1. What is margin ratio?
Fixed margin Margin Ratio = (Fixed Margin + UPL) * Avg Price of Open Positions / (Contract Face value * Holding Positions)
Cross-margin Margin Ratio = Equity Balance / Position Margin + Withholding Margin of working orders)
If the trader’s margin ratio breaches 10% for 10x leverage, a margin call will be triggered.
If the trader’s margin ratio breaches 20% for 20x leverage, a margin call will be triggered.
For LTC 10x contract, if the loss has reached 90% of the position margin, a margin call will be triggered.
For LTC 20x contract, if the loss has reached 80% of the position margin, a margin call will be triggered.
2. What is forced liquidation?
In cross-margin mode: When the latest trading price of a position goes to an unfavourable direction to the user, if his futures account equity is ≤10% of his margin for 10x leverage (=maintenance margin ratio ≤10%) or ≤20% of his margin for 20x leverage (=maintenance margin ratio ≤20%), the position will be forced-liquidated, which is called forced-liquidation. After a position is forced-liquidated, the system will cancel the user’s all unfulfilled orders to release the margin to see if the user’s maintenance margin ratio is still lower than 10% for 10x leverage, or 20% for 20x leverage. If so, the holding position will be taken over by the forced-liquidation engine and closing orders will be placed in the market at a price at which trading efficiency and liquidation profit are maximized based on the latest market depth, basis, bankruptcy price, and index price.
In fixed-margin mode: When the latest trading price of a position goes to an unfavourable direction to the user, if the maintenance margin ratio of his position is ≤10% of his margin for 10x leverage or ≤20% of his margin for 20x leverage, the position will be forced-liquidated and taken over by the forced-liquidation engine. At this stage, the user’s liquidation loss is equal to the loss when his position maintenance margin ratio falls to zero. The maximum loss will not exceed the total margin of the liquidation position.
In cross-margin mode, all positions of all contracts will be closed when forced-liquidation is triggered. In fixed-margin mode, only the positions of the liquidation side will be closed when forced-liquidation is triggered.
When forced-liquidation is triggered, our risk management system will take over all the holding positions. The liquidation loss of the user will be the loss when the maintenance margin ratio equals to 0. At the same time, the risk management system will send a closing order to the market at a price at which trading efficiency and liquidation profit are maximized, based on market liquidity, bid-ask spread, bankruptcy price, and the index price. The closing order will be closely monitored by our system. If the order remains unfilled after a long period of time, our system will re-evaluate the market depth, basis, bankruptcy price, and the index price to create a new closing order until it is fully fulfilled. After force liquidation occurs, the liquidation positions will be separated from the user's equity balance. If the positions are not fully fulfilled, the loss will be logged as the user's liquidation loss and will be socialized during delivery. The users will not suffer further losses for the liquidation positions.
The status of the filled and unfilled liquidation orders can be found under the liquidation order list. If the liquidation positions (close long or close short) are filled above the bankruptcy price (maintenance margin ratio=0), premiums will be generated and will be injected to the insurance fund to cover any future societal loss or to settle incidents in futures trading.
If the liquidation positions (close long or close short) are filled below the bankruptcy price (maintenance margin ratio=0) or are not fully-filled during delivery, societal loss will be generated and will be covered by the insurance fund. If the loss cannot be fully-covered, the remaining portion will be subject to a clawback. The loss will be socialized with the profits made among all users of all three contracts.
3. Liquidation and risk management rules
Our futures adopts fixed-margin, cross-margin and liquidation price modes. Investors can only choose either fixed-margin or cross-margin mode according to their trading style.
If a user chooses cross-margin mode, the total equity balance in his/her futures account, plus all the realized profits and losses will be used as positions margin. When the margin ratio is equal to or below 10% (10x) / 20% (20x), the account will be liquidated. All positions will be force-closed, while liquidation orders remain unfilled will be covered by insurance fund or socialized.
If a user chooses fixed-margin mode, the initial margin required will also be the position margin. When the margin ratio is equal to or below 10% (10x) / 20% (20x), the account will be liquidated. All positions of the same side of this contract will be force-closed. While the positions of the other side and other contracts will not be affected.
Cross margin mode: all BTC and LTC available in the futures account will be regarded as position margin. The margin amount, therefore, will change according to price fluctuation. When the futures price moves towards a direction which is unfavorable to the investor, the equity of the investor will be decreased. When the margin ratio is equal to or below 10% (10x) / 20% (20x), the account will be liquidated. The loss will be equal to or close to the equity balance of his/her futures account. A user may increase the margin or change the number of contracts to manipulate the leverage multiplier. The higher the margin, the lower the contract number, hence lower leverage multiplier and lower risk of triggering a forced liquidation.
Fixed margin mode: the initial margin will be regarded as the position margin. So, the margin amount remains unchanged even when the futures price fluctuates. When the futures price moves towards a direction which is unfavorable to the investor, unrealized losses occur. When the margin ratio is equal to or below 10% (10x) / 20% (20x), the account will be liquidated. The loss will be equal to or close to the initial margin placed for the side of the contract.
Liquidation price mode: To avoid volatile market movements which leads to forced liquidation of multiple positions, OKEx futures provides liquidation price mode for investors to minimize the risk. When a user's account is liquidated, all the holding positions will be closed at a price to alter the account's equity balance to zero, instead of market price. This mode can avoid hammering the market and minimize price movements in futures trading. If the liquidated orders are not fully filled after settlement, the unfilled orders will be regarded as bankruptcy positions and will be socialized with the profits made among all users of all futures markets.
If the size of a user’s position or open orders accumulate to a level which poses a clawback threat to the futures trading system or other users, OKEx may request to cancel your orders or close part of your position. As a final measure, OKEx reserves the right to limit or partially cancel the position or orders to reduce the risk in the system.
4. What is insurance fund?
Insurance fund is set up to cover the societal loss generated or to settle incidents in futures trading. The sources of the fund are mainly from OKEx and the premiums after forced liquidations.
5. Societal loss & full account clawback system
OKEX Futures uses a "full account clawback" system to calculate the clawback rate. The system's margin call losses from all three contracts will merged and clawbacks will be calculated according to each user's entire account profit, instead of calculating each contract's margin call loss and clawback separately. Only users that have a net profit across all three contracts for that week will be subject to clawbacks. Clawbacks will only occur if the insurance fund does not have enough funds to cover the system's total margin call losses.
Settlement and delivery of the three contracts (weekly, bi-weekly & quarterly) occurs at 16:00 every Friday (Hong Kong time).
Unfilled liquidation orders during settlement:
The system's total margin call losses = weekly losses + bi-weekly losses + quarterly losses = 0BTC-100BTC-20BTC = -120BTC
If system's losses + insurance fund >= 0, then clawback rate = 0
If system's losses + insurance fund <0, then clawback rate = (system losses + insurance fund) / net profit across all contracts
System's losses: -120BTC
Insurance fund = 100BTC
Profit across all contracts = 20,000BTC
Clawback rate = (-120BTC+100BTC) / 20,000BTC = 0.1%
Clawback amount for the users who gained net profit of all contracts = (profit from weekly contract + profit from bi-weekly contract + profit from quarterly contract) * clawback rate.
The clawback amount will be deducted from the profit automatically.
For example, profits gained by a user:
Weekly = 3BTC
Bi-weekly = -2BTC
Quarterly = 1BTC
Total = 3-2+1 = 2BTC.
If the clawback rate = 0.1%, the clawback amount of the user will be 2BTC * 0.1% = 0.002BTC.