Automatic-Deleveraging: what it is and how it affects your positions
What is ADL?
Automatic-Deleveraging ("ADL") is a risk management mechanism deployed to protect the OKX insurance funds. In circumstances where an OKX insurance fund (which is applicable to a specific product) is not able to absorb further loss incurred in connection with the liquidation of a loss-making position, ADL is triggered to limit further losses to such insurance fund. In essence, loss-making positions are matched with opposing profitable or highly leveraged positions (which are thus "deleveraged") ("Deleveraged Positions") and both positions are offset against each other and closed, thereby eliminating further risk caused by the loss-making position to the OKX insurance funds. It is important to recognise that as a result of ADL, profitable positions can be closed and thus future profit-making potential out of that position is restricted.
OKX maintains several insurance funds. Each product line may have one or more insurance funds applicable to it ("Applicable Insurance Fund"). Further details of the different available insurance funds, including their current and historic value, is shown at this link. The risk of ADL is linked to the state and value of each Applicable Insurance Fund (and not to OKX's overall insurance fund value), as explained in this article.
The ADL mechanism applies to Perpetual Futures, Expiry Futures and Options trading.
Why is ADL necessary?
ADL is necessary to protect the OKX insurance funds. The insurance funds consist of crypto held by OKX, and are designed, in part, to provide a capital buffer against the trading and operational risks inherent in the facilitation of crypto exchange services. These include risks arising from order matching, leveraged margin trading, and lending and borrowing. These risks may occur due to market conditions, malicious actors or force majeure events. The insurance funds are funded by OKX and / or various fee and revenue streams attributable to certain OKX products.
Given the socialised benefit of the insurance funds, it is necessary to take steps to protect the funds, including through ADL.
When is ADL triggered?
ADL is designed to be a risk management mechanism of last resort. As such, it is not intended to be frequently triggered. OKX takes steps to minimize the chances of ADL occurring, when loss-making positions can safely be absorbed by the market or, if appropriate, in part by the Applicable Insurance Fund. ADL is triggered when such absorption would cause excessive risk.
ADL is triggered in the following instances:
When the present value of an Applicable Insurance Fund is lower than
the Average value of the Applicable Insurance Fund in the last 8 hours ("8 Hr Average") minus the greater of
30% of the 8 Hr Average; or
USD 50,000 (or equivalent)
(the result of (a) is the "Volatile Drop Threshold");
When the Applicable Insurance Fund has been fully depleted;
Applicable to Crypto Pre-Market Futures only: outstanding liquidation orders surpass a certain volume and time threshold (as determined by OKX) and the market cannot effectively absorb such orders.
As an example of the Volatile Drop Threshold trigger, assume:
A. The present value of an Applicable Insurance Fund is USD 200,000;
B. The 8 Hr Average is USD 400,000;
C. 30% of the 8 Hr Average is USD 120,000 (since this is a number that is larger than USD 50,000, trigger 1(a)(i) above would be used, not trigger 1(a)(ii)).
Then, since USD 200,000 is less than the Volatile Drop Threshold of USD 280,000 (i.e. USD 400,000 - USD 120,000), ADL would be triggered.
What happens when ADL is triggered?
Normally, without ADL, loss-making positions are liquidated and thus closed, by placing such positions onto the orderbook applicable to that position, with the aim that orders in the market for the opposing position will absorb the loss-making position. The result is that the loss for the loss-making position is crystallised, and the order in the market for the opposing position is filled.
However, when ADL is triggered, loss-making positions are liquidated and thus closed by matching such positions with opposing profitable or highly leveraged positions, i.e. the Deleveraged Positions, (which may belong to other users, not the user who is responsible for the loss-making position), without placing the loss-making position onto the order book, and irrespective of whether the opposing Deleveraged Positions were the subject of an unfilled order, i.e. even if no order has been placed to close the Deleveraged Positions, they will be forcibly closed at the mark price at the time of matching. Once a match between a loss-making position and an opposing Deleveraged Position is made, both positions are offset against each other and closed. This realises the loss for the loss-making position, and realises any profit for the Deleveraged Position up till the time of the matching. The Deleveraged Positions cannot gain any further profit without the user entering a new order into the order book. A key risk is that any new entry price for new orders may be different from the Deleveraged Positions.
For Deleveraged Positions in Isolated mode, profit is calculated by dividing the position's rate of return by the position's margin ratio (which takes into account the amount of leverage used for that position). Loss is calculated by multiplying the position's rate of return (which would be a negative number) by the position's margin ratio. For Spot and Futures mode, Multi-Currency mode, and Portfolio mode, the above formula uses the user's account's margin ratio instead of the position's margin ratio. The higher the resultant number, the higher that position's ranking for ADL.
When does ADL stop?
OKX takes steps to limit the duration for which ADL is triggered, by assessing in real time whether future losses can be absorbed by the market, or if appropriate, the Applicable Insurance Fund.
ADL ends in the following circumstances, each of which corresponds to the triggering conditions referred to above (in other words, the cessation condition below must match the correspondingly numbered trigger condition above):
The value of an Applicable Insurance Fund increases to an amount higher than the Volatile Drop Threshold plus a buffer of the greater of
6% of the 8 Hr Average at the time that ADL was triggered; or
USD 10,000 (or equivalent);
The value of an Applicable Insurance Fund is at least USD 8,000 (or equivalent);
Applicable to Crypto Pre-Market Futures only: the volume of liquidation orders falls below a certain threshold, as determined by OKX.
As an example of the Volatile Drop Threshold cessation condition, assume:
A. The value of an Applicable Insurance Fund has risen to USD 320,000;
B. The Volatile Drop Threshold is USD 280,000;
C. The 8 Hr Average at the time that ADL was triggered was USD400,000;
D. 6% of the 8 Hr Average is USD 24,000 (since this is a figure that is greater than USD 10,000, cessation trigger 1(a), above, will be used, not 1(b)).
Then, since USD 320,000 is greater than USD 304,000 (i.e. USD280,000 + USD 24,000), ADL would be stopped.
How can I predict when ADL is going to occur?
ADL occurs most frequently in highly volatile markets. As such, it is by its nature not readily predictable. OKX does take steps to limit the occurrence of ADL.
ADL occurs on positions based on a variety of factors, including the extent of profit and extent of loss a position is incurring, and the amount of leverage undertaken. Using such factors, each position is ranked. A position's likely exposure to ADL, based on this ranking, is shown on the OKX Platform using a warning light system (example shown below where four of the five lights are lit):
Five lights indicate the highest risk of the position being exposed to ADL, whereas one1 light indicates a lower risk. Notwithstanding this warning light system, in highly volatile markets, even positions with a lower risk may be exposed to ADL.
For visibility as to the current state of the Applicable Insurance Funds, click here. Severe fluctuations of the value of an Applicable Insurance Fund is one indicator of an increased likelihood of ADL triggering. Note however that there may be a time-lag between the change in the amount of an Applicable Insurance Fund and the abovementioned website being updated, and that ADL may occur suddenly, even though severe fluctuations had not previously occurred.
Users can also subscribe to the ADL Triggering API channel which provides certain information and warnings about ADL occurring.
Other than the above, no warnings are issued prior to ADL occurring. Upon ADL occurring, an email notification is provided to affected users with details of the relevant positions closed.
Can I avoid my positions being affected by ADL?
OKX's risk management engines choose which positions are going to be subject to ADL based on a variety of factors, including the extent of profit and extent of loss a position is incurring, and the amount of leverage undertaken. While it is not possible to eliminate the possibility of ADL being triggered, reducing leverage reduces the possibility of your positions being affected by ADL.
Are any trading fees charged for ADL?
Trading fees are not charged on the Deleveraged Positions. Liquidation fees are charged on the loss-making position.