On the MTF you will never be allowed to have a negative balance on your account. This is thanks to our Equity Protection Process (EPP) which manages the risk atomically for all positions on the platform to ensure full market integrity.
When you enter a trade, you have an initial margin amount to lodge for opening the position, and then a maintenance margin level which triggers the equity protection process once you breach it.
Positions begin this process once the portfolio value (i.e., equity) of a margin account falls below Maintenance Margin threshold. Upon liquidation, any and all Contracts using margin from that margin account are impacted.
The entire process works in summary as follows:
- Margin Account equity, valued at the Mark Prices on Contract Level, falls below maintenance margin for the Margin account for given user. This kicks off liquidation process. Note: Multiple contracts can share the same margin account, and mark price can and does differ across maturities.
- The system executes an Immediate or Cancel (IoC) close order for any and all contracts in the margin account, at the 0-equity imputed price for each position.
- The orderbook of the given contract(s) may not be liquid enough to absorb the full position size being closed, resulting in unfilled liquidation
- The unfilled liquidation is then assigned to liquidity providers (LPs) / marketmakers who essentially have open ended offers to accept any unfilled liquidations (always respecting price time priority, AFTER the orderbook has been swept up to the price that the LP is assigned). This assignment procedure is meant to form a backstop of liquidity to prevent system losses that other platforms address using an insurance fund.
- If the unfilled liquidation can't find a new counterparty in neither the orderbook nor in the PAS assignment, then unwind occurs, which reduces the OI by the remaining size.
The EPP three main steps:
- Liquidation
- Assignment
- Unwind
Liquidation
This is the first step of the process and it begins by submitting an Immediate-or-Cancel order to the market. The limit price of this order is chosen such that if the order is matched, the remaining portfolio value of the margin account will not be negative. A liquidation in one margin account will not affect any other margin accounts.
| EXAMPLE: LIQUIDATION |
You have an open long position of 10,000 contracts (USD) in Bitcoin-Dollar Futures with an Avg Entry Price of $80,000. The value of this position is 0.125 BTC (10,000 / $80,000) -- (technical note: as it is inverse, its value in a long position is represented as -0.125 BTC). The Initial Margin requirement for this position was 0.0025 BTC (2% of 0.125 BTC) -- this means you need at least 0.0025 BTC in order to enter the position at that size and price. The Maintenance Margin requirement for this position, once entered at that size and price, is 0.00125 BTC (1% of 0.125 BTC). This is the equity in your trading account required to keep the position "alive" to avoid liquidation. Assume that you decide to collateralise this position with more than the minimum requirements and you put 0.01 BTC in your account (0.01/0.125 = 8% margin). This means you are "over-collateralising" your position with respect to the minimum requirements (which are 2% to initiate, 1% to maintain). In this position, the price at which you will be liquidated is approximately $74,765.0, where your position value will be 10,000/74,765 = -0.133752 BTC. At this point, it would mean the notional value of your position from entry has dropped from -0.125 to -0.133752, with a loss of -0.0087524 BTC. With your position marked at a loss of -0.0087524 BTC your 0.01 BTC margin equity is now down to 0.0012475, which has breached your maintenance margin level (0.00125 BTC) for the position (0.125 BTC). Thus, as soon as the Mark Price reaches 74,765 USD, your position will enter liquidation. At this point, an immediate-or-cancel sell order is submitted on your behalf at $74,070 (the price at which you have exhausted your equity), where your position value will be just above 0 BTC. The limit price of this order assures that if the order is matched, the portfolio value of the margin account will not be less than zero. |
If the liquidation order results in being filled at price better than the bankruptcy price, then the user keeps whatever remaining maintenance margin there is. This is contrary to how some other exchanges operate where you lose the entire maintenance margin regardless of what price your liquidation is filled at.
Assignment
If a position cannot be liquidated (for example due to lack of demand on the market) and there are unfilled contracts from the above Immediate-or-Cancel order, then the remainder of the position undergoes "assignment" process. This process takes the unfilled liquidation remainder and assigns it to a liquidity provider at the 0-equity price, in order that your counterparty is able to maintain their position.
| EXAMPLE: ASSIGNMENT | Assume in the above Liquidation example that the immediate-or-cancel order at 74,070 only fills 4,000 contracts and there is 6,000 contracts still remaining in the open position. The system will assign the 6,000 Contract long position to a liquidity provider who inherits the position at the entry price of the 0-equity point for the bankrupt counterparty. This keeps the healthy counterparty in their position and facilitates a more orderly market.. |
Unwind
If, for whatever reason, this assignment process is unable to find liquidity providers to take the position at the zero equity point, then the remaining contracts undergo an "unwind". This means that the contracts between you and your counterparties end and that the remaining portfolio value of the margin account is transferred to your counterparties. An unwind of one margin account will not affect any other margin accounts.
| EXAMPLE: UNWIND | Assume in the above Assignment example that the system could only find liquidity providers to take 5,000 Contracts at the zero equity price. This leaves 1,000 contracts that could not be liquidated in the book nor assigned to liquidity providers. At this point, the system will force the user out of the remaining 1000 contracts Long and find a counterparty who is 1,000 contracts Short and force that position to be closed, compensating the counterparty with any portfolio balance remaining for the unwound user's 1,000 contract position (at a price of 74,070), to maintain systemic balance. This results in an OI drop of 1000 Contracts. Note that any margin salvaged in the initial liquidation remains in the liquidated user's account and is not transferred as part of the unwind of the last 1000 contracts. |
The unwind mechanism encourages market participants to sufficiently collateralize their margin accounts. It also compensates any party whose position has been unwound as a result of their counterparty not posting sufficient margin. Therefore, if a trade closes because your counterparty's position has been unwound, then the compensation payment should enable you to replace your trade with no loss (and potentially a profit). See Example Unwind.
In the unwind scenario, there is an order of operations of who, on the other side, is picked as counterparty:
The ranking utilises the following criteria:
- Position Value = [absolute(Size/Amount)] (inverse)
- Return on Equity = [PnL/IM]
- Effective Leverage = [Position Value/Portfolio Value]
Rank (1,2,3...)-- Separate for LONG and SHORT:
- if negative: [RoE/Effective Leverage]
- if positive: [RoE*Effective Leverage]
E.g. When a long position is unwound, it targets the positions of short by highest rank (1 first, 2 second, 3 third, etc.) until fully unwound.
Who Benefits From My Loss?
Crypto Facilities does not benefit from liquidations, assignments or unwinds outside of the normal transaction fees. This risk management system is in place only to maintain an orderly market for margin trading in cryptocurrency derivatives.
We strongly encourage our members to adequately collateralise their margin accounts. It is your responsibility to monitor your margin levels continuously and to make sure that your portfolio value is high enough to prevent any liquidation event.
By trading on the platform, you agree to your remaining portfolio value of a margin account being transferred to your counterparties if this margin account falls below the Maintenance Margin.
If one of your positions is unwound as a result of a counterparty not posting sufficient margin, you agree to forfeit any claims vis-à-vis that counterparty, apart from your share in their remaining portfolio value.