Liquidation Mechanism

What is liquidation

In futures trading, liquidation is an essential risk management mechanism designed to protect both users and the platform from potential losses caused by sharp market fluctuations. When a user's account or position maintenance margin ratio (MMR) falls to 100% or below, liquidation is automatically triggered. The liquidation system takes over the position and follows a stepwise process, which may include canceling pending orders and partially or fully closing positions. The process may vary depending on the margin mode (cross or isolated).

When liquidation is triggered

Cross margin mode Liquidation is triggered when the account MMR falls to 100% or below. MMR = Account Margin Balance / Total Maintenance Margin Required for All Positions Isolated margin mode Liquidation is triggered when the position MMR falls to 100% or below. MMR = Position Margin Balance / Maintenance Margin Required for the Position For detailed margin calculations, see Initial Margin and Maintenance Margin.

Liquidation process

Using cross margin mode as an example: once liquidation is triggered, the liquidation system takes over the affected position and performs the following operations:

1. Cancel all unfilled pending orders.
2. Based on market liquidity and the position size, reduce the position in batches at the bankruptcy price.
3. If the account or position MMR returns above 100% during the process, liquidation stops; otherwise, the process continues until all positions are closed.

If market liquidity is insufficient to absorb all reduced positions, the remaining portion will be taken over by the insurance fund at the bankruptcy price. Any surplus from liquidation will be credited to the insurance fund. If the insurance fund cannot absorb all remaining positions, the Auto-Deleveraging (ADL) mechanism will be triggered. For details, see Insurance Fund and Auto-Deleveraging (ADL).

Key factors in liquidation

Bankruptcy price calculation

Classic futures – cross margin mode Long Bankruptcy Price = Mark Price × [1 – (Composite MMR + Liquidation Fee Rate) × Margin Ratio] / (1 – Liquidation Fee Rate) Short Bankruptcy Price = Mark Price × [1 + (Composite MMR + Liquidation Fee Rate) × Margin Ratio] / (1 + Liquidation Fee Rate) Classic futures – isolated margin mode Long Bankruptcy Price = (Average Entry Price – Initial Margin / Contract Multiplier / Position Size) / (1 – Liquidation Fee Rate) Short Bankruptcy Price = (Average Entry Price + Initial Margin / Contract Multiplier / Position Size) / (1 + Liquidation Fee Rate) In the formulas above, the composite MMR refers to the final maintenance margin requirement under the tiered margin system, and the liquidation fee rate is 0.075%. For details on margin ratio calculation, see Maintenance Margin.

Liquidation surplus

Long Position Liquidation Surplus = (Average Fill Price – Bankruptcy Price) × Number of Filled Contracts × Contract Multiplier Short Position Liquidation Surplus = (Bankruptcy Price – Average Fill Price) × Number of Filled Contracts × Contract Multiplier For examples of liquidation surplus calculation, see Insurance Fund.

Example

A user holds a BTCUSDT Perp position with the following conditions:

At this point, since the account MMR is ≤ 100%, liquidation is triggered, and the liquidation system takes over the position.

1. Cancel all unfilled pending orders.
2. The system cancels all unfilled pending orders first.
3. It then calculates the bankruptcy price. BTCUSDT Long Bankruptcy Price = Mark Price × [1 – (Composite MMR + Liquidation Fee Rate) × Margin Ratio] / (1 – Liquidation Fee Rate) = 20,000 × [1 – (0.5% + 0.075%) × 100%] / (1 – 0.075%) ≈ 19,900 USDT
4. The position is reduced. The liquidation system reduces the position in batches at the bankruptcy price based on market conditions and position size. After reducing 600 contracts, the account MMR rises to 105% (> 100%), so liquidation ends with 400 contracts remaining.