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 margin account equity falls below the Maintenance Margin requirement. If the margin account equity is below the Maintenance Margin but above the Liquidation Margin, then a Partial Liquidation is triggered. If the margin account equity is below both the Maintenance Margin and the Liquidation Margin threshold, then a Full Liquidation is triggered. 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 a given user. This kicks off the liquidation process. Note: Multiple contracts can share the same margin account, and mark price can and does differ across maturities.
- Where Margin Account Equity is above the Liquidation Margin, the system will attempt to partially close positions to restore equity above Maintenance Margin or until full closure of the position(s).
- The system executes an Immediate-or-Cancel close order for any and all contracts, or a partial liquidation order as applicable, in the margin account, at the Zero Equity 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) and market makers who have open-ended offers to accept any unfilled liquidations, always respecting price time priority after the orderbook has been swept up to the price at which the LP is assigned. This assignment procedure forms a backstop of liquidity to prevent system losses that other platforms address using an insurance fund.
- If the unfilled liquidation cannot find a new counterparty in either the orderbook or the PAS assignment, then a covered liquidation is attempted using the Derivatives Liquidity Pool. If covered liquidation cannot be executed, an unwind occurs, which reduces open interest by the remaining size.
The EPP five main steps:
- Partial Liquidation*
- Full Liquidation
- Assignment
- Covered Liquidation
- Unwind
1. Partial Liquidation
A Partial Liquidation begins by submitting an Immediate-or-Cancel order for 10% of the entire position(s) quantity to the market. The limit price of these orders is chosen such that if the order is matched, the remaining Margin Account Equity will not be negative. The Partial Liquidation process continues to close 10% of the remaining position(s) until either:
- the Margin Account Equity is restored to a level at or above the Maintenance Margin requirement for all remaining open positions; or
- the relevant position(s) are closed in their entirety.
Partial Liquidation Fee
Where the order is executed at a price more favourable than the Zero Equity Price, the Partial Liquidation Fee is the absolute difference between: (A) the lesser of the execution price and the Mark Price, in the case of a sell order, or the greater of the execution price and the Mark Price, in the case of a buy order; and (B) the Zero Equity Price, multiplied by the quantity of the order executed.
| Example Partial Liquidation | You hold a long position of 10 contracts in PF_BTCUSD at a Mark Price of $20,000, with a Margin Account Equity of $1,900 against a Maintenance Margin requirement of $2,000. Since Margin Account Equity is below Maintenance Margin but above the Liquidation Margin threshold, the Partial Liquidation process begins. Iteration 1: Margin Account Equity of $1,900 is below Maintenance Margin of $2,000. The system submits an immediate-or-cancel order for 10% of the position (1 PF_BTCUSD contract) at the Zero Equity Price of $19,810. The order fills at $19,820, generating an excess of $10 above the Zero Equity Price. A Partial Liquidation Fee of $10 is charged. Margin Account Equity is now $1,710 with 9 contracts remaining. Iteration 2: Margin Account Equity of $1,710 is below Maintenance Margin of $1,800. The system submits an immediate-or-cancel order for 1 contract at the Zero Equity Price of $19,810. The order fills at $19,850, generating an excess of $40 above the Zero Equity Price. A Partial Liquidation Fee of $40 is charged. Margin Account Equity is now $1,520 with 8 contracts remaining. Iteration 3: Margin Account Equity of $1,520 is below Maintenance Margin of $1,600. The system submits an immediate-or-cancel order for 1 contract at the Zero Equity Price of $19,810. The order fills at exactly the Zero Equity Price, generating no excess and therefore no fee. Margin Account Equity is now $1,330 with 7 contracts remaining. Iteration 4: Margin Account Equity of $1,330 is below Maintenance Margin of $1,400. The system submits an immediate-or-cancel order for 1 contract at the Zero Equity Price of $19,810. The order fills at $20,100, above the Mark Price of $20,000. The fee is calculated against the Mark Price rather than the fill price, giving an excess of $190 above the Zero Equity Price. A Partial Liquidation Fee of $190 is charged. The remaining $100 excess above the Mark Price is retained by the trader. Margin Account Equity is now $1,240 with 6 contracts remaining. Iteration 5 onwards: Margin Account Equity of $1,240 exceeds the Maintenance Margin of $1,200. The Partial Liquidation process exits and no further contracts are closed. In total, 4 PF_BTCUSD contracts were closed for $79,580 in notional value, with $240 in Partial Liquidation Fees charged. |
2. Full Liquidation
A Full Liquidation begins by submitting an Immediate-or-Cancel order for the entire position(s) quantity to the market. The limit price of this order is chosen such that if the order is matched, the remaining Margin Account Equity will not be negative. A Full Liquidation in one margin account will not affect any other margin accounts.
If the liquidation order fills at a price better than the bankruptcy price, the trader retains any remaining Maintenance Margin less any applicable trading and liquidation fees.
Full Liquidation Fee
The Full Liquidation Fee is calculated as 50% of the minimum Maintenance Margin of the relevant contract and capped at 5% For example, if the minimum Maintenance Margin for PF_BTCUSD is 1%, the Full Liquidation Fee is 0.5%.
| Example Full Liquidation | You hold a long position of 10 contracts in PF_BTCUSD with an average entry price of $20,000. The notional value of this position is $200,000 (10 x $20,000) and the Margin Account Equity is $10,000. The Initial Margin requirement is $4,000 (2% of $200,000) and the Maintenance Margin level is $2,000. The Liquidation Margin threshold is $1,000. As the Mark Price falls to $19,200, Margin Account Equity drops below both the Maintenance Margin and the Liquidation Margin threshold. A Full Liquidation is triggered. A Full Liquidation Fee of $1,000 (0.5% x $200,000) is immediately debited from the account. An Immediate-or-Cancel sell order is submitted on your behalf at approximately $19,100, the price at which Margin Account Equity will be just above zero. The limit price of this order assures that if the order is matched, the Margin Account Equity will not be less than zero. The order fills at $19,150, which is above the bankruptcy price of $19,100. The trader retains the remaining Maintenance Margin of $500 after deduction of the Full Liquidation Fee and applicable trading fees. |
3. Assignment
If a position cannot be fully liquidated due to insufficient demand in the orderbook, the unfilled remainder undergoes the Assignment process. The unfilled contracts are assigned to a liquidity provider at a price of 0.75% to 2.5% away from the Mark Price, provided there are sufficient funds in the Derivatives Liquidity Pool. If no funds are available in the liquidity pool at the time of assignment, the fill price defaults to the Zero Equity Price so that the counterparty is able to maintain their position.
| Example Assignment | You hold the following cross-margined positions in your USD margin wallet:
Once Margin Account Equity falls below Maintenance Margin, the EPP is triggered and the system submits Immediate-or-Cancel sell orders at the Zero Equity Price for each contract. The entire FF_XBTUSD_230728 position of 3 contracts is successfully sold into the orderbook. However, only 8 of the 10 PF_XBTUSD contracts find counterparties in the orderbook. The remaining 2 contracts are routed to the Position Assignment System, where they are assigned to liquidity providers participating in the program based on their individual preferences.
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4. Covered Liquidation
If the Assignment process is unable to find liquidity providers to take the remaining position, and the Derivatives Liquidity Pool has sufficient funds to cover the additional losses and the market spread is below 4%, the remaining contracts undergo a Covered Liquidation. A further Immediate-or-Cancel order is submitted at a price 5% away from the best bid or ask. If the Liquidity Pool does not have sufficient funds, the position moves to the final step of the EPP: Unwind.
| Example Covered Liquidation | You hold the following cross-margined positions in your USD margin wallet:
Once Margin Account Equity falls below Maintenance Margin, the EPP is triggered. The entire FF_ETHUSD_230728 position of 15 contracts is successfully sold into the orderbook. Of the 50 PF_ETHUSD contracts, 30 are liquidated into the orderbook and 15 are filled via the Position Assignment System. The remaining 5 contracts proceed to Covered Liquidation. Assuming the Derivatives Liquidity Pool has sufficient funds, an Immediate-or-Cancel order is submitted for the remaining 5 contracts at 5% below the best bid price. Once filled, any additional losses are covered by the liquidity pool, ensuring Margin Account Equity does not fall below zero.
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5. Unwind
If Covered Liquidation cannot be executed, the remaining contracts undergo an Unwind. The contracts between you and your counterparties are closed and the remaining Margin Account Equity is transferred to your counterparties. An unwind of one margin wallet will not affect any other margin wallets.
| Example Unwind | You hold the following cross-margined positions in your USD margin wallet:
Once Margin Account Equity falls below Maintenance Margin, the EPP is triggered. The entire FF_ETHUSD_230728 position of 15 contracts is successfully sold into the orderbook. Of the 50 PF_ETHUSD contracts, 30 are liquidated into the orderbook, 15 are filled via the Position Assignment System, and 3 are covered by the liquidity pool. The remaining 2 contracts cannot be liquidated by any other means and are unwound.
The unwind mechanism encourages market participants to sufficiently collateralise their margin accounts and compensates any party whose position has been unwound as a result of their counterparty failing to post sufficient margin. Unwind thresholds are chosen to cover approximately a 1-hour 99th percentile adverse price move, such that any compensation payment should enable the affected party to replace their position at no loss. |