Insurance Funds

1. What is insurance funds?

Insurance funds are used to reduce the ADL of traders’ positions. The funds are used to improve the price of non-executed liquidation orders, and make up for bankruptcy losses, so as to reduce the occurrence of ADL. The increase in the amount of venture fund comes from the fact that liquidation orders trade at a price better than the bankruptcy price in the market.

2. Function of insurance funds

BKEX uses insurance funds and automatic deleveraging system (ADL) to deal with position bankruptcy. The function of insurance funds is to reduce the occurrence of ADL.

In margin trading, when the margin of the position is lower than the maintenance margin, liquidation will be triggered. If the position cannot be settled at a price better than the bankruptcy price, the loss of the position will exceed the initial margin invested by the trader (i.e. position bankruptcy). In this case, the insurance funds are used to make up for the position loss, so as to reduce the trigger of ADL.

3. The mechanism of insurance funds

Each position has a corresponding liquidation price and bankruptcy price. The liquidation price is the corresponding price when the margin of the position reaches the price demanded by the maintenance margin. On BKEX, when the mark price reaches the liquidation price of the position, the position will be liquidated. The latest market price on BKEX is usually used for settlement at the time of liquidation. Bankruptcy price refers to the price corresponding to the loss of all initial margin in a position.

When liquidation occurs, take long orders as an example. If the position can be liquidated at a price better than the bankruptcy price, the remaining margin of the position will be added to the insurance funds. Similarly, taking long orders as an example, in case of the opposite situation, the position is liquidated at a price worse than the bankruptcy price, the system will withdraw the amount from the balance of the insurance funds to make up for the position loss. If the insurance funds are not enough to make up for the position loss, the liquidation position will be taken over by ADL system.

BKEX adopts the hierarchical liquidation mechanism. When the order is in the liquidation state of basic risk limit, the system will sort all positions according to the yield from high to low (profit first), and close the positions in turn. The remaining funds after liquidation of the last position will be included in the insurance funds.

4. Depletion of insurance funds

If the insurance funds are not enough to make up for the position loss, the liquidation position will be taken over by ADL system.