DCOs and FCMs, FTX 

believes that a direct clearing participant of a DCO will receive comparable protections to an 

FCM’s customers. Notwithstanding the comparability of DCO and clearing FCM risk 

management requirements, in practice, FTX proposes to monitor and manage customer risk in 

12 Derivatives Clearing Organization General Provisions and Core Principles (“DCO Final Rule”), 76 Fed. 

Reg. 69334, 69,335 (Nov. 8, 2011).

13 Id. at 69,365-76. 14 DCO Final Rule, 76 Fed. Reg. at 69,363.
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a more stringent fashion than is required by either regime, as described in the proposed default 

rules and Exhibit G. 

In addition to the traditional risk management functions that FTX will be performing, 

the following are some noteworthy examples of improvements on traditional risk management 

practices that FTX will implement: 

• FTX will rely only on collateral deposited with FTX when evaluating its risk exposure, 

as opposed to holistic credit checks that rely on information, such as a person’s worth, 

occupation, credit score, and other information that may be stale at any particular point 

in time.

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

snapshots.

• Settlement variation margin will be exchanged on a near real-time basis to avoid the 

accumulation of large losses over time.

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

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

• When participant positions fall below the maintenance margin threshold, FTX will 

liquidate positions rapidly, intra-day on the CLOB.

• If FTX is unable to liquidate a position on the CLOB, FTX will resort immediately to 

agreements with backstop liquidity providers who agree to accept a pre-negotiated 

volume of liquidation orders over a specified timeframe.

• If the backstop liquidity providers cannot cure a participant’s shortfall, FTX will draw 

from its $250 million reserve fund capitalized by unencumbered cash to cover any 

remaining risk to the clearinghouse or its customers.

C. To reserve against defaults by participants, FTX will utilize backstop 

liquidity providers and $250 million of its own capital

As FTX intends not to rely on clearing FCMs or otherwise require that its participants

mutualize the risk to the clearinghouse, FTX does have resources beyond liquidating positions 

on its CLOB to manage margin risk. 

Following reasonable efforts to liquidate positions on the CLOB, FTX proposes a 

“backstop liquidity provider program,” which will effectively mutualize a portion of the

clearing risk among a select group of professional traders who can absorb and lay-off risk that 

may be temporarily difficult to resolve in the open market. To serve as a backstop liquidity 

provider, a trader will need to meet certain criteria. For example, the trader must agree to 

provide a certain minimum amount of backstop liquidity to be available on a 24/7 basis, and to 

provide initial and variation margin payments within a short period of time. In addition to these 

providers, other holders of large positions will be able to serve as secondary backstop liquidity 

providers. In the event clearing member defaults result in account deficits, however, FTX will 

then rely primarily on $250 million of its own unencumbered capital to manage margin risks. 
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II. Having Successfully Operated A Direct-Access Exchange and DCO for Several 

Years, FTX Has Already Proven Its Ability To Perform Many Functions 

Traditionally Undertaken by FCMs

A. FTX maintains considerable financial resources and reports to the CFTC

routinely

The financial stability of a DCO, or an FCM, is based upon the premise that the entity 

has and maintains adequate financial resources to remain operational, and to meet its 

obligations to customers, clearing members, and operational costs. Pursuant to Section 4f(b) 

of the CEA, an FCM must meet certain minimum financial requirements prescribed by the 

CFTC. Furthermore, CFTC Regulation 1.17 sets forth adjusted net capital requirements for 

FCMs. For an FCM that is not a broker-dealer, a security-based swap dealer, or a securitybased major swap participant, the FCM must maintain adjusted net capital equal to, or 

exceeding the greater of: (i) $1 million or (ii) the FCM’s risk-based capital requirement (i.e., 

8% of the total risk margin requirement for positions carried by the FCM in customer accounts 

and non-customer accounts). 

Similarly, for a DCO to meet Section 5b(c)(2)(B) of the CEA and CFTC Regulation 

39.11, the DCO must have adequate financial, operational, and managerial resources “as 

determined by the Commission” to discharge each responsibility of the DCO. A more 

quantitative metric of this requirement is that the DCO must possess financial resources that 

exceed the total amount that would enable the DCO to meet its financial obligations to its 

clearing members notwithstanding a default by its largest member, based on the value of the 

DCO’s own capital, guaranty fund deposits, default insurance, and certain assessments of 

additional guaranty fund contributions. The DCO must also possess financial resources, 

limited to its own capital, that exceed the total amount that would enable the DCO to cover 

operating costs for one year. Notably, the Commission declined to adopt a minimum capital 

requirement for DCOs. Instead, the Commission emphasized that it is appropriate “to provide 

flexibility to DCOs in designing their financial resources structure so long as the aggregate 

amount is sufficient.”16

To this point, as described above, FTX has committed $250 million of its own 

unencumbered capital to meet its obligations as a DCO in the event of a participant’s default. 

Although some clearinghouses rely upon guaranty fund deposits and assessments from clearing 

members to meet their financial resources obligations, the Commission has provided DCOs

flexibility with meeting the financial resources requirement, so long as the resources are 

permissible. For example, ICE NGX, which operates a direct clearing model, relies upon 

participant collateral, a guarantee fund in the form of a letter of credit, cash, and default 

insurance to meet its financial obligations under DCO Core Principle B.17 

Furthermore, as a registered Designated Contract Market (“DCM”) and DCO, FTX is 

also subject to robust systems safeguard requirements.18 To satisfy these requirements, FTX 

has adopted a comprehensive system safeguard program designed to identify and minimize 

16 Id. at 69,347. 17 See https://www.theice.com/ngx/clearing-settlement. 18 CFTC Regulations 38.1050-51; Regulation 39.18. 
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operationalize risk. FTX has also implemented controls relating to information security, 

including controls related to: access to systems and data; user and device identification and 

authentication; vulnerability management; penetration testing; business continuity and disaster 

recovery processes; and security incident response and management, among others. 

B. FTX has a track record demonstrating protection of customer money, 

securities, and property

One of the CEA’s fundamental components is the protection of customers, and the 

safeguarding of customer money, securities or other property pledged to margin, guarantee, or 

secure trades or contracts. Section 4d of the CEA directs FCMs to segregate customer money, 

securities, and other property from its own assets. Section 4d(a)(2) of the CEA requires an 

FCM to treat and deal with futures customer funds as belonging to the futures customer, and 

prohibits an FCM from using customer funds to margin or extend credit to any other person. 

Further, CFTC Regulation 1.20 requires that an FCM must separately account for all futures 

customer funds and segregate such funds as belonging to its futures customers. Account names

must clearly identify customer funds as the futures customer funds and show that such funds 

are segregated as required by sections 4d(a) and 4d(b) of the CEA and by CFTC regulations. 

An FCM may deposit futures customer funds, subject to the risk management policies and 

procedures of the futures commission merchant required by CFTC Regulation 1.11 with: (1) 

a bank or trust company; (2) a DCO; or (3) another FCM.

DCOs are subject to other comparable obligations to those set forth in Section 4d of the 

CEA; namely, CFTC Regulation 39.15 requires the DCO file rules for CFTC approval related 

to the commingling of DCO and clearing member customer positions, as well as rules on

money, securities, or property received by the DCO to margin, guarantee, or secure such 

positions. The DCO’s rules must, for example, identify the products that would be 

commingled, analyze the risk characteristics of the eligible products, and analyze the liquidity 

of the respective markets for eligible products. 

Under FTX Rule 7.3, FTX separately accounts for and segregates all participant funds 

used to purchase, margin, guarantee, secure, or settle Company Contracts from FTX’s 

proprietary funds. In doing so, FTX maintains a proprietary account that will be credited with 

fees or other payments owed to a participant that are debited as a result of trades and settlements 

of Company Contracts. FTX maintains a record of each participant’s account balances and 

Company Contracts, and is prohibited from holding, using, or disposing of except as belonging 

to participants.

C. FTX has implemented eligibility criteria that promote free and open 

access and protect against undue risk

Section 5b(c)(2)(C) of the CEA requires a DCO to have appropriate admission and 

continuing eligibility standards (including sufficient financial resources and operational 

capacity) for members of, and participants in, the DCO. CFTC Regulation 1.3 defines “clearing 

member” as “any person that has clearing privileges such that it can process, clear and settle 

trades through a derivatives clearing organization on behalf of itself or others. The derivatives 
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clearing organization need not be organized as a membership organization.”19 Under this 

definition, all of FTX’s participants will qualify as “clearing members.” 

CFTC Regulation 39.12 requires these participant eligibility criteria to be objective, 

publicly disclosed, and risk-based. Specifically, CFTC Regulation 39.12(a)(2) requires that 

clearing members have access to sufficient financial resources to meet obligations arising from 

participation in the DCO in extreme but plausible market conditions. The DCO must also 

maintain appropriate standards for determining the eligibility of agreements, contracts, or 

transactions submitted to the DCO for clearing. Furthermore, the DCO must have procedures 

to verify, on an ongoing basis, the compliance of each participation and membership 

requirement of the DCO.

The CFTC explained that the participant eligibility requirements in CFTC Regulation 

39.12(a)(1) satisfy “the dual Congressional mandate to provide for fair and open access while 

ensuring that such increased access does not materially increase risk.”20 The CFTC 

emphasized that the rule provides a DCO with discretion to balance restrictions on participation 

with legitimate risk management concerns.21 In this regard, the CFTC found that the DCOs 

are “in the best position in the first instance to determine the optimal balance.”22 

FTX’s membership criteria for participants are fully aligned with the Congressional 

mandate to provide for fair and open access to clearing services in a manner that is consistent 

with prudent risk management. FTX’s real-time monitoring of participant positions enables it 

to determine, at all times, whether a participant’s account has sufficient cash and collateral to 

meet its margin obligations to the DCO. In the event an account does not have sufficient 

financial resources, FTX will immediately begin to liquidate the participant’s position until the 

amount of funds in the participant account is equal to its margin obligations to the DCO. 

Because FTX monitors participant accounts 24/7 and liquidates underfunded positions in realtime, there is no need to establish minimum capital requirements for each participant. Instead,

FTX’s risk management framework enables it to ensure at all times that each participant has 

sufficient financial resources to meet its current obligations arising from participation in the 

DCO. 

In addition, FTX’s membership requirements will advance many of the policy 

considerations underlying CFTC Regulation 39.12, including promoting competition and 

liquidity. FTX anticipates that its participants will be diverse, encompassing traders and 

investors with varying investment objectives, risk tolerances, and portfolio sizes. Diffusing the 

risk of defaults across numerous participants also greatly reduces the likelihood that the default 

of any one or two large members will seriously jeopardize the clearinghouse, thereby 

strengthening the DCO’s financial stability. 

19 17 CFR § 1.3. 20 DCO Final Rule, 76 Fed. Reg. at 69,353. 21 Id. 22 Id. 
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III. FCMs Also Perform Certain Trading-Related Functions That Are Independent 

of Clearing Functions

FCMs are subject to certain obligations related to trading on an exchange that are 

unrelated to clearing positions, such as: (i) providing disclosures to customers regarding, inter 

alia, the risks of trading;23 (ii) order and transaction recordkeeping obligations;24 (iii) minimum 

trading standards;25 (iv) trading authorization requirements;26 (v) requirements to produce 

monthly statements and confirmations;27 and (vi) conflict of interest and trading standards.28 

These FCM requirements primarily focus on the FCM customer’s execution of transactions on 

the exchange. As these functions are trading-related, rather than clearing-related, FTX believes 

they are outside the scope of FTX’s request to amend its clearing order. It should be noted, 

however, that FTX acting in its capacity as a DCM (which is a category of self-regulatory 

organization) would handle many of these requirements in accordance with Part 38 of the 

CFTC’s rules, and has already been providing direct-access to its exchange for years now, as 

have others.

* * *

23 CFTC Regulations 33.7 and 1.55; NFA Interpretive Notice 9073 – Disclosure Requirements for NFA 

Members Engaging in Virtual Currency Activities. FTX is also subject to exchange trading related public 

disclosure requirements as set forth in DCM Core Principle 7, and CFTC regulations 38.1400 and 38.1401. 24 CFTC Regulation 1.35. FTX is also subject to exchange trading related recordkeeping requirements as set 

forth in DCM Core Principle 18, and CFTC regulations 38.950 and 38.951.

25 CFTC Regulation 155.3. FTX is also subject to exchange trading related requirements to protect its 

markets and market participants as set forth in DCM Core Principle 12, and CFTC regulations 38.650 and 

38.651.

26 CFTC Regulation 166.2. 27 CFTC Regulation 1.33. FTX provides IRS Form 1099s to customers, trade history is available to each 

customer.

28 See CFTC Regulations 1.56, 1.71, and 155.3. FTX is also subject to exchange trading conflicts of interest 

requirements as set forth in DCM Core Principle 16, and CFTC regulations 38.850 and 38.851.
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FTX appreciates the opportunity to present its views on these important issues and 

would value the opportunity to discuss these matters further, at your convenience.

Sincerely,

Brian G. Mulherin

General Counsel, FTX US Derivatives

cc: Eileen Donovan