1. What Is Forced Liquidation?
Forced liquidation refers to the process where the system takes over a trader's position to prevent the trader's net equity from falling to a negative value in the event that price fluctuations lead to unrealized losses that cause the trader to have an insufficient margin (maintenance margin + liquidation fee).
2. What Are the Prerequisites of Forced Liquidation? What Is the Process of Forced Liquidation?
The prerequisites of forced liquidation for BingX Perpetual Futures are based on risk ratio. If the risk of your Futures position is ≥100%, it may lead to a partial reduction or forced liquidation of that position.
1. Risk
Risk is an indicator evaluating the sufficiency of the collateral asset in a contract. A lower risk indicates that the collateral assets are sufficient and the position is more secure, while a higher risk indicates that the collateral assets may face shortage and the position is less secure. Users are advised to pay attention to the changes in the risk of their positions and keep an eye on emails, push notifications, and messages for related notifications to avoid forced liquidation.
- Position risk under isolated margin mode = (The maintenance margin for isolated margin position + position closing fee) / (position margin + unrealized PnL)
- Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions)
Note: The maintenance margin and position closing fee for cross margin positions are calculated based on position data and the number of pending orders. Frozen assets refer to the margin and trading fees reserved for isolated margin pending orders and trading fees for cross margin pending orders.
2. Forced Liquidation Process
In specific, the forced liquidation process can be categorized into two of the following scenarios (with examples at the end of this article):
2.1 Isolated Margin Mode
When the risk is ≥ 100% (i.e. the current collateral asset ≤ the maintenance margin required for isolated margin position + position closing fee) under isolated margin mode, forced liquidation will be triggered. The process is as follows:
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The position will be frozen and the user will not be able to increase/reduce position margin, place orders, etc.
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The isolated margin position will be liquidated based on the bankruptcy price.
2.2 Cross Margin Mode
When the risk is ≥ 100% (i.e. the current collateral assets ≤ the maintenance margin required for all cross margin positions + position closing fees) under cross margin mode, forced liquidation will be triggered. The process is as follows:
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The corresponding margin account will be frozen and the user will not be able to deposit, withdraw, transfer, place orders, cancel orders, etc.
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The forced liquidation process will stop if the risk is < 100% after canceling all pending orders under the margin account of the particular currency.
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The forced liquidation process will stop if the risk is < 100% after long and short positions of the same currency under the margin account are closed to offset with each other at market price.
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If the risk is still ≥100% after the executions of the above, the system will liquidate the cross margin positions one by one based on the bankruptcy price in the order of unrealized PnL (i.e. the position with the greatest loss will be liquidated first) until the risk is < 100% or all cross margin positions are liquidated.
3. Estimated Liquidation Price
The estimated liquidation price refers to the price when the risk is 100% (this price is for investors' investment reference only). The actual forced liquidation price is the price when the risk is ≥ 100%.
3.1 Isolated Margin Mode
3.1.1 The estimated liquidation price of the same contract in different directions
In the isolated margin mode, the long and short positions of the same pair will have two different estimated liquidation prices according to their margins.
3.1.2 Reasons for changes in the estimated liquidation price
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The user adjusts (increases or reduces) the margin for the open position.
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The settlement of funding fees (including paying or collecting funding fees).
3.2 Cross Margin Mode
3.2.1 The estimated liquidation price of the same contract in different directions
In the cross margin mode, long and short positions of the same pair are hedged and hence share the same estimated liquidation price.
3.2.2 Reasons for changes in the estimated liquidation price
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Changes in collateral assets due to the changes in unrealized PnL of other cross margin positions affected by price fluctuations.
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Opening of other positions uses up partial funds in the account.
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Transferring funds into the account or transferring funds out of the account.
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Deductions of trading fees incurred from opening and closing positions.
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The settling of funding fees (including paying or collecting funding fees).
4. Bankruptcy Price
The bankruptcy price is the price at which the margin drops to zero. When the risk is ≥100%, the system will place an order at the bankruptcy price to liquidate the position. Since the whole process doesn't go through the matching system, the bankruptcy price will not be shown on the K-line and the bankruptcy price does not equal the actual liquidation price.
5. Insurance Fund
Insurance funds are used in the event of negative equity incurred from forced liquidation.
- How it is sourced: When the system liquidates a user's position, it will take over that position at the bankruptcy price. If the execution price when the position is being processed is more favorable than the bankruptcy price, the surplus generated from the liquidation will be transferred to the insurance fund.
- How it is used: When the system liquidates a user's position, it will take over that position at the bankruptcy price. If the execution price when the position is being processed is less favorable than the bankruptcy price, or the position cannot be processed, the resulting deficit will be funded by insurance fund. When the insurance fund is insufficient or rapidly depleted, auto-deleveraging (ADL) will be triggered.
6. Forced Liquidation Examples
6.1 Isolated Margin Mode
Assuming the user's account balance is 1,100 USDT and the ETH/USDT price is 1,000 USDT, a long position in isolated margin mode is opened for 10 ETH with 10x leverage. When the ETH price drops to 904 USDT, the user's position conditions at this time are as follows (assuming the maintenance margin rate is 0.4%, and the taker fee rate is 0.05%).
- Initial margin = Average position price * amount / leverage = 1,000 * 10 / 10 = 1,000
- Unrealized PnL = (Market price - average position price) * amount = (904 - 1,000) * 10 = -960
- Risk = (The maintenance margin of the isolated margin position + position closing fee) / (position margin + unrealized PnL) = (904*10*0.4% + 904*10*0.05%) / (1,000 - 960) = 101.70%
At this point, the risk is ≥100%, triggering the forced liquidation. The system will take over the user's position at the bankruptcy price of 900.4502251 USDT and the user will lose all the margin for that position.
- Realized PnL = (Bankruptcy price - average position price) * amount = (900.4502251 - 1,000) * 10 = -995.4977489
After the system takes over a user's position, it will be processed at market price. If the execution price is 902 USDT, there will be a surplus which will be transferred to the insurance fund. If the execution price is 900 USDT, there will be a deficit which will be funded by the insurance fund.
- Surplus = (Execution price - bankruptcy price) * amount = (902 - 900.4502251) * 10 = 15.497749
- Deficit = (Execution price - bankruptcy price) * amount = (900 - 900.4502251) * 10 = -4.502251
6.2 Cross Margin Mode
Assuming the user's account balance is 5,000 USDT. In cross margin mode, a long position is opened for 2 BTC with 10x leverage when the BTC/USDT price is 10,000 USDT and another long position is opened for 10 ETH with 10x leverage when the ETH/USDT price is 1,000 USDT.When the BTC price drops to 8,004 USDT, and ETH to 912 USDT, the user's position conditions at this time are as follows (assuming the maintenance margin rate is 0.4%, and the taker fee rate is 0.05%).
- Balance = Deposits - withdrawals + all realized PnL + all funding fees - all trading fees = 5,000 - 0 + 0 + 0 - (10,000*2*0.05% + 1,000*10*0.05%) = 4,985
- BTC unrealized PnL = (Market price - average position price) * amount = (8,004 - 10,000) * 2 = -3,992
- ETH unrealized PnL = (Market price - average position price) * amount = (912 - 1,000) * 10 = -880
- Position risk under cross margin mode = (The combined maintenance margin of all cross margin positions + position closing fees of all cross margin positions) / (balance - all margins used in isolated margin positions - frozen assets + all unrealized PnL of cross margin positions) = [(8,004*2*0.4% + 912*10*0.4%) + (8,004*2*0.05% + 912*10*0.05%)] / (4,985 - 0 - 0 - 3,992 - 880) = 100.07%
At this point, the risk is ≥100%, triggering the forced liquidation. If the system detects that there are no pending orders and no long and short positions of the same currency to close and offset with each other, the user's positions will be liquidated in the order of unrealized PnL (the position with the greatest loss will be liquidated first). The system will prioritize BTC positions to liquidate according to the sorting rules. If the risk is still ≥100% after closing all BTC positions, the system will continue to close ETH positions until the risk is < 100% or all cross margin positions are liquidated.
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