How Margin Requirements Trigger Incremental Liquidation
Summary
This educational article explains when leveraged positions can be liquidated and how Deribit’s process works. Liquidation begins when maintenance margin exceeds account equity, which is calculated using mark prices rather than last traded prices. Initial margin reaching its limit restricts orders that would increase exposure; the maintenance margin threshold starts the liquidation process and temporarily removes trading control from the account holder.
The article describes incremental liquidation: the system first attempts to close part of a position to restore margin coverage, and may stop if that succeeds. Continued adverse price movement can still lead to full liquidation. System liquidation orders incur extra fees that fund an insurance pool, so the article advises against relying on liquidation as a substitute for a planned exit. Estimated liquidation prices are conditional estimates and can change with position size, other positions, or account funds; they may be absent for portfolio margin accounts or positions whose maximum loss is fully covered.
Key ideas
- Liquidation occurs when maintenance margin requirements exceed account equity.
- Deribit uses mark prices to calculate account equity for liquidation purposes.
- Incremental liquidation can close only part of a position if that restores margin coverage.
- Adverse price movement can continue after a partial liquidation and lead to further closures.
- Liquidation fees support an insurance fund, and estimated liquidation prices can change with account conditions.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.