How does liquidation work?

Liquidation is the process of reducing your trading account's risk when its health deteriorates to a "Critical" level. This happens when your Account Margin falls below a certain percentage of your Margin Requirements. The primary goal is to bring your account back to a "Healthy" state by increasing your margin and/or decreasing your margin requirements.

Your account's health is continuously monitored and categorised based on the ratio of your Account Margin to your Initial Margin Requirement (IMR). The Account Health determines what actions you can take and what automated actions the system may perform.

You can view your current account health in the margin panel on the "Trade" screen (see below *)

Here is a description of the main actions in the "Critical" and "Suspended" health states:

• Critical: Your account enters this state when your margin falls below 50% of your IMR but is still above 25%. At this point, positions may be liquidated by our liquidation engine, and you will be unable to submit risk-increasing orders or withdraw assets.

• Suspended: Your account is suspended if your margin falls below 25% of your IMR. In this state, the account is considered to have defaulted. You will be unable to submit or cancel any orders, and the exchange will take action to close out your risk positions. Any costs associated with this process will be allocated back to the defaulted account.

For full details on exact actions on these health states, please Visit the Health indicators article.

When the liquidation engine is activated, it will aim to reduce your risk and restore your account to a healthy status. The engine's goal is to find the smallest possible trade size needed to return you to a healthy state. The process follows these systematic steps:

1. Cancel Limit Orders and AMM Instructions: The first step is to cancel all open orders and AMMIs.

2. Convert Collateral: If canceling orders is not sufficient, the system sells the user's spot assets to convert them to USDC.

3. Reduce Positions: If your margin-to-requirement ratio is still too low, the engine begins to systematically close or hedge futures and options positions.

    

• Default State: When an account is in a "Suspended" state and considered in default, it cannot submit or cancel orders, or withdraw assets. The account can only have assets deposited or transferred in.

• Default Procedure: If liquidation orders are not getting filled, distressed derivatives position will be closed out by the exchange, with any costs or profits allocated back to the defaulted account.

• Insurance Fund: There is an Insurance Fund ring-fenced to handle any losses arising from defaults. The fund size is calculated based on the open risk on the exchange and certain stress-testing scenarios, which are run on a daily basis.

*To view your Current Account Health from your account:

1. Go to the left-hand navigation and choose Trade.

2. You will see your current account health in the margin panel.