How Does an Auto-Deleveraging (ADL) System Function in a Futures Exchange?

The Auto-Deleveraging (ADL) system is a last-resort mechanism used when the insurance fund cannot cover a liquidation loss. The system automatically deleverages (reduces) the positions of opposing traders who have a high-profit and high-leverage position.

The priority for deleveraging is based on a ranking system. This process is necessary to close the insolvent position and maintain the solvency of the exchange, but it is disruptive to the deleveraged traders.