What Is Forced Liquidation?
Forced liquidation refers to the process where the system takes over a trader's position to prevent the trader's net equity from falling to a negative value in the event that price fluctuations lead to unrealized losses that cause the trader to have an insufficient margin (maintenance margin + liquidation fee).
What Are the Prerequisites of Forced Liquidation? What Is the Process of Forced Liquidation?
The prerequisites of forced liquidation for BloFin Perpetual Futures are based on the margin ratio of the contract position. If the margin ratio of your contract position is ≤100%, it may lead to a partial reduction or forced liquidation of that position.
1. Margin Ratio
Margin ratio is an indicator evaluating the sufficiency of the collateral asset in a contract. A higher margin ratio indicates that the collateral assets are sufficient and the position is more secure, while a lower margin ratio indicates that the collateral assets may face shortage and the position is less secure. Users are advised to pay attention to the changes in the margin ratio of their positions to avoid forced liquidation.
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Margin ratio under isolated margin mode = (Margin Balance + PnL)/ (Maintenance Margin + Transaction fee)
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Margin ratio under cross margin mode = (Account balance + ∑PnL) / ∑(Maintenance margin+Transaction fee)
2. Forced Liquidation Process
In specific, the forced liquidation process can be categorized into two of the following scenarios (with examples at the end of this article):
When the margin rate of the contract position is ≤100%, (i.e. the current collateral assets + profits in your account ≤ the maintenance margins required + position closing fees), it will trigger a position reduction or liquidation. The process is as follows:
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When the mark price reaches the liquidated price, it will trigger the liquidation. The user will not be able to increase/reduce position margin, place orders, etc.
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The liquidation engine will take over the position at bankruptcy price. Then the engine will take the risk of liquidating the position to market.
3. Estimated Liquidation Price
The estimated liquidation price refers to the price when the margin rate is 100% (this price is for investors' investment reference only). The actual forced liquidation price is the price when the margin rate is ≤ 100%.
In the isolated margin mode, the long and short positions of the same pair will have two different estimated liquidation prices according to their margins.
In the cross margin mode, long and short positions of the same pair are hedged and hence share the same estimated liquidation price.
Reasons for changes in the estimated liquidation price
Isolated Margin mode:
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The user adjusts (increases or reduces) the margin for the open position.
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The settlement of funding fees (including paying or collecting funding fees).
Cross Margin mode:
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Changes in collateral assets due to the changes in unrealized PnL of other cross margin positions affected by price fluctuations.
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Opening of other positions uses up partial funds in the account.
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Transferring funds into the account or transferring funds out of the account.
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Deductions of trading fees incurred from opening and closing positions.
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The settling of funding fees (including paying or collecting funding fees).
Click here to learn more about liquidation price calculation.
4. Bankruptcy Price
The bankruptcy price is the price at which the balance drops to zero. When the margin rate is ≤100%, the system will take over the position at bankruptcy price. Since the process of taking over a position doesn't go through the matching system, the bankruptcy price will not be shown on the K-line and the bankruptcy price does not equal the liquidation price.
Note: liquidated price means the margin rate ≤ 100% (there may be some margin in the account, but insufficient to keep the position), and bankruptcy price means the balance drops to 0.
5. Insurance Fund
The insurance fund is used by BloFin to resist the risk of massive liquidation.
How it is sourced: it is mainly composed of the fund provided by BloFin and the liquidation surplus from the liquidation orders.
How it is used: When the system liquidates a user's position, it will take over that position at the actual liquidated price. If the execution price when the position is being processed is less favorable than the price, or the position cannot be processed, the resulting deficit will be funded by insurance fund. When the insurance fund is insufficient or rapidly depleted, auto-deleveraging (ADL) will be triggered.
6. Forced Liquidation Examples
6.1 Isolated Margin Mode
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Initial status:
- ETHUSDT entry price = 2,300 USDT, position size = 2 ETH, leverage = 20X, MMR (Maintenance Margin Ratio) = 0.35%, position side = long
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liquidation price = (230 - 2*2,300) / (2*(0.35%+0.06%-1)) = 2,193.99
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bankruptcy price = (230 - 2* 2,300) / ( 2* (0.06% - 1)) = 2,186.31
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When the margin ratio reaches 100%, the liquidation engine will take over the position at 2186.31 and exposure under the risk of selling and the remaining amount, if any, will be injected into insurance funds.
6.2 Cross Margin Mode
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Initial status:
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Account balance = 4,460
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ETHUSDT entry price = 2,300 USDT, position size = 2 ETH, leverage = 20X, MMR (Maintenance Margin Ratio) = 0.35%, position side = long
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BTCUSDT entry price = 42,300 USDT, position size = 2 BTC, leverage = 20X, MMR (Maintenance Margin Ratio) = 0.35%, position side = long
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Considering there are multiple positions under cross margin mode, the ETHUSDT and BTCUSDT liquidation prices are calculated real-time. When the margin ratio reaches 100%, the liquidation engine will take over the position at the liquidation prices of BTCUSDT and ETHUSDT and exposure under the risk of selling and the remaining amount, if any, will be injected into insurance funds.