Risk on leveraged futures trading on the platform is managed via Forced Liquidation process in the Instant Margining System.
Liquidation occurs on the margin account level (of which multiple Contracts can be trading in) when the required Maintenance Margin across contracts exceeds the Equity (Portfolio Value). 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 a linear futures position cannot be filled but there are enough funds in the liquidity pool and the market spread is <4%, then the position will be filled in the order book as a covered liquidation* and any negative balances covered by the liquidity pool
- If the unfilled liquidation cannot find a new counterparty in neither the orderbook nor in the PAS assignment, then unwind occurs, which reduces the OI by the remaining size.
*Linear futures only – unavailable for inverse futures