Insurance Fund: A balance on the exchange, filled by the Remaining Margin of a position liquidated at a price better than the Bankruptcy Price, and used to cover the loss from a position closed at a price worse than the Bankruptcy Price.
During a Liquidation, the position on the exchange is closed automatically due to a significant Margin loss. Every position has its Liquidation Price and Bankruptcy Price.
Liquidation Price refers to the price at which a Mark Margin (based on the Mark Price) level reaches the Maintenance Margin level. Bankruptcy Price stands for the price at which a trader would have lost all his Initial Margin. The Liquidation Price will always be at a price better than the Bankruptcy Price.
To make trading safe and transparent BTCMEX uses the Dual-Price Mechanism, which means Liquidation is triggered by the Mark Price (average BTC market price), while the liquidated position will be closed at the Last Traded Price (BTC price on the exchange). The Liquidation Fill Priceis the Last Traded Price at the moment the position is closed. The difference between the Fill Price and the Bankruptcy Price is the amount of a margin taken from or given to the Insurance Fund.
The liquidated trader will have his position closed at the Bankruptcy Price, thus lose his entire Initial Margin.
If the Fill Price at which a position is liquidated is better than the Bankruptcy Price, the funds will be added to the Insurance Fund. If the price is worse, the Insurance Funds will be used to cover the loss. If the Insurance Fund is insufficient to cover the loss on BTCMEX, the Auto-Deleveraging system will be triggered.
Insurance Fund Loss Covering: Examples
For example, a trader goes Long with the Liquidation Price USD 3,100 and the Bankruptcy Price USD 3,000.
The Liquidation occurs once the Mark Price hits USD 3,100.
– If the Fill Price is USD 3,060 (higher than the Bankruptcy Price), (3,060-3,000=60). USD 60 will be added to the Insurance Fund.
– If the Fill Price is USD 2,960 (lower than the Bankruptcy Price), (2,940-3,000=-40). USD 40 will be taken from the Insurance Fund to cover the contract loss.
The opposite happens when a trader’s Short position is liquidated:
With the Liquidation Price USD 2,900 and the Bankruptcy Price USD 3,000.
– If the Fill Price is USD 2,960, (3,000-2,960=40).USD 40 will be added to the Insurance Fund.
– If the Fill Price is USD 3,060, (3,000-3,060=-60). USD 60 will be taken from the Insurance Fund to cover the loss.