How Does an Exchange’s Risk Engine Determine the Appropriate Size for an ADL Event?

The risk engine calculates the total negative equity remaining after the insurance fund is depleted. It then identifies all profitable traders and their respective unrealized profits.

The engine uses an ADL ranking system (often based on profit and leverage) to determine the proportional reduction needed to cover the deficit. It only reduces the positions of the most highly leveraged and profitable traders, moving down the rank until the total deficit is covered.

The size is precisely the amount needed to zero out the negative equity.