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The SCXM Guaranty Fund

Funding and Coverage

Seed Digital Commodities Market (“SCXM”) will make an initial contribution  of $500,000 to its guaranty fund (the "SCXM Guaranty Fund". The SCXM Guaranty Fund will increase periodically through:

  1. SXCM allocating a portion of its trading revenue to the fund (at its sole discretion); and
  2. Allocating any excess funds remaining in the event of a default by a participant after the participant's account has been fully liquidated.

Fund Security

The SCXM Guaranty Fund will be held in a segregated account under Seed Digital Commodities Market LLC at a U.S. regulated, FDIC-insured bank and will be subject to quarterly reviews.

Callability of the SCXM Guaranty Fund

In the event that a participant fails to meet their delivery obligations on settlement, SCXM will use the defaulting participant’s initial margin to settle their obligation either physically or financially. If the initial margin proves to be insufficient, SCXM will undergo a liquidation procedure which is outlined in the waterfall process shown below.

waterfall.PNG

With that said, when applying SCXM’s developed risk controls and margin methodologies, the probability of a participant defaulting was calculated to be very low (less than 1%). Historically, in the event of a default, the average loss beyond margin coverage is approximately 7.5%. Under these metrics, the initial contribution of $500,000 would provide the following coverage:[1]

Percentage of Participants Defaulting

Outstanding Notional Balance[2]

5%

$10,000,000

10%

$5,000,000

15%

$3,333,333

20%

$2,500,000

In the event that multiple participants default during a settlement cycle, funds from the Seed Guaranty Fund will be applied on a pro rata basis, proportional to each non-defaulting participant’s losses compared to the aggregate amount of losses sustained across all non-defaulting participants.

Growth of the SCXM Guaranty Fund

With an average daily trading volume of $100M and an allocation of 3-5% of trading revenue (for example purposes), the fund may grow from $500K to $2M in just over a year which would provide coverage for up to $40M in outstanding notional balance. Allocating excess funds remaining after the liquidation of a defaulting participant would help the fund grow faster but this is not considered in the table shown below.

Target Fund Balance

Days Required[3]

$1,000,000

125

$1,500,000

250

$2,000,000

375

 

[1] SCXM’s risk model was applied to historical data for BTC and ETH since their inception.

[2] For SCXM, the Outstanding Notional Balance refers to the overnight balances that failed to settle at T.

[3] If 5% of trading revenue was allocated to the fund.