Under risk control rules for account management, auto-deleveraging is not a concept alongside "forced order cancellation", "forced repayment" and "forced liquidation", but a special form of "forced liquidation" mechanism by BIT to find counterparties under extreme market conditions in order to control overall risk.
As introduced in the Risk control rules for account management, in unfavorable market conditions, if the account’s maintenance margin rate exceeds 100%, the forced liquidation mechanism will be triggered. The system will first try to unwind the positions by order matching. If the pending order manages to find a match in the order book market and is fully filled, then the forced liquidation is completed as expected. However, if the pending order fails to be filled due to a lack of liquidity and the maintenance margin rate of the account continues to rise above 200% due to unilateral market fluctuations, the auto-deleveraging mechanism will be triggered to ensure that the forced liquidation will be completed successfully. Or in extreme scenarios when the total collateral drops below zero during the forced liquidation, the auto-deleveraging mechanism will also be triggered. After auto-deleveraging is triggered, the forced liquidation by order matching will be abandoned and replaced by the system directly finding a counterparty determined by the algorithm for the account being forced liquidated, and trading directly at the mark price. Thus, the forced liquidation is successfully completed and the risk of bankruptcy is reduced. At the same time, the counterparty to the forced liquidated account is executed with auto-deleveraging by providing liquidity. Auto-deleveraging mechanism is designed to effectively prevent the exchange's equity from being a source of the user’s derivatives trading profit during a black swan event, and further guarantee the solvency of BIT and the security of all users' deposits.
To avoid confusion, the following two points need to be reiterated:
For the forced liquidation account, auto-deleveraging is a special way of liquidity finding during the forced liquidation process. Therefore an auto-deleveraging account is a counterparty to a forced liquidation account.
As the counterparty to a forced liquidation account, the auto-deleveraging account reduces its own leverage level and locks in profits by providing liquidity.
As the counterparties to the forced liquidation account, auto-deleveraging accounts will be ranked by the account's margin&profit score. The higher the margin&profit score, the higher the ranking in the auto-deleveraging sequence.
The rules are as below:
All the counterparties will be ranked by margin&profit score(from the highest to the lowest). Margin&Profit Score= Account Margin Rate * Return Rate of Position
Account Margin Rate (Regular Mode) = (Total Maintenance Margin + Long Option Size for ADL Instrument * Underlying price) / (Total Margin Balance+ Long Option Size for ADL Instrument * Underlying price)
Account Margin Rate (Portfolio Margin Mode) = Total Maintenance Margin / Total Collateral (same as maintenance margin rate)
Return Rate of Long Position =Max( (Mark Price - Position Average Price) / Position Average Price, 0)
Return Rate of Short Position =Max( (Position Average Price - Mark price) / Position Average Price, 0)
Note: If margin & profit scores happen to be the same, the priority will be determined by 1) position size (largest to smallest), 2) return rate of position (highest to lowest), 3) account margin rate (highest to lowest).
Note: Isolated positions will also participate in the automatic position reduction ranking. At this time, the isolated margin rate and isolated position profit rate are used to calculate the leverage profit score.
Example
If Amy has a long position in the BTCUSD perpetual contract and the current maintenance margin rate of her account exceeds 200%, the auto-deleveraging mechanism will be triggered. At this moment, the system will calculate the margin&profit score of all the counterparties (i.e., BTCUSD perpetual contract short position holders) A, B, C and D. According to the calculation results, account A ranks highest in the auto-deleveraging sequence and will be given priority to trade with Amy's BTCUSD perpetual position.
Account | Account Margin Rate | Position Return Rate | Margin& Profit Score | Auto-Deleveraging Sequence |
A | 70% | 50% | 0.35 | 1 |
B | 30% | 90% | 0.27 | 2 |
C | 50% | 10% | 0.05 | 3 |
D | 60% | 0% | 0 | 4 |
How to check the risk of the current position being auto-deleveraged?
On the position page, the light on the right side of the product shows the ranking of the user's position in the auto-deleveraging sequence, the more lights on, the higher the possibility of being deleveraged.
Users will receive an SMS or email notification of details when their position has been auto-deleveraged. Users can also view them in the order history. If the account’s position has been auto-deleveraged, it can be reopened in the market at any time.
How to avoid Auto-Deleveraging?
Reduce the margin rate of the account, which will immediately lower the ranking of the account in auto-deleveraging sequence.
Close some/all high margin positions, which will release more margin and reduce effective leverage level.
Most of the accounts executed with forced liquidation are due to high leverage and high market volatility. In fact, this is also true for the accounts that rank high in auto-deleveraging sequence. The only difference is that the current market direction is favorable to the auto-deleveraging accounts and unfavorable to the forced liquidation accounts. But who can guarantee that the market's high volatility will not turn an auto-deleveraging account into a forced liquidation account? Therefore, not only does the auto-deleveraging mechanism provide liquidity for the forced liquidation accounts, but is also effective protection for the auto-deleveraging accounts. After all, it is always wise to lock in profits at the right time.