Platform Risk Management
Publish on 2020-02-18
Leveraged trading can increase buying or selling power to allow for potentially higher returns; however, it also carries a high degree of risk given that it can magnify losses as well. If a user has an open leveraged position and the market moves against their position, their account value can quickly depreciate. If the market continues to move against the user’s open position, the account’s net asset value can fall to $0 or below $0 (i.e., “beyond bankrupt”).
Left unaddressed, trading platforms must cover the losses incurred by account’s that are beyond bankrupt. Accordingly, trading platforms seek to minimize instances of negative account value by employing a robust risk management system.
AscendEX Futures’ risk management system encompasses three key functions:
- Margin Requirements
- Liquidation Engine
- Insurance Fund
To open a leveraged contract on AscendEX Futures, a user must post collateral (USDT, PAX, USDC, BTC, or ETH) to their account. Collateral essentially serves as a means to verify an account’s “credit worthiness” to the trading platform by providing real assets to cover potential losses incurred by adverse market movements. Collateral contributes to an account’s Margin Rate and is used to determine how much leverage the user can trade with and at what point the account is at risk to be auto-liquidated.
Liquidation is the process by which a platform sheds risk on behalf of an account to prevent further losses.
To maintain an open position on a leveraged contract on AscendEX Futures and avoid liquidation, a user’s Account Margin Rate must meet or exceed a Maintenance Margin Rate. In the event that the notional value of an account’s collateral falls below the Maintenance Margin Rate, an account will begin the process of auto-liquidation. AscendEX Futures employs a liquidation engine with three key components:
- Position Reduction with Smart Order Routing
- Transfer of distressed order flow to Backstop Liquidity Providers (“BLPs”)
- Transfer of distressed order flow to users with top-10 opposing positions (“Auto-deleveraging”)
AscendEX Futures maintains segregated insurance fund for each derivative product on its platform. Each Insurance Fund is used to cover losses incurred by accounts that are beyond bankruptcy; therefore, the Insurance Fund seeks to minimizes instances of “clawbacks” and “socialized losses.”