Introduction to Auto-deleveraging (ADL)

Gepubliceerd op 16 dec 2020Geüpdatet op 6 sep 20247 min. leestijd

Insurance fund

The insurance fund is used by OKX to resist the risk of massive liquidation, mainly composed of the fund provided by OKX and the liquidation surplus from the liquidation orders.

The insurance funds used for different business lines, including margin trading, futures, perpetual swap, and options, are independent of each other. Even within the same business line, the insurance funds for the contracts with different underlyings and different currencies are also separated. The specific rules are as follows:

Business lines	Insurance fund rules	Examples
Margin trading	Different currencies are provided with different insurance fund pools. Each pair for margin trading has two insurance fund pools, one is for the quote currency, while the other is for the trading currency. In other words, the insurance fund pool for each currency in margin trading includes all the pairs that with “this” currency as the quote currency or trading currency.	when the three margin pairs, BTC/USDT, ETH/BTC, and ETH/USDT, are being liquidated: 1) The liquidated currencies for BTC/USDT: BTC, USDT. 2) The liquidated currencies for ETH/BTC: ETH, BTC. 3) The liquidated currencies for ETH/USDT: ETH, USDT. Then the insurance fund for BTC margin trading includes: the BTC of item1) and item 2); the insurance fund for ETH margin trading includes: the ETH of item 2) and item 3); the insurance fund for USDT margin trading includes: the USDT of item 1) and item 3).
Futures	The insurance funds for coin margined futures and USDT margined futures are independent of each other. The insurance fund for contracts with the same underlying but with different expiry dates are calculated together. For coin margined futures, contracts with different underlyings are provided with the insurance funds in the corresponding currencies. For USDT margined futures, the insurance fund currency for all the contracts is USDT, but the pools are independent of each other.	BTCUSD futures (weekly, bi-weekly, quarterly, bi-quarterly) has an insurance fund with currency BTC, and all the BTCUSD futures contracts with different expiry dates share the same fund. ETHUSDT futures (weekly, bi-weekly, quarterly, bi-quarterly) has an insurance fund with currency USDT, and so does XRPUSDT futures. But their insurance fund pools are independent of each other and cannot be calculated together.
Perpetual Swap	The insurance fund pools for coin margined perpetual contracts and USDT margined perpetual contracts are independent of each other. For coin margined perpetual contracts, contracts with different underlyings are provided with the insurance funds in the corresponding currencies. For USDT margined perpetual contracts, the insurance fund currency for all the contracts is USDT, but the pools are independent of each other.	BTCUSD perpetual contract has an insurance fund with currency BTC; LTCUSD perperual contract has an insurance fund with currency LTC. ETHUSDT perpetual contract has an insurance fund with currency USDT, and so does XRPUSDT perpetual contract. But their insurance funds are independent of each other and cannot be calculated together.
Options	Options with different underlyings have insurance fund pools with the corresponding currencies. The insurance fund for all the options contracts with the same underlying will be calculated together, regardless of the expiry date, strike price, and type of contracts.	The insurance fund currency for all the BTCUSD options is BTC; The insurance fund currency for all the ETHUSD options is ETH.

Every day at 8:00 AM (UTC), the platform will cover all losses, caused by partial liquidation or liquidation in the market from 8:00 AM (UTC) yesterday to 8:00 AM (UTC) today, with the insurance fund, and record it as bankruptcy loss. Every day at 8:00 AM (UTC), the platform will transfer all surpluses, caused by partial liquidation or liquidation in the market from 8:00 AM (UTC) yesterday to 8:00 AM (UTC) today, into the insurance fund, and record it as liquidation balance deposit.

Insurance funds of each instruments decrease less than absolute value or percentage, OKX will face to potential liquidity risk and market risk, meanwhile the transfer process will be restricted in the users who have traded these instruments for a short term. It will be released after checking the potential risk.

Auto-Deleveraging (ADL) rules

Autoーdeleveraging, abbreviated as ADL, refers to a mechanism for liquidation of counterparty positions to control the platform's overall risk when extreme market conditions or force majeure lead to insufficient insurance fund or rapid decline of the insurance fund. At present, the "insufficient" and "rapid decline" define as following:

ADL triggering：

the insurance fund lost all
the insurance fund has dropped by 30% from the peak within 8 hours
(premarket only) There is a significant volume of outstanding liquidation orders which the market cannot effectively absorb

ADL ending：

the insurance fund recovered above 8k USD
the insurance fund has increased above 75% from the peak within 8 hours
(premarket only) The volume of liquidation orders falls to a certain level

Meanwhile, the platform may adjust it according to market conditions in the future. After ADL is triggered, the platform will no longer use the method of placing orders on the market and waiting for a suitable price to liquidate or partially liquidate user's positions, but directly find the counterparty account with the highest ranking and trade with the mark price at the time. After the transaction is completed, the counterparty position will be closed. The profits from the position will be added to the account balance.

ADL is executed with counterparty at underlying's latest mark price, and no trading fee will be charged.

User can review fluctuation of insurance funds balance in minutes and ADL triggering records on Insurance fund, data will exist for 24h. Noted: ADL triggering records will publish as following:

Peak balance of insurance fund within 8 hours(blue)
Triggering balance of ADL(red)
Recovering balance of ADL(green)

Plus, user can subscribe ADL triggering channel_API for warning signals of insurance fund, which will help you anticipate potential ADL risk.

ADL's counterparty ranking is determined by the following rules, including account risk or position risk, and the return rate of the contract position:

Position mode	Margin profit calculation	Counterparty ranking rule
Isolated	Profitable position: Margin profit = position return rate / position margin ratio Loss-making position: Margin profit = position return rate * position margin ratio	Based on margin profit, from the largest to the smallest. The rate of return on loss-making positions is negative, and profitable positions are ranked in front of the loss-making positions.
Single-currency cross	Profitable position: Margin profit = position return rate / account margin ratio Loss-making position: Margin profit = position return rate * account margin ratio
Multi-currency cross	Profitable position: Margin profit = position return rate / account margin ratio Loss-making position: Margin profit = position return rate * account margin ratio
Portfolio margin cross	Profitable position: Margin profit = position return rate / account margin ratio Loss-making position: Margin profit = position return rate * account margin ratio

According to the above rules, the higher the return rate and the lower the position margin ratio, the more likely the account to be used as ADL counterparties, facing the risk of automatically deleveraging. Users can see their own ADL risk level in real-time through the signal lights on the page. The signal light has 5 grids. When all 5 grids are on, it means that the counterparty ranking of this position is the highest, and the risk of automatically deleveraging is also the highest; when only 1 grid is on, it means that the counterparty ranking of the position is the lowst and the risk of automatically deleveraging is also the lowest.

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After their positions are automatically deleveraged, users will receive email notifications to inform them of the related positions and prices. They can also find the bills on the report center page with a bill type of auto-deleveraging.