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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: Financial Resource Requirements under Core Principle B and CFTC 

Regulation 39.11(a)(1) in the Absence of Clearing Futures Commission 

Merchants (“FCMs”)

Dear Mr. Hutchison: 

FTX US Derivatives (“FTX”) seeks to clear derivatives products that are not fully 

collateralized through a direct access market for both retail and institutional participants. In 

doing so, FTX plans to leverage its experience offering exchange and clearing services directly 

to market participants. Instead of weighing the credit worthiness of chains of intermediaries, 

FTX will margin all products directly against each market participant, which enables FTX to 

know and manage the precise amount of risk held by each portfolio, as well as by all portfolios 

in aggregate, at any given moment. FTX deploys a sophisticated real-time risk management 

system to support derivatives on cash markets that are always open, and commits to $250 

million in dedicated, unencumbered cash to cover any remaining risk to the clearing house or 

its customers.1

Historically, clearinghouses have sought to manage their counterparty credit risk, in 

part, by mutualizing that risk among a relatively small number of clearing futures commission 

merchants (“FCMs”), who in turn managed the direct relationships with their much more 

numerous clients. Naturally, this created a relationship of reliance on those clearing FCMs to 

support the resilience of the clearinghouse. As a result, clearinghouses have been required to 

hold reserves against the possibility that such clearing FCMs themselves may default on their 

obligations, thereby requiring the clearinghouse to intercede.

Section 5b of the Commodity Exchange Act (“CEA”) sets forth various core principles 

in the regulation of derivatives clearing organizations (“DCOs”), which have been 

implemented by the Commodity Futures Trading Commission (“CFTC”) in Part 39 of the 

CFTC regulations. One of those core principles, namely Core Principle B, describes the 

minimum financial resources required of a DCO to ensure its financial resilience. Those 

requirements, however, likely presuppose a relatively small number of large FCM clearing 

members. The following analysis, therefore, describes the standard in existing law for 

calculating minimum financial resources a DCO is required to maintain, and explores how 

1 As set forth in Exhibit G to the FTX application for an amendment to its Amended Clearing Order, FTX also 

relies on other default resources.
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those standards might be viewed with respect to a clearinghouse that utilizes a direct-access 

model without clearing FCMs, but that is nonetheless likely to have large direct-access clearing 

members.

A. Legal Standard

The Commodity Exchange Act (“CEA”) establishes both general and specific financial 

resources requirements for CFTC regulated clearinghouses in DCO Core Principle B.

Generally, each DCO is required to have “adequate financial, operational, and managerial 

resources, as determined by the Commission, to discharge each responsibility of the derivatives 

clearing organization.” See CEA § 5b(c)(2)(B)(i). Additionally, a DCO is required to possess 

financial resources that, “at a minimum, exceed the total amount that would – (I) enable the 

organization meet its financial obligations to its members and participants notwithstanding a 

default by the member or participant creating the largest financial exposure for that 

organization in extreme but plausible market conditions . . . .” See CEA § 5b(c)(2)(B)(ii). This 

specific requirement is generally referred to as “Cover-1,” and is memorialized in CFTC 

Regulation 39.11(a)(1). Additionally, CFTC Regulation 39.11(c)(1) grants DCOs “reasonable 

discretion in determining the methodology used to compute such requirements . . . .” By 

contrast, a systemically important DCO is required to cover the default of “the two clearing 

members creating the largest combined loss to the derivatives clearing organization in extreme 

but plausible market conditions”, otherwise known as the “Cover-2” standard. See CFTC Reg. 

39.33(a)(1).

B. Proposed Methodology for Computing FTX Guaranty Fund Requirements

Although FTX does not have clearing FCMs, it does nonetheless have large, 

institutional direct-access members. In an abundance of caution, FTX proposes to account for 

the possibility that FTX’s largest direct-access clearing member could be smaller than the 

largest clearing FCM at a comparable clearinghouse. FTX proposes to calculate its minimum 

financial obligations under CFTC Regulation 39.11(a)(1) using the following methodology: 

FTX will calculate the amount needed to meet its financial obligations to members and 

participants notwithstanding the default of: (a) the single largest clearing member (i.e., the 

Cover-1 amount); or (b) if Cover-1 is less than 10% of total initial margin (“IM”) at the 

clearinghouse, then the two largest clearing members (i.e., the Cover-2 amount); or (c) if 

Cover-2 is less than 10% of IM, then the three largest clearing members (i.e., the Cover-3 

amount).

FTX’s Guaranty Fund (GF) minimum sizing methodology explicitly meets or exceeds 

the regulations in 39.11 and conforms with the CFTC’s principles based regulatory framework. 

The method starts by calculating the regulatory standard Cover-1 requirement. The Cover-1 

standard sizes the GF to allow the DCO to continue operations even if the largest single 

participant defaults in an extreme but plausible scenario. FTX’s largest exposure may be 

smaller than what is envisioned by the regulations due to the absence of clearing FCMs; 

however, FTX’s largest clearing members are still highly likely to be institutional, rather than 

retail participants. Nonetheless, to allow for the possibility that such institutional clearing 

members could possibly be smaller than the largest clearing FCMs, we compare the percent of 
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Initial Margin (IM) the Cover-1 entity is required to post relative to the total IM required from 

all participants. If the largest FTX clearing member holds less than 10% of the total IM at the 

DCO, FTX moves to a Cover-2 standard. The Cover-2 standard is outlined in Subpart C of 

CFTC Regulations, specifically CFTC Regulation 39.33, and requires that certain important or 

complex DCOs can absorb the joint default by the two clearing members creating the largest 

combined financial exposure, again in an extreme but plausible scenario. As yet another layer 

of protection for the clearinghouse, if the Cover-2 entities combined hold less than 10% of the 

total IM at the DCO, FTX will then move to a Cover-3 standard, which is more conservative 

than current CFTC regulations. 

C. Appropriateness of FTX’s Cover-1 Proxies

FTX is taking an innovative approach to determine the minimum size of the GF to meet 

the letter and the spirit of CFTC regulations. The regulations balance the severity versus the 

likelihood of default scenarios on DCO operations. Regulation 39.11 specifies Cover-1 as the 

standard requirement for a DCO’s GF sizing. Cover-1, which assumes the largest exposure 

defaults in an extreme but plausible scenario, is a reasonable and conservative benchmark; if 

the DCO can cover the largest single default in an extreme event, any lesser default will not 

threaten the DCO’s ability to operate.

Increasing the number of the largest participants that are assumed to default at the same 

time makes a scenario more extreme but naturally decreases the plausibility of such a scenario. 

If a DCO is large and/or complex as specified in Sub Part C, a Cover-2 standard may apply 

which further increases the conservativeness of the GF size. Here the CFTC has determined 

that, while the likelihood of the largest 2 entities defaulting at the same time in the worst case 

scenario is even less than Cover-1, this exceptional coverage is warranted if the DCO is 

important enough.

FTX’s GF methodology considers not only Cover-1 and Cover-2 but also allows for a 

highly conservative Cover-3 sizing. The regulations do not explicitly consider Cover-3, likely 

because of the low probability of such a default event in a traditional, intermediated-clearing 

model. FTX’s adoption of a Cover-3 standard for sizing the GF is conservative and exceeds 

the regulations, given the low probability of such a scenario. Note that the largest participants 

on FTX are highly unlikely to be retail participants, but instead large institutional participants.

To determine whether FTX should consider additional participants in the GF sizing 

calculation (e.g., moving from Cover-1 to Cover-2 to Cover-3), we consider how much IM the 

participants are required to post relative to the total IM at the DCO. This metric proxies what 

a Cover-1 might look like at a more traditional DCO operating with an intermediated-clearing 

model.

The following analysis shows that 10% of IM is a conservative estimate of the percent 

of IM that a Cover-1 participant might post at a traditional DCO. The analysis uses information 

from the CPMI-IOSCO Quantitative Disclosures for major Central Counterparties (CCPs), 

which is a more generic term that includes DCOs, in Q3 of 2021.
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FIELD IM ACCOUNTS CME2 ICUS3 ICEU4 OCC5

6.1.1 House Account IM (mm USD) $32,027 $8,129 $11,978 $24,451

6.1.1 Client Gross IM (mm USD) $132,135 $15,445 $61,348 $2,518

6.1.1 Client Net IM (mm USD) $0 $0 $17,114 $88,078

6.1.1 Total IM (mm USD) $164,162 $23,574 $90,440 $115,047

18.1.1.1 Clearing Members 40 30 65 107

Clearing Member Margin % 20% 34% 13% 21%

For each clearinghouse shown above, all the clearing members’ house positions 

combined represent between 13% and 34% of the total margin posted. This is determined by 

taking the House Account IM and dividing it by the Total IM at the relevant CCP. What might 

reasonably be considered the largest 40 accounts combined at CME only hold 20% of the total 

IM at that clearinghouse. Similar ratios are seen at the other relevant clearinghouses presented. 

Thus, it is not likely that the largest single participant at any of these clearinghouses holds 10% 

of total IM. This analysis suggests that the 10% threshold selected by FTX is an appropriate 

and conservative measure to determine if additional coverage participants are warranted.

FTX’s proposed approach to calculate the minimum GF size will meet the Cover-1 

requirement at a minimum and likely exceed it. The above analysis shows that covering 10% 

of IM is a conservative proxy for what could be considered a large clearing member at a 

traditional DCO and may represent a larger percentage than any current clearing member at the 

DCOs discussed above. Further, sizing the GF to cover up to the 3 largest simultaneous 

exposures is more conservative than current regulations require. FTX believes, therefore, that 

its GF methodology is appropriate and innovative and in the spirit of the CFTC’s history of 

principles based and prudent risk management.

Thank you for considering our proposed methodology, and we would welcome any 

questions or comments the CFTC may have in that regard.

Sincerely,

Julie L. Schoening, Ph.D.

Chief Risk Officer, FTX US Derivatives

2 See https://www.cmegroup.com/clearing/cpmi-iosco-reporting.html. 3 See https://www.theice.com/clearing/quarterly-clearing-disclosures. 4 See id.

5 See https://www.theocc.com/Risk-Management/PFMI-Disclosures.

JLSchoening (Feb 8, 2022 23:12 EST)

JLSchoening
FTX Letter re FInancial Resource Requirements

2022-02-08

Final Audit Report 2022-02-09

Created: 2022-02-09

By: Brian Mulherin (gc@ledgerx.com)

Status: Signed

Transaction ID: CBJCHBCAABAA2jq6lrMvxCnj3W1x6boNmlehr0j3ah1f

"FTX Letter re FInancial Resource Requirements 2022-02-08" H

istory

Document created by Brian Mulherin (gc@ledgerx.com)

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Document emailed to JLSchoening (julie@ftx.us) for signature

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