On Kraken Futures you will never be allowed to have a negative balance on your account, unlike many CFD and other exchanges. This is thanks to our Equity Protection Process (EPP) which manages the risk atomically for all positions on the platform to ensure full market integrity.
When you enter a trade, you have an initial margin amount to lodge for opening the position, and then a maintenance margin level which triggers the equity protection process once you breach it.
Positions begin this process once the portfolio value (i.e., equity) of a margin account falls below Maintenance Margin threshold.
The EPP three main steps:
This is the first step of the process and it begins by submitting an Immediate-or-Cancel order to the market. The limit price of this order is chosen such that if the order is matched, the remaining portfolio value of the margin account will not be negative. A liquidation in one margin account will not affect any other margin accounts.
You have an open long position of 1,000 contracts in Bitcoin-Dollar Futures with an Avg Entry Price of 8000. The value of this position is 0.125 BTC (1000 / 8000) and the margin you used for this position was 0.01 BTC. The Initial Margin requirement for this position was 0.0025 BTC (2% of 0.125 BTC) and the Maintenance Margin level is 0.00125 BTC.
In this position, the price at which you will be liquidated is 7481, where your position value will be 0.00125 BTC. As soon as the Mark Price reaches 7481 or below, your position will enter liquidation.
An immediate-or-cancel sell order is submitted on your behalf at 7407, where your position value will be just above 0 BTC. The limit price of this order assures that if the order is matched, the portfolio value of the margin account will not be less than zero.
If the liquidation order results in being filled at price better than the bankruptcy price, then the client keeps whatever remaining maintenance margin there is. This is contrary to how some other exchanges operate where you lose the entire maintenance margin regardless of what price your liquidation is filled at.
If a position cannot be liquidated (for example due to lack of demand on the market) and there are unfilled contracts from the above Immediate-or-Cancel order, then the remainder of the position undergoes "assignment" process. This process takes the unfilled liquidation remainder and assigns it to a liquidity provider at the 0-equity price, in order that your counterparty is able to maintain their position.
|EXAMPLE: ASSIGNMENT||Assume in the above Liquidation example that the immediate-or-cancel order at 7407 only fills 400 contracts and there is 600 contracts still remaining in the open position. The system will assign the 600 Contract long position to a liquidity provider who inherits the position at the entry price of the 0-equity point for the bankrupt counterparty. This keeps the healthy counterparty in their position and facilitates a more orderly market..|
If, for whatever reason, this assignment process is unable to find liquidity providers to take the position at the zero equity point, then the remaining contracts undergo an "unwind". This means that the contracts between you and your counterparties end and that the remaining portfolio value of the margin account is transferred to your counterparties. An unwind of one margin account will not affect any other margin accounts.
|EXAMPLE: UNWIND||Assume in the above Assignment example that the system could only find liquidity providers to take 500 Contracts at the zero equity price. This leaves 100 contracts that could not be liquidated in the book nor assigned to liquidity providers. At this point, the system will force the client out of the remaining 100 contracts Long and find a counterparty who is 100 contracts Short and force that position to be closed, compensating the counterparty with any portfolio balance remaining for the unwound client (at a price of 7407), to maintain systemic balance. This results in an OI drop of 100 Contracts.|
The unwind mechanism encourages market participants to sufficiently collateralise their margin accounts. It also compensates any party whose position has been unwound as a result of their counterparty not posting sufficient margin. Unwind Thresholds are chosen such that they cover approximately a 1 hour 99th percentile adverse price move. Therefore, if a trade closes because your counterparty's position has been unwound, then the compensation payment should enable you to replace your trade with no loss (and potentially a profit). In the unwind scenario, there is an order of operations of who, on the other side, is picked as counterparty:
The ranking utilises the following criteria:
- Position Value = [absolute(Size/Price)] (inverse)
- Return on Equity = [PnL/IM]
- Effective Leverage = [Position Value/Portfolio Value]
Rank (1,2,3...)-- Separate for LONG and SHORT:
- if negative: [RoE/Effective Leverage]
- if positive: [RoE*Effective Leverage]
E.g. When a long position is unwound, it targets the positions of short by highest rank (1 first, 2 second, 3 third, etc.) until fully unwound.
Who Benefits From My Loss?
Kraken Futures does not benefit from liquidations, assignments or unwinds outside of the normal transaction fees. This risk management system is in place only to maintain an orderly market for margin trading in cryptocurrency derivatives.
We strongly encourage our clients to adequately collateralise their margin accounts. It is your responsibility to monitor your margin levels continuously and to make sure that your portfolio value is high enough to prevent any liquidation event.
By trading on the platform, you agree to your remaining portfolio value of a margin account being transferred to your counterparties if this margin account falls below the Maintenance Margin.
If one of your positions is unwound as a result of a counterparty not posting sufficient margin, you agree to forfeit any claims vis-à-vis that counterparty, apart from your share in their remaining portfolio value.