Ⅳ. Introduction to Auto-deleveraging (ADL)

Ⅳ. Introduction to Auto-deleveraging (ADL)

Insurance fund

The insurance fund is used by BitUBU to resist the risk of massive liquidation，mainly composed of the fund provided by BitUBU 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.

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 rapid decline means that the insurance fund has dropped by 30% from the peak within 8 hours, and 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. When the mechanism is adopted, the clawback will no longer be triggered.

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

Marin 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 / margin ratio

Loss-making position:
Margin profit = position return rate * position margin ratio

Multi-currency cross

Profitable position:
Margin profit = position return rate / position margin ratio

Loss-making position:
Margin profit = position return rate * position margin ratio

Portfolio margin cross

Profitable position:
Margin profit = position return rate / position margin ratio

Loss-making position:
Margin profit = position return rate * position 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.


After their positions are automatically deleveraged, users will receive text messages and 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.

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