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  4. What is the Insurance Fund and Auto-Deleveraging?

What is the Insurance Fund and Auto-Deleveraging?

Phemex uses an Insurance Fund to prevent positions from becoming Auto-Deleveraged. The Insurance Fund alleviates unfilled liquidation orders on the platform before they are taken over by the auto-deleveraging system. Due to how Phemex’s platform is structured, the exchange does not require payments from traders who have negative account balances when they are liquidated in a leveraged trade. Instead, the exchange uses its Insurance Fund to ensure the winning party of a trade receives all of their expected profits, even if the losing party does not have enough to cover the winning party’s gains. The Fund grows from liquidations that were able to be executed in the market at a price better than the bankruptcy price of that specific position.

Phemex reduces the risk of socialized loss by automatically decreasing a trader’s leverage in case of a sharp price change. For instance, if your position is liquidated it will be taken over by our liquidation engine, but if the liquidation cannot be filled by the time the market price reaches your bankruptcy price, the Auto Deleveraging system (ADL) will automatically deleverage an opposing traders’ positions. The price at which a trader’s positions are closed out at equals the bankruptcy price of the initial liquidated order. Deleveraging priority is calculated by profit and leverage. More profitable and higher leveraged traders are deleveraged first.

NOTE: A huge liquidation can cause a cascade of margin calls/stops. Phemex provides an insurance fund so that everyone receives their due profits without anyone owing more than they initially invested. The insurance fund only comes into action in extreme circumstances, it acts as a safeguard for the hazards of leveraged trading.

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