Avoid Unnecessary Liquidations and Minimize Negative Impacts Brought by Liquidations
In Binance JEX, the basic reference for liquidation is fair mark price, a weighted price calculated on the basis of index price of various spot exchanges. Calculating floating PNL via fair mark price will prevent futures market from being manipulated, thus avoiding unnecessary liquidation.
Binance JEX employs risk limits mechanism for all positions. The base value and increasing amount of risk limits vary from one trading pair to another. Risk limits is used to regulate and control on both individual trader’s position and market depth.
Binance JEX uses the fair mark price to calculate if a position is to be liquidated. The fair mark price is based on spot prices in multiple major exchanges. Calculating floating PNL via fair mark price helps to prevent the futures market from being manipulated, thus reduces the occurrence of unnecessary liquidations.
Binance JEX imposes risk limits on all futures positions. The base risk limit and incremental risk limit vary from one symbol to another. This mechanism helps to regulate both individual position sizes and market depth, thus minimizes negative impacts brought by the liquidation of large positions.
The employment of risk limits means that required maintenance margin rates for positions in different risk limit tiers differ. If the value of a position exceeds the base risk limit, Binance JEX will first try to liquidate part of that position to bring its risk limit down to a lower tier. This lowers the required maintenance margin rate and in many cases can help to avoid a full liquidation.
- If position value is within basic risk limits, when one position is liquidated, it will be taken over by liquidation engine with bankruptcy price.
- If position value is out of basic risk limits, when one position is liquidated, it will be handled by liquidation engine according to the following logic.
2.1 Automatically deleveraging user’s positions and submitting FillOrKill (All filled or all canceled) orders. Order value for FillOrKill Order = position value - risk limits of lower laddering. Hence, position maintenance margin will be turned to lower class to prevent all positions from being liquidated.
2.2 If the account is still in liquidation status after reducing positions, all positions will be liquidated.
2.3 If liquidation process is once again triggered after reducing positions, step1 and step2 will be repeated.
- If the value of a position is within the base risk limit, when liquidation is triggered, the whole position will be taken over by the liquidation engine at bankruptcy price;
- If the value of a position is in a higher risk limit tier, when liquidation is triggered, the position will be handled following steps below:
2.1 A FillOrKill (Execute All or Cancel Immediately) order will be submitted to cut down the size of the position. Its value is equal to the difference between current position value and the risk limit of a lower tier. This will bring risk limit and required maintenance margin rate down to a lower tier and in many cases can help to avoid a full liquidation.
2.2 If, after step 2.1, the margin level of this position still fails to meet margin requirement, then the remaining position will be liquidated.
- If the margin level of this position meets margin requirement after step 2.1 but later liquidation is once again triggered, then steps 2.1 and 2.2 will be repeated.
- User A holds BTC futures worth 1,500K USDT( within basic risk limits for BTC futures). If it triggers liquidation process, all positions in A’s account will be liquidated.
- User B holds BTC futures worth 3,500K USDT (out of basic risk limits for BTC futures) . If it triggers liquidation process, positions in B’s account will be reduced to less than 3,000 K. And the system will re-check if reduced positions have met maintaining requirements.
If after reducing , positions have met maintaining requirements, rest positions won’t be reduced any more and the already reduced part is called partial liquidation or auto-deleveraging.(ADL)
If after reducing, rest positions can not yet meet maintaining requirements, then all positions will be liquidated.
(1) User A holds 1,500 K USDT worth of BTC contract (this is within the base risk limit of BTC contract). If liquidation is triggered, the whole position will be liquidated.
(2) User B holds 3,500 K USDT worth of BTC contract (this is higher than the base risk limit of BTC contract). If liquidation is triggered, the position will first be cut down to below 3,000 K, then the system will check if the margin level now meets the requirement for User B to hold the remaining position:
-If yes, the remaining position will be kept;
- If no, the remaining position will also be liquidated.
When liquidation process is triggered, positions will be taken over by liquidation engine with bankruptcy price. Bankruptcy price is not real liquidation price. Liquidation engine will handle liquidation order with some specified strategies.
When liquidation is triggered, the position will be taken over by Binance JEX’s liquidation engine at bankruptcy price (the price at which you lose all your initial margin). However, this price may not be the actual price the position is closed at. The liquidation engine will close the position following steps below:
- In liquidation, if bankruptcy price is superior to bankruptcy price, rest margin and floating profits will be injected into futures protection fund.
- If liquidation engine cannot close positions with bankruptcy price, USDT in futures protection fund will be employed to ensure liquidation being fulfilled smoothly.
- If both 1 and 2 cannot ensure liquidation go smoothly, ADL will be triggered. ADL will force some positions of counterparty to be closed with bankruptcy price.
- If the engine is able to close this position at a price better than bankruptcy price, then the remaining margin of the position will be added to the insurance fund;
- If the engine is unable to close this position at bankruptcy price, it will draw funds from the insurance fund to cover the loss gap to ensure the position is liquidated;
- If, after step 1 and 2, this position still cannot be fully liquidated, then an auto-deleveraging (ADL) event will be triggered. This mechanism will close some positions of opposing traders at bankruptcy price to ensure this position is liquidated.
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