The Insurance Fund's purpose is to use the collateral from non-bankrupt clients' fees to compensate losses when their accounts fall below zero. The Insurance Fund's main goal is to reduce the number of counterparty liquidations.
1. If a trader in liquidation (defined as collateralized maintenance margin) has less than 0 USDT after liquidating all of his holdings, or is otherwise unable to liquidate positions, the trader is bankrupt, and HitBTC will be forced to take over the remaining positions.
2. In a large number of these situations, HitBTC will take over the positions and slowly dump them onto the market using the Insurance Fund. The Insurance Fund will collect liquidation fees from clients that do not result in client bankruptcy. Counterparty liquidation will occur if the insurance fund is unable to take holdings from the liquidations.
The following rules will apply to the Insurance Fund:
The fund will have a maximum net notional position check. The fund will not be allowed to exceed a predefined position notional on the market; by default, this is 100% the size of the insurance fund. Any positions that would increase beyond the max notional will be subjected to counterparty-liquidation. The insurance fund will offload positions according to a preset algorithm. All events that normally require intervention by the insurance fund will instead go into counterparty-liquidation before the fund could take positions.
ADL (Auto-Deleveraging) is a feature that covers the losses of some traders by the profit of others if the Insurance Fund cannot cover the losses.
When a significant price movement occurs, some users may not have enough margin collateral to cover their losses. Then the ADL mechanism starts.
As all futures positions are ranked in the range from 0 to 4 (five ranks) where the highest one stands for most profitable positions which are more likely to be deleveraged. These ranks are, in essence, indexes of equal intervals over the whole spectrum of internal ranks.
Unlike common liquidation, deleveraging causes any open orders to be canceled including stop orders.
The indicator (from 0 to 4) shows how likely it is that the position will be used in the ADL procedure. So, if all indicator cells are active near the contract position, and there is a market situation when the liquidation loss cannot be covered, this contract will be automatically used to cover the loss of the opposite side.
In fact, this feature starts rarely, since, with its frequent use, there would be negative feedback from users.