How Futures Auto-Deleveraging Uses Insurance Funds and Risk Rankings

Summary

The document describes auto-deleveraging (ADL) as an emergency futures risk mechanism used when an insurance fund cannot cover losses remaining after forced liquidation. A selected counterparty’s position may be partially or fully reduced to match the liquidated position, even if that counterparty has not independently reached its liquidation threshold. ADL is presented as an exceptional process rather than a routine consequence of every liquidation; it ends when the relevant fund returns to a positive balance, according to the cited exchange explanation.

Selection is based on a risk-adjusted ranking involving position return on investment and maintenance-margin rates. The stated formulas differ for profitable and loss-making positions and between cross or multi-asset margin and isolated margin. The document says matched positions are executed at bankruptcy price and mentions mark-price protection, while advising users to consult current contract rules because parameters may change. After an ADL notice, traders should review the affected contract, quantity, orders, execution record, and account balance. Lower leverage and smaller, less concentrated positions may reduce exposure, but cannot prevent ADL or eliminate market risk. These details are specific to the exchange and may change.

Key ideas

• ADL can occur when the insurance fund cannot absorb a liquidation shortfall.
• An ADL action can reduce a selected counterparty’s position without that position reaching its own liquidation threshold.
• The ranking uses position ROI and maintenance-margin rates, with calculations varying by margin mode and whether the position is profitable.
• The document describes execution at bankruptcy price, while noting that current contract rules should be checked.
• Reducing leverage and concentration may lower exposure to extreme liquidation events but cannot guarantee protection.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.