Deconstructing the Risks of Perpetual Futures and the Stability Mechanisms of the exchange

Perptual Futures, as a complex financial derivative, feature high leverage and high risk. The exchange has designed a complete risk management system to maintain market stability and fairness. This article will delve into the core components of this system, including the margin mechanism, forced liquidation process, and risk prevention measures.

The Core Risk Management Framework of Perptual Futures

The risk management system of Perptual Futures is mainly composed of three pillars:

1. Forced Liquidation: When the account margin is insufficient to maintain the position, the system will automatically close the losing position.

2. Risk Guarantee Fund: Used to compensate for losses due to liquidation caused by severe market fluctuations.

3. Automatic Position Reduction Mechanism ( ADL ): In extreme circumstances, part of the profitable position will be liquidated to compensate for system losses.

These three mechanisms form a chain that distributes risks progressively, from individuals to collectives and then to the market, ensuring the overall stability of the exchange system.

Margin and Leverage: The Foundation of Risk

Margin is divided into initial margin and maintenance margin. The initial margin is the minimum collateral required to open a position, while the maintenance margin is the minimum collateral needed to maintain the position.

exchanges typically offer three types of margin models:

• Isolated Margin: Allocating margin separately for each position
• Full margin: All funds in the account serve as shared collateral.
• Combined Margin: Margin requirements based on overall risk assessment

In order to prevent a single trader from holding too large a position, the exchange implements a tiered margin system, gradually increasing the margin requirements as the position increases.

Liquidation Trigger: Key Price Indicator

Forced liquidation mainly relies on two price indicators:

• Mark Price: Reflects the “fair value” price of the contract, used to trigger liquidation.
• Latest transaction price: The most recent price at which a transaction was completed on the order book.

In addition, there are two important price thresholds:

• Liquidation Price: The marked price that triggers forced liquidation
• Bankruptcy Price: The price point at which the margin is completely lost.

The interval between the liquidation price and the bankruptcy price is the operational buffer zone of the clearing system.

Detailed Explanation of Forced Liquidation Process

When the liquidation conditions are triggered, the risk engine will execute the following steps:

1. Cancel unfilled orders
2. Adopt partial position closing or ladder-style liquidation strategy
3. If necessary, perform a complete liquidation.

During the liquidation process, an additional liquidation fee will be charged to replenish the risk protection fund.

Risk Assurance Fund and Automatic Liquidation Mechanism

The risk assurance fund is a buffer pool to compensate for liquidation losses, primarily sourced from forced liquidation fees and surplus.

Automatic reduction of positions ( ADL ) is the last line of defense, and it will only be triggered when the risk protection fund is exhausted. ADL will forcibly close the most profitable and highest leveraged positions in the opposite direction to cover the system’s losses.

Conclusion

The risk management system of Perptual Futures is a multi-layered defense structure designed to maintain market fairness and stability. Although the exchange provides comprehensive risk control mechanisms, traders still need to take responsibility for their own risks, use leverage cautiously, and actively manage position risks. Understanding and respecting this set of rules is the foundation for participating in Perptual Futures trading.