What is the Insurance Fund?
Simply put, the Insurance Fund is what prevents the balance of losing traders to drop below zero, while also ensuring that winning traders get their profits.
To illustrate, let’s suppose that Alice has $2,000 in her futures account, which is used to open a 10x BNB long position at $20 per coin. Note that Alice is buying contracts from another trader and not from the exchange. So, on the other side of the trade, we have Bob, with a short position of the same size.
Because of the 10x leverage, Alice now holds a 100 BNB position (worth $20,000), with a $2,000 collateral. However, if the BNB price drops from $20 to $18, Alice could have her position automatically closed. This means that her assets would be liquidated and her $2,000 collateral entirely lost.
If for whatever reason, the system is not able to close her positions on time and the market price drops more, the Insurance Fund will be activated to cover those losses until the position is closed. This wouldn’t change much for Alice, as she was liquidated and her balance is zero, but it ensures that Bob is able to get his profit. Without the Insurance Fund, Alice’s balance would not only drop from $2,000 to zero but could also become negative.
In practice, however, her long position would probably be closed before that because her maintenance margin would be lower than the minimum required. The liquidation fees go directly to the Insurance Fund, and any remaining funds are returned to the users. So, the Insurance Fund is a mechanism designed to use the collateral taken from liquidated traders to cover losses of bankrupt accounts. In normal market conditions, the Insurance Fund is expected to grow continually as users are liquidated.
Summing up, the Insurance Fund gets bigger when users are liquidated before their positions reach a break-even or negative value. But in more extreme cases, the system may be unable to close all positions, and the Insurance Fund will be used to cover potential losses. Although uncommon, this could happen during periods of high volatility or low market liquidity.
How do Insurance Funds work?
In cases where a trader in liquidation (defined as collateral < maintenance margin) has less than 0 USDT after all his positions are liquidated, or is otherwise unable to liquidate positions, the trader is bankrupt, and Coinlocally will take over the remaining positions.
In the majority of these cases, Coinlocally will use the Insurance Fund to take over the positions and offload them onto the market gradually. The Insurance Fund will collect liquidation fees from users that do not result in bankruptcy. If the insurance fund is unable to accept positions from the liquidations, counterparty-liquidation will occur.
How can I see my Insurance Funds?
You can find the trading rules, including your insurance fund and other important information, from the link below:
https://futures.coinlocally.com/en_US/futuresData
- The liquidation price displayed on the order page is for reference only. The actual liquidation price will be affected by market fluctuations and other factors. The final liquidation price is subject to the actual price the platform charges. Please note that price differences may lead to asset losses when liquidation happens. Therefore, please keep track of the LTV ratio to avoid being liquidated.
- When your position is liquidated, a certain percentage of the Insurance Clearance fee will be collected and contributed to the Insurance Fund reserves, marked as ''Insurance Clearance'' in the Transaction History.
- Click here to see more information : https://futuresdoc.gitbook.io/help-center/perpetual/overview/insurance-fund-and-allocation