Reserve Fund Policy

​

1. Introduction

This Reserve Fund Policy establishes the framework for the operation, funding, and management of the Reserve Fund. The Reserve Fund serves as a critical risk management tool designed to absorb residual shortfalls that may arise from client account liquidations, thereby protecting the exchange and its clients from potential losses due to market volatility and extreme price movements. The Reserve Fund operates in conjunction with the margin and liquidation procedures to ensure the financial stability of the exchange and maintain client confidence. This policy outlines the funding mechanisms, governance structure, stress testing requirements, and disclosure obligations related to the Reserve Fund.

​

2. Purpose

​

2.1 Purpose

The Reserve Fund serves the following primary purposes:

• Loss Absorption: Absorb residual shortfalls arising from automatic liquidations when the Liquidation Protocol (orderly liquidation, DLP and auto-deleveraging - see more information in Section 6 Trading and Margin Policy) has been insufficient to liquidate within the bounds of a positive account equity.
• Client Protection: Provide an additional layer of protection and reassurance for clients and their funds
• Exchange Stability: Ensure the financial resilience of the Company’s operations

​

3. Reserve Fund Structure and Funding

The Reserve Fund will be initially funded by the Company, and shall always contain the greater of:

• Minimum Amount: USD $50,000
• Percentage-Based Amount: 0.1% of total user deposits

This initial funding demonstrates the Company’s commitment to client protection and provides immediate coverage for potential liquidation shortfalls. The Reserve Fund will be maintained at a minimum of those two levels by the Company at all times.

​

3.1 Close Out Margin (CoM) Contributions

When a client account reaches the Close Out Margin (CoM) level and automatic liquidation is triggered (see the Trading and Margin Policy section 2 for more information on CoM):

• At most, 60% of CoM account equity is transferred to Designated Liquidity Providers (DLPs) to facilitate position transfer
• The balance (>40%) is credited to the Reserve Fund

This mechanism ensures that the Reserve Fund is continuously built up through the normal course of risk management operations.

​

3.2 Company Contributions

The Company reserves the right to make additional contributions to the Reserve Fund at its discretion, particularly:

• During periods of high market volatility
• When Reserve Fund balance falls below target levels
• As part of regular capital planning exercises

​

4. Governance and Management

​

4.1 Oversight Responsibility

Board of Directors:

• Ultimate oversight of Reserve Fund policy and performance
• Approval of material changes to funding methodology
• Review of annual Reserve Fund assessment

Board Audit & Risk Management Committee (BARC):

• Quarterly review of Reserve Fund performance
• Oversight of stress testing program
• Recommendation of policy changes to the Board

Chief Operating Officer (COO):

• Daily monitoring of Reserve Fund balance
• Implementation of funding mechanisms
• Coordination of stress testing activities
• Reporting to BARC and Board
• Financial management of Reserve Fund assets
• Accounting and reporting of Reserve Fund activities

​

4.2 Review Frequency

Daily Monitoring:

• Reserve Fund balance tracking
• Liquidation event analysis
• Target level assessment

Monthly Reviews:

• Reserve Fund performance analysis including stress testing
• Target size recalculation
• Funding mechanism effectiveness

Quarterly Reviews:

• Comprehensive Reserve Fund assessment by BARC
• Policy effectiveness review

Annual Reviews:

• Complete policy review and update
• Board approval of any material changes

​

5. Stress Testing Program

​

5.1 Stress Testing Objectives

The stress testing program evaluates the Reserve Fund’s ability to absorb potential losses during extreme market conditions, including:

• Market crashes and flash crashes
• Extended periods of high volatility
• Liquidity crises
• Correlated asset price movements

​

5.2 Stress Testing Methodology

Scenarios Tested:

• Trader with large deposit attempts to trigger liquidations by moving mark price
• Trader places a large market order that clears many levels of the order book
• Large moves in mark price triggered by corresponding index price move, or by large liquidations
• Market makers reduce their quote sizes below pre-agreed levels in volatile conditions.
• Large overnight move resulting in a large number of liquidations on market open.

Testing methodology:

• We take comprehensive snapshots of the exchange every 5 seconds. This includes the full order book, balances in every user’s account, and Reserve Fund balance. We use one of these snapshots for our monthly snapshot on which to perform the stress test.
• Survey market makers for quote sizes in high volatility conditions, and other relevant parameters.
• Introduce the parameters received from market makers into our testing suite.
• Stress test the order book, matching engine and clearing house in the scenarios above, taking into account open orders of exchange participants.
• Reverse stress testing to identify breaking points

Key Metrics Evaluated:

• Maximum potential Reserve Fund drawdown
• Time to Reserve Fund depletion under stress
• Recovery time following stress events

​

5.3 Stress Testing Frequency

Monthly Stress Tests:

• Maximum stress scenario evaluation
• Multi-factor stress combinations

​

5.4 Stress Test Results and Actions

Threshold Levels:

• Green Zone: Reserve Fund adequate for all tested scenarios
• Amber Zone: Reserve Fund adequate for most scenarios, monitoring required
• Red Zone: Reserve Fund inadequate, immediate action required

Response Actions:

• Amber Zone: Increase monitoring frequency, consider additional funding
• Red Zone: Immediate Reserve Fund top-up, review Reserve Fund Policy limits, review position and leverage limits.

​

6. Client Disclosures and Transparency

​

6.1 Public Disclosures

Website Disclosure:

• Reserve Fund Policy summary
• Explanation of funding mechanisms

Client Agreement Disclosures:

• Reserve Fund purpose and limitations
• Client rights and expectations
• Circumstances under which Reserve Fund may be used

​

6.2 Regular Reporting

Monthly Reports:

• Reserve Fund balance and changes
• Liquidation events and Reserve Fund usage
• Stress test summary results

Annual Reports:

• Complete Reserve Fund annual review
• Policy effectiveness assessment
• Forward-looking Reserve Fund strategy

​

7. Reserve Fund Usage and Recovery

​

7.1 Usage Criteria

The Reserve Fund may be utilized when Designated Liquidity Providers are unable to assume positions, auto-deleveraging occurs, and resulting client account equity is negative.

​

7.2 Recovery Mechanisms

Short-Term Recovery:
The Company will top-up the Reserve Fund if the balance falls below minimum levels (as specified in Section 3) Medium-Term Recovery:

• Adjustment of margin requirements if necessary
• Review of liquidation procedures
• Enhanced risk management measures

​

8. Regulatory Compliance and Reporting

​

8.1 Regulatory Notifications

The Company will notify the Bermuda Monetary Authority (BMA) of:

• Material Reserve Fund usage events
• Significant changes to Reserve Fund policy
• Stress test results indicating potential concerns

​

8.2 Record Keeping

Comprehensive records will be maintained including:

• All Reserve Fund transactions and balances
• Liquidation events and associated costs
• Stress test results and methodologies
• Policy reviews and decision rationales
• Snapshots of the exchange taken every 5 seconds.

​

9. Policy Review and Updates

This Reserve Fund Policy will be reviewed:

• Annually by the Board of Directors
• Quarterly by BARC for operational effectiveness
• Ad hoc when significant market events, regulatory changes or adverse monthly stress tests occur

Material changes to this policy require Board approval and will be communicated to clients with appropriate notice periods.