Trading and Margin Policy

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1. Introduction

This document outlines the key definitions, principles, requirements, and procedures governing trading on the exchange. It is designed to ensure robust risk management, protect both the Company and its clients from excessive leverage-related risks, and maintain market integrity. The Company is committed to providing a fair and efficient trading environment. Margin requirements, maximum position stipulations and robust liquidation protocols are critical components of this commitment, acting as a buffer against potential losses and ensuring that clients maintain sufficient capital to cover their open positions, as well as guaranteeing orderly market conditions and strong order book liquidity.

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2. Definitions

• Mark Price = Median (Best Bid Price, Best Ask Price, Last Traded Price).
• Market Data Price = Polygon’s Fair Market Value, if Polygon is available, else Alpaca’s ‘last trade price’.
• Unrealized PNL = Sum of value of open positions evaluated at the mark price.
• Realized PnL = PnL of closed positions.
• Available Balance = Sum of Realized PnL, cash deposited and net funding payments, less cash withdrawn and fees paid.
• Account equity = Sum of Available Balance and Unrealized PNL.
• Market Data Fair Range = previous Market Data Price $\pm$ 50%
• Index Price = Market Data price if Market Data Price is within the Market Data Fair Range, or previous Market Data Price if Market Data Price is not within the Market Data Fair Range.
• Position Value = Mark Price $\times$ Quantity
• Funding rate = Rate paid between longs and shorts if price of future deviates above or below price of underlying instrument. (see here for more information).
• Funding fee = Position Value $\times$ Funding Rate
• Fair Value Price = Index Price $+$ 1-minute TWAP (Mark Price $-$ Index Price).
• Liquidation Band = distance from fair value price beyond which liquidations do not occur (see Section 6.2).
• Liquidation Spread = max spread from the mark price at which orderly liquidation IOC order is executed (see Section 6.1).
• Fair Value Range = Fair Value $\pm$ Liquidation Band
• DLP Fee = the fee which is paid to Designated Liquidity Providers to absorb liquidated positions.
• Mark to Market (MTM) = the evaluation of portfolios, at a frequency of 200ms. Each asset and market will go through this process, where all portfolios with active positions will go through a process of recalculating the position exposure and unrealized profit & loss. Calculation of the MTM will be using the Mark Price. The Mark to Market will be used to calculate Unrealized PnL, flag portfolios violating margin requirements, and trigger any liquidation procedures for flagged portfolios.
• Maximum Leverage Limit = maximum leverage allowed to place a trade on a symbol. These are defined in Section 2.1 below.
• Initial Margin (“IM”) is the minimum borrow capacity applied to collateral, which is based upon the overall leverage limit on the instrument traded. The base level of initial margin required is defined as $\frac{100\%}{Maximum Leverage Limit}$.
• Portfolio Initial Margin (“PIM”) is defined as the sum of the IMs of each trade which led to the portfolio being created.
• Maintenance margin (“MM”) represents the minimum amount of margin required prior to an orderly liquidation. MM is defined as $\frac{2}{3} \times PIM$.
• Close out margin (“CoM”) represents the margin threshold where actions take place through Liquidity Support Program and the Insurance Funds. CoM is defined as $\frac{1}{3} \times PIM$.

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3. Leverage Limits

The Company will enforce conservative minimum margin requirements that have been rigorously tested to ensure robust operation of the order book and Liquidation Protocol (see section 6 below). These limits are designed to protect investors by restricting the maximum exposure they can take on volatile assets. This approach reflects a commitment to prudent risk management and alignment with recognized investor protection standards.

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3.1 Maximum Leverage Limits

The maximum leverage limits applied to customer accounts will vary as detailed in the Order Execution Rules Section 10.1.

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4. Maximum position limits

The Company enforces standardized maximum position limits per account per symbol to manage concentration risk and maintain orderly market conditions. These limits are designed to prevent excessive concentration of positions that could pose systemic risks to the exchange or impact market liquidity in the event of a liquidation. The standard maximum position limits are based on the notional value of positions and vary according to Section 10.2 of the Order Execution Rules. Implementation:

• Position limits are calculated based on the notional value of the position (not the margin required).
• Limits apply on a per-account basis and are monitored in real-time.
• The system will prevent users from entering orders that increase their position above the maximum position sizes, including in edge cases eg by out-of-order execution of passive orders

Users have the ability to request limit extensions on a case-by-case basis. Requests can be submitted to support@qfex.com. Requests will be considered by QFEX, at their discretion, but taking into account the total open interest on the symbol. If the user’s position size (including the new trades they intend to make) is more than 20% of the open interest on that symbol, QFEX will not approve their request. Their leverage level will also be instructive in this determination. Please note: maximum position size logic is also altered at weekends and during market close (for equities and indices). This is to protect against market manipulation on the exchange when there is no live index price, and also to protect users against liquidations on large discontinuous moves on open. Please see the Order Execution Rules section 5 for more information on how maximum position size logic is altered at weekends. The Company reserves the right to change maximum position sizes at its sole discretion, for example in times of market stress.

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5. Margin Call and Close-Out Procedures

The Company will implement robust margin call and automatic close-out procedures to protect clients from accumulating losses beyond their available equity and to safeguard the exchange’s financial stability. These procedures will include:

• Margin Call Notification: Clients will receive notifications by email and by push notification on their browser when their margin level falls below two predefined thresholds, indicating that additional funds are required to maintain open positions. These levels are 75% and 70% of the initial margin required to place the trade.
• Margin Close-Out Rule: An automatic close-out rule will be applied on a per-account basis. If a client’s funds fall to 66.6% of the initial margin (the maintenance margin), one or more of their open positions will be automatically closed out against the order book. Users will be notified by email and push notification in their browser that their account is being liquidated.

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6. Liquidation Protocol

The Company operates a multi-stage liquidation framework based on account equity levels relative to margin requirements. The system progresses through position netting, order book liquidation, DLP liquidation, and auto-deleveraging as account equity deteriorates. The Liquidation Protocol applies for positions with leverage greater than 1. If leverage on a symbol is equal to 1, the position is never liquidated.

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6.1. Liquidation Spread

For all liquidations, the Company first considers whether a different user’s positions are being liquidated in the opposite direction. If so, the positions are netted off as far as possible, to avoid impacting the order book. For all liquidations, the Company calculates a Liquidation Spread. This is the maximum spread in bps from mark price that will be crossed when a position on symbol Y is liquidated. The Liquidation Spread is a function of the notional, computed as a linear interpolation between the Minimum Liquidation Spread (as defined in Order Execution Rules section 10.5) and
$\frac{1}{5} \times \frac{1}{Max Leverage Limit}$ for a notional equal to the Max Position Size (as defined in section 4).
If the notional amount exceeds the Max Position Size, the Liquidation Spread is capped at $\frac{1}{5} \times \frac{1}{Max Leverage Limit}$.

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6.2. Liquidation Band

The Company implements a Liquidation Band methodology to prevent liquidations being triggered by price manipulation or temporary market disruptions. When market prices move outside a pre-defined range on a particular symbol which is defined below, the exchange automatically suspends all liquidation processing on that symbol, preventing the execution of the auto-liquation process described in section 6.3 below. Liquidations do not occur when the mark price < Fair Value Price - Liquidation Band or mark price > Fair Value Price + Liquidation Band The Liquidation Band is defined in Section 10.3 of the Order Execution Rules. Weekday Overnight and Weekend Trading are periods when the underlying market is not open. These are defined in the Order Execution Rules Section 5.

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6.3. Designated Liquidity Provider (DLP) Program

The Company operates an optional opt-in Designated Liquidity Provider program for qualified market makers to facilitate off-order-book liquidation of accounts whose margin has reached critically low levels (see section 6.3.3 above). The DLP program is designed to provide efficient liquidation mechanisms while offering compensation to participants for accepting liquidated positions and associated risks.

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6.3.1. Program Structure

The DLP program is based on established industry practices, and allocates liquidation fills pro-rata to participants according to their available margin capacity. The system ensures that participants’ resultant positions do not breach established position limits, maintaining appropriate risk controls for all DLP participants.

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6.3.2. Fee Structure

DLP participants receive compensation for accepting liquidated positions through a fee structure that reflects the size and risk characteristics of the transferred positions. The fee (DLP fee) paid to DLP participants is equal to the Liquidation Spread $\times$ notional size of position accepted.

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6.4. Liquidation Cascade

This section details the sequential auto-liquidation process when Account Equity < Maintenance Margin, for all symbols Y where the user has a position open. This process is run every second.

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6.4.1. Closing of Open Orders

All open orders of the user are first closed.

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6.4.2. Netting of Liquidated Positions

1. Cancel all open orders for the account
2. Conduct position netting across accounts being liquidated
3. Match offsetting positions internally without order book impact
4. Trades are booked between accounts at the current mark price. NB commission is charged at rates set in the Exchange Fees Schedule.

Example: Account 1 (long 100 units Symbol Y) + Account 2 (short 100 units Symbol Y) = positions netted, no trades submitted to order book. Trades booked between accounts at current mark price.

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6.4.3. Liquidations

This section illustrates the different liquidation modes, depending on the user’s Account Equity.

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6.4.3.1 Orderbook Liquidations

Condition: CoM < Account Equity < Maintenance Margin, and positions remaining after netting
process:

1. Compute notional amount to be liquidated.
2. Cap notional amount to ensure that the overall amount of liquidation quantity submitted to the orderbook does not cause the 60-second EMA of this quantity to exceed the Orderbook Liquidation Limits in Section 10.4 of the Order Execution Rules.
3. Enter limit IOC orders at the mark price $\pm$ Liquidation Spread as defined in section 6.1.

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6.4.3.2 DLP Liquidations

Condition: Account Equity <= CoM and DLP has sufficient capacity to absorb full position on symbol Y.

1. Check that the DLP Program has enough room to absorb liquidated positions.
2. If it does, transfer the full position on symbol Y to DLP at mark price. Trades are booked to DLP participants with a fee equal to the DLP Fee = Liquidation Spread * notional size of position being transferred.
3. The residual balance of the CoM after positions and fees are transferred to DLPs is allocated to the Reserve Fund. If Account Equity < DLP Fee, the Reserve Fund covers the shortfall. See Reserve Fund Policy for more information on the monies in the Reserve Fund.

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6.4.3.3 Auto-Deleveraging

Condition: Account Equity <= CoM and DLP has insufficient capacity to absorb full position on symbol Y

1. Transfer maximum position possible to DLP using Section 6.3.3 methodology
2. Auto-deleverage remaining position on symbol Y:
   1. Rank accounts with offsetting position on symbol Y by (Account Equity ÷ Position Maintenance Margin).
   2. Deleverage lowest ratio accounts first, until they have 1x leverage on symbol Y. This ranking process serves to ensure that accounts closest to being liquidated themselves have positions removed by the auto-deleveraging engine first.
   3. Continue down the ranked list until the residual liquidated position on symbol Y has been fully offset.
   4. Auto-deleveraging trades are booked at the current mark price. Commission charged on auto-deleveraging is charged entirely to the account being liquidated - accounts are not charged when a profitable position in their account is allocated to another by the auto-deleveraging engine. See exchange fees document.

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7. Reserve Fund

The Liquidation Protocol is closely integrated with the Company’s Reserve Fund to provide comprehensive protection against losses that exceed Account Equity. See Reserve Fund Policy for more information on the balances in the Reserve Fund. Regular stress testing of the Liquidation Protocol ensures that the system can handle extreme market conditions while maintaining adequate Reserve Fund levels. The exchange monitors liquidation frequency and effectiveness to optimize protocol parameters and ensure continued system resilience.

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8. Policy Review

The Trading and Margin Policy will be reviewed at least annually by the Operations function and formally approved by the Board of Directors. It will also be reviewed ad hoc whenever significant changes occur in market conditions, regulatory requirements, QFEX’s business model, or risk appetite. Amendments will require Board approval, and any material changes will be communicated to clients in a timely manner.