Risk limit is designed to reduce potential risks from market fluctuations by setting a maximum limit on the number of positions a user can hold. In extreme market conditions, large positions can result in significant losses, negatively impacting the entire market. By setting a risk limit, the system can adjust users’ margin requirements in a timely manner, reducing potential risks.
The risk limit comprises several key parameters, each playing a different role in risk management:
- Base Risk Limit: The initial maximum position a user can hold in the futures market in specific leverage range. Beyond this limit, the maintenance margin level and the initial margin level will start to increase progressively.
- Maintenance Margin Level: The minimum margin requirement that the exchange uses to complete liquidation. The lower the maintenance margin level, the harder it is for the exchange to carry out liquidations, especially in markets with insufficient liquidity.
- Initial Margin Level: The minimum margin amount required for users when opening a position. As the risk limit increases, the initial margin level also rises accordingly.
Initial Margin
Initial Margin is the minimum amount of margin required when opening a position.
In the isolated margin mode, users can increase or decrease the margin on a position, but the margin cannot fall below the sum of the initial margin and the exit fees.Each position’s margin is calculated separately, with no impact on the profit or loss of other positions.In cross margin mode, all available funds in the user’s account are considered as available margin
Maintenance Margin
Maintenance margin refers to the minimum amount required to maintain an existing position. If the account balance falls below the maintenance margin level, the position may be liquidated. Maintenance margin is calculated based on the notional value tier of your position - regardless of the leverage, the calculation method of maintenance margin of the same notional value tier is the same.
Difference Between Maintenance Margin and Initial Margin
- Initial Margin: The minimum amount of margin required when opening a position, and usually higher than the maintenance margin.
- Maintenance Margin: The minimum amount of margin required while holding a position.
Reduction of Position
When a user's position is at Tier 3 or above, if the maintenance margin rate is lower than maintenance margin rate + liquidation fee rate required for the current tier is lower but still higher than lowest tier, the position will not be entirely liquidated - the contract size of position will be reduced to Tier 1. After the deduction if the maintenance margin rate still does not meet that required for Tier 1, the reduction will continue.
When the user's position is at Tier 2 or below, when the maintenance margin rate is lower than the maintenance margin ratio + liquidation fee ratio required for this tier or the user's position is at tier 3 or above but still lower than Tier 1, the whole position will directly be liquidated at the bankruptcy price the price at which the margin rate is zero.