A Forced Partial Liquidation system is introduced to avoid large amount of liquidation orders due to Forced Full Liquidation impacting the market.
1. Forced Partial Liquidation
For position at Tier 3 or above (Number of Swaps>=12,001, e.g. 15,000), Forced Partial Liquidation occurs when the Margin Ratio is lower than the required Maintenance Margin Ratio (2%). The relevant position will be liquidated until it is at Tier 1. In the above example, the Number of Swaps to be closed = Number of Swaps held – max Number of Swaps acceptable for Tier 1 = 15,000-2,000=13,000 swaps.
For Fixed Margin Mode, liquidation orders will be sent in a price slightly better than market price, force-closing the required Number of Swaps. During the time, the position will be frozen and not be controlled by the user.
About a minute later, if the orders are filled and the Margin Ratio of the remaining position reach the Maintenance Margin Ratio+ Forced-Liquidation Fee Rate required by the relevant tier, then the remaining liquidation orders will be canceled, and the user’s control over the position is restored.
If the liquidation orders are unfilled or the Margin Ratio of the remaining position does not reach the required Maintenance Margin Ratio+ Forced-Liquidation Fee Rate, then the unfilled liquidation orders will be canceled. The liquidation procedure will start over again. This process will be repeated until the latest Margin Ratio meets MMR requirement.
In Cross Margin Mode, if there is only long position or short position, the Forced Partial Liquidation process will be the same as above.
In Cross Margin Mode, if there are both long and short positions, the pairs of long/short positions will be closed immediately. If Margin Ratio reaches the required Maintenance Margin Ratio, liquidation will stop; if it is not reached, the liquidation will continue.
2. Forced Full Liquidation
Fixed Margin Mode:When a user's maintenance margin ratio tier is 2 or below and his maintenance margin ratio falls below the tier's required level, or when a user's maintenance margin ratio tier is 3 or above and his maintenance margin ratio is less than the requirement of tier 1, the position will be closed at its bankruptcy price (at which all margins are lost) and taken over by the forced liquidation engine.
Cross Margin Mode: When a user's maintenance margin ratio tier is 2 or below and his maintenance margin ratio falls below the tier's required level, or when a user's maintenance margin ratio tier is 3 or above and his maintenance margin ratio is less than the requirement of tier 1, the position will be closed at its bankruptcy price (at which all margins are lost) and taken over by the forced liquidation engine.
3. Insurance fund
The insurance fund is used to offset the risk of massive liquidation. It's mainly derived from OKX treasury funds and the liquidation premium from liquidation orders.
When triggering liquidation, liquidation engine will take over positions at the bankruptcy price and the profits are credited to the insurance fund. At the same time, any losses will be compensated by insurance fund as a priority.
If the insurance fund of a contract rapidly decreases (e.g., by 30% in 8 hours) or becomes insufficient, auto-deleveraging (ADL) is triggered (to slow the decrease rate and reduce the ADL risk, OKX invites market makers to increase liquidity on the exchange. Note that funds for market-maker activities may be borrowed from the insurance fund; however, OKX implements strict risk controls to secure the insurance fund on best effort basis).