Key Words: Forced-Liquidation Engine, Margin Ratio, Insurance Fund.
- Margin Ratio
The most critical indicator to measure account risk.
When the margin ratio falls to 0%, the account will trigger a forced liquidation, which is the only basis for the forced liquidation of the account. The higher the margin ratio, the lower the risk, and vice versa.
Margin Ratio = Net Asset Value / Total Initial Margin - Adjustment Factor
The adjustment factor is to prevent position overruns, which is currently set at 10%.
For example: The net asset value is 150 USDT and the total initial margin is 15 USDT. The margin ratio is 150/15-10% = 990%. When there is 1.5 USDT net asset value remaining, 1.5 / 15-10% = 0, which will trigger the forced liquidation.
- Forced Liquidation in Isolated Margin Mode
- Forced-Liquidation Engine
If a user's position loses 90% of the principal (trading fees and funding fees included), it will be closed and taken over by the forced-liquidation engine.
- Forced Liquidation
If a liquidation position is traded at a price better than the bankruptcy price (a price at which the principal is 0), a liquidation premium will be generated. This part of the premium will be injected into the Insurance Fund to cover any deficit when the close price is worse than the bankruptcy price.
- Insurance Fund
Insurance Fund is set up by the platform as financial guarantees to maintain the normal operation of contract trading, which is used to protect traders from negative equity and being held accountable for excessive loss.
- Forced Liquidation in Cross Margin Mode
In cross margin mode, the margin of all orders and the remaining funds in the account will be shared. This means that each trade can lose more than the margin of that specific trade. When continuous losses lead to the account reaching the liquidation level, all trades will be forced to close at the same time, and you will lose all account funds.
1. Reasons for the Change of Estimated Liquidation Price in the Cross Margin Mode
In order to give users a more intuitive sense of the risks in the Cross Margin mode, Bingbon provides users with an estimated liquidation price for reference. When the estimated liquidation price is reached, the margin rate will go to 0. All positions will be forced to close. However, the liquidation price is expected to change.
a. When the user holds positions in multiple trading pairs, the price change of each trading pair will cause changes in the P&L of the order and the estimated liquidation price will change accordingly.
b. When the user holds positions in a single trading pair, the charge of funding fees will affect the overall funds of the account. Therefore, the estimated liquidation price will change along with the settlement of funding fees.
c. Any actions that can directly cause changes in account funds such as opening or closing positions will affect the estimated liquidation price.
2. Reasons for Forced Liquidation of Floating Profit in Cross Margin Mode
Please note that the margin rate is the only trigger factor for forced liquidation. When the margin rate is 0, forced liquidation will be triggered even being in a floating profit. Bingbon allows users to use floating profit in advance, which may cause you to use the floating profit (such as transfer funds out or use the floating profit to open new positions) with former positions still opened and the account funds become negative followingly. When closing positions, you need to compensate for the deficit. If the floating profit is less than the deficit, the forced liquidation will be triggered.
The user transfers 100 USDT to the Standard Contract Account and opens a position. Now the NAV is 100 USDT, the position margin is 100 USDT, and the free margin is 0 USDT.
When a floating profit of 150 USDT is generated, the NAV becomes 250 USDT; the position margin is 100 USDT; the free margin is 150 USDT.
Then the user transfers out 150 USDT from an earlier profitable trade. When the market goes down, the floating profit decreases to 50 USDT.
The user transfers in 100 USDT for trading, the current floating profit is 50 USDT, and 150 USDT is transferred out.
Thus, Net Asset Value = 100 + 50 - 150 = 0 USDT.
In this case, forced liquidation is triggered despite being in a floating profit.
It is recommended that users also observe other account indicators to identify risks.
a. Margin Rate - Pay attention when the margin rate is close to 0.
b. Net Asset Value - Pay attention when net asset value is much smaller than the floating profit.