Liquidation
To prevent unnecessary liquidations caused by illiquidity or market manipulation, NFEX employs the Mark Price mechanism. Perpetual contracts traded on NFEX are leveraged, which means traders borrow capital to trade NFT contracts.
To keep their positions open, traders must maintain a percentage of the position value, known as the maintenance margin. If a trader's equity falls below the required maintenance margin, their account may be liquidated. That is:
Where:
NOTE:
The maintenance margin is subject to change based on real-time market prices. In order to avoid liquidation, traders have the option to either add more margin or reduce their positions. If a trader's equity falls below the maintenance margin requirement and they fail to take corrective action, their positions will be liquidated, and the maintenance margin will be added to NFEX's insurance fund pool.
Liquidation Process
NFEX triggers liquidation when a trader's account equity reaches the maintenance margin level, which is also the point where both the Mark Price and the Last Price meet the Liquidation Price. NFEX strives to avoid full liquidation of a trader's position whenever possible. In cross-margin mode, the following steps are taken during liquidation:
When liquidation is triggered, traders positions will be taken orver by NFEX and traders will have no control over their accounts, including the ability to place or cancel orders, deposit, or withdraw funds.
NFEX will cancel any open orders of the contract to free up margin in an attempt to reduce risks.
Position netting occurs, which involves offsetting a trader's long and short positions under the contract to reduce risks.
If the above protection steps still fail to fulfill the required maintenance margin, NFEX liquidation engine will place a limit order(known as a liquidation order) to close the positions at the
bankruptcy price.
If NFEX is able to liquidate the position at a price better than the bankruptcy price, any remaining collateral will be added to the insurance fund;
If NFEX is unable to fulfill the liquidation order at a price better than the bankruptcy price, and the order cannot be completed, the trader's account will go bankrupt, resulting in negative equity. In such cases, the insurance fund will pay the debt and balance the account back to zero;
However, in extreme situations where the liquidated order still cannot be closed, NFEX will trigger Auto-Deleveraging (ADL).
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