DCO EXHIBIT G

Attach as Exhibit G, documents that demonstrate compliance with the default rules and 

procedures requirements set forth in § 39.16 of the Commission’s regulations, including but 

not limited to:

a. Default Management Plan – Applicant must provide a copy of its written default 

management plan which must contain all of the information required by § 39.16(b), along 

with Applicant’s most recently documented results of a test of its default management 

plan.

See attached Default Management Plan.

b. Definition of default – Applicant must describe or otherwise document:

(1) The events (activities, lapses, or situations) that will constitute a clearing 

member default;

LedgerX LLC, doing business as FTX US Derivatives (“FTX”), is a derivatives clearing 

organization (the “Clearinghouse”). The Clearinghouse defines default as the event when 

the participant account collateral is below the maintenance margin requirement, and 

liquidating an account on the Central Limit Order Book has not successfully resulted in the 

account being above its maintenance margin requirement.

(2) What action Applicant can take upon a default and how Applicant will 

otherwise enforce the rules applicable in the event of default, including the steps and 

the sequence of the steps that will be followed. Identify whether a Default 

Management Committee exists and, if so, its role in the default process; and

The clearing house initiates an entirely automated sequence of actions designed with the 

specific purpose of restoring the clearing house’s balanced book.

Such sequence of events include the sequence described in c(1).

The Chief Risk Officer is responsible for the default management procedures for the 

clearing house. Significant changes to these procedures (as defined in the Default 

Management Plan) require approval from the Board of Directors and the Risk Management 

Committee.

The clearing house does not have a Default Management committee because the process is 

highly automated. The Chief Risk Officer will escalate to the Risk Management Committee 

as appropriate.
(3) An example of a hypothetical default scenario and the results of the default 

management process used in the scenario.

1. Alice wants to trade a BTC derivative contract with a small notional size. She decides to 

trade the micro contract with notional size of 0.0001 BTC. The micro futures contract is 

trading on the limit order book at $60,002/BTC, with best bid at $60,001/BTC for 20,000 

contracts, and best ask at $60,003/BTC for 35,000 contracts.

a. The micro contract’s value is thus $6.0002 ($60,002/BTC *0.0001 BTC).

2. According to the clearing house’s proprietary real time margin system, the initial margin 

per contract is currently $1.20004 (20% of the contract value) and maintenance margin is 

$0.90003 (15% of the contract value).

3. Participant Alice wishes to establish a long position of 20,000 micro contracts at a price 

of $60,000/BTC. Alice deposits in USD and has $30,000 worth of free collateral in her 

account.

a. She places a limit order on the bid side at $60,000/BTC for 20,000 lots.

b. At a market price of $60,000/BTC initial margin per contract would be $1.20 

and maintenance margin per contract would be $0.90.

c. As soon as this limit order is submitted, $24,000 ($1.20* 20,000 contracts) 

worth of collateral is locked. Alice has $6,000 worth of remaining free collateral. The 

limit order rests on the book because it was not immediately filled.

4. 5 minutes later, the prevailing market price moves down. Alice’s limit order for 20,000 

lots is filled in full.

a. Once Alice’s position is established, the collateral lock drops from the initial 

margin level to the maintenance margin level. Alice has $18,000 worth of collateral 

locked as maintenance margin, and $12,000 worth of free collateral.

5. The BTC futures contract price continues to fluctuate. 20 hours later, the price drops to 

$55,000/BTC.

a. The collateral lock is now $16,500 for maintenance margin. However, Alice’s 

free collateral has dropped from $12,000 to $3,500 due to the price decline of 

$5,000/BTC per each contract Alice holds in the long position along with the 

decrease in maintenance margin as the position notional decreases.

b. As the futures contract price fluctuates, Alice continues to receive informational 

alerts automatically generated by the clearing house’s margin system. It is Alice’s 

responsibility to deposit additional collateral as the account moves towards the 

maintenance margin level and free collateral amount continues to decline.

6. Hypothetically, Alice fails to deposit additional collateral to her account. 2 hours later, 

BTC futures contract price declined further to drop below $52,940/BTC.

a. Alice now has less collateral than that is required by the maintenance margin 

threshold, and the liquidation engine begins to reduce Alice’s position size.

b. Note that if Alice had funded her account with additional collateral just before 

the contract price moved below $52,942/BTC then the liquidation engine would not 

have been triggered because the newly deposited collateral would have increased 

Alice’s total collateral to exceed the maintenance margin requirement.

c. The liquidation engine will first cancel all pending orders, which Alice does not 

have in this scenario.
d. The liquidation engine will partially liquidate Alice’s position using marketable 

limit orders, in a manner that does not cause meaningful price disruption, until the 

account’s collateral is greater than the maintenance margin level.

e. Within 6 seconds, a sell order to liquidate 10% of Alice’s position (2,000 micro 

contracts) is successfully filled at $52,940/BTC. Alice’s long position is now 18,000 

contracts with a corresponding maintenance margin level of $14,294. Alice’s account 

now has free collateral of $1,586 and at a market price of $52,940/BTC the 

liquidation engine does not have to sell any more contracts. Alice’s account lost 

$14,120 in the decrease in BTC price from $60,000 to $52,940.

7. No loss is sustained by the clearing house. Alice’s risk position is successfully managed by 

the fully automated liquidation engine.

c. Remedial action – Applicant must describe or otherwise document:

(1) The authority and methods by which Applicant may take appropriate action 

in the event of the default of a clearing member which may include, among other 

things, liquidating positions, hedging, auctioning, allocating (including any 

obligations of clearing members to participate in auctions or to accept allocations), 

and transferring of customer accounts to another clearing member (including an 

explanation of the movement of positions and collateral on deposit); and

Pursuant to authority in the Participant Agreement and Rulebook, FTX’s automated 

systems perform the following actions sequentially in near-real-time, at a frequency 

determined by the Chief Risk Officer.

Waterfall Layer Sub-Paths 

through 

Layer

Methodology

Liquidation Orders N/A The first step is to carefully close positions with rate-limited 

liquidation orders in the market. An account begins to be 

liquidated if the total account value divided by the total position 

notional, which is the position size multiplied by its market price 

(“Margin Fraction”), is less than its maintenance margin. 

During the liquidation process, users may not send orders using 

their account.

To close positions in the market while minimizing impact, the 

liquidation engine will periodically send standard limit orders on 

behalf of the liquidated account. Approximately every 

Liquidation Delay Period seconds (currently 6 seconds), the 

liquidation engine sends the Liquidation Percentage (currently 

10 percent) of the position size as an order on the market.
The speed of the liquidation process depends on the size of the 

position. For small positions, the Clearinghouse will aim to fully 

close the position in about a minute.

If partially liquidating the account causes its Margin Fraction to 

rise above the maintenance margin threshold, the liquidation 

process terminates. Otherwise, the process continues.

Match-Up of Defaulting

Open Interest

N/A Defaulting open interest is matched to counterparties using one 

or both of the following methods. Typically, a liquidation will 

proceed directly through the Primary BLP path, skip the 

secondary BLP path, and if necessary, proceed to the Guaranty 

fund.

The backstop liquidity provider system is activated when an 

account’s margin drops below the minimum Margin Fraction 

needed to avoid being closed against the backstop liquidity 

provider (“Auto-Close Margin Fraction” or “ACMF”), and 

therefore closer to bankruptcy. 

In this step, the account will have its defaulting positions closed 

down at the bankruptcy price (the market price that would set an 

account value at zero, or “Zero Price”), and the positions will be 

transferred to the backstop liquidity provider.

If the account’s value is at or above the Zero Price, the liquidation 

terminates here. If account’s value is below the Zero Price, the 

waterfall will continue to the next step, in which the Guaranty 

fund steps in to bring the account’s value back to the Zero Price.

Primary 

Backstop 

Liquidity 

Providers 

(BLPs)

The Primary BLPs sign up to the Backstop Liquidity Provider 

Program voluntarily and should ordinarily be able to absorb all 

assignment of open interest from defaulting positions, without 

resorting to Secondary BLPs.

Primary Backstop Liquidity Providers (“BLPs”) have a 

maximum capacity per minute and per hour and the position is 

closed against BLPs in proportion to the remaining capacity. 

Secondary 

BLPs (subpath, not sublayer)

Secondary BLPs will only have their positions auto-closed if an 

account hits the Auto-Close Margin Fraction and the Primary 

BLPs are out of capacity.

The Secondary BLP is an alternate route to the Guaranty Fund. 

As long as BLP capacity remains, the Secondary BLP path will 

be skipped entirely, and the waterfall will proceed downwards to 
the Guaranty Fund and beyond without hitting the Secondary 

BLPs.

Any remaining open interest not assigned to a takeover 

counterparty is assigned to participants with large opposing 

positions (starting with the top 10 opposing positions, more if 

their total is insufficient), in proportion to their position sizes.

Guaranty Fund N/A If an account’s value hits the Zero Price, the Guaranty fund will 

pay out to bring the account’s balance back to 0.

In other words, the Guaranty Fund pays out the difference 

between the current account value and the bankruptcy price.

Settlement Variation 

Margin Gain Haircutting

If the account is bankrupt and the Guaranty Fund is empty, the 

remaining losses are taken from positions with positive 

unrealized Profit and Loss (proportionally to Profit and Loss).

Full Tear-Up/ Bankruptcy The Clearinghouse is bankrupt. Positions are torn up after 

consultations with the Risk Management Committee, the Board 

of Directors, and regulators as appropriate.

Actions taken by a clearing member or other events that would put a clearing member 

on Applicant’s “watch list” or similar device.

FTX operates an entirely collateral-based margin system. However, the clearing house 

develops and maintains a sophisticated review and internal assessment and monitoring 

process for each participant.

Additionally, the clearing house maintains a watch list for existing participants that engage 

in suspicious market activity, repeated or excessive liquidation in excess of the risk 

monitoring program, where the clearing house has the discretion to increase margin 

requirements, impose risk reducing transactions, and suspense trading and clearing.

d. Process to address shortfalls – Applicant must describe or otherwise document:

(1) Procedures for the prompt application of Applicant and/or clearing member 

financial resources to address monetary shortfalls resulting from a default;

FTX’s automated systems immediately apply guaranty fund resources via internal ledger 

transactions whenever there is a need to address monetary shortfalls resulting from a 

default.

(2) How Applicant will make publicly available its default rules including a 

description of the priority of application of financial resources in the event of default 

(i.e., the “waterfall”); and
FTX will make publicly available its default rules available via its Rulebook, which is 

posted on its website. FTX will make publicly available a description of the default 

waterfall on its website. 

(3) How Applicant will take timely action to contain losses and liquidity pressures 

and to continue to meet each obligation of Applicant.

FTX’s automated systems act upon underwater positions in real-time, without the need for 

human intervention. This approach significantly reduces the risk of runaway losses versus 

credit-based systems, where losses can accumulate for much longer periods of time, and 

where action to contain losses is manual and therefore not timely.

e. Use of cross-margin programs – Describe or otherwise document, as applicable, how 

cross-margining programs will provide for fair and efficient means of covering losses in 

the event of a default of any clearing member participating in the program.

While FTX would like to offer cross-margining programs in the future, FTX does not currently 

offer cross-margining programs.

f. Customer priority rule – Describe or otherwise document rules and procedures regarding 

priority of customer accounts over proprietary accounts of defaulting clearing members 

and, where applicable, specifically in the context of specialized margin reduction 

programs such as cross-margining or common banking arrangements with other 

derivatives clearing organizations, clearing agencies, financial market utilities or foreign 

entities that perform similar functions.

FTX does not currently deal with clearing members who carry customer accounts, only direct 

clearing members. FTX does not currently offer cross-margining or other banking arrangements 

with other derivatives clearing organizations, clearing agencies, financial market utilities or 

foreign entities that perform similar functions.

The Clearinghouse holds clearing member funds separate from the operating funds of the 

Clearinghouse.