How Does the Risk Limit System Help Prevent Fund Depletion?
A risk limit system imposes a maximum position size and/or leverage a trader can use, which scales inversely with the size of their position. As a trader increases their open contract size, the required maintenance margin increases, or their maximum allowed leverage decreases.
This prevents single, extremely large liquidations from causing massive deficits that could drain the insurance fund.
Glossar
Margin Tier System
Framework ⎊ The Margin Tier System, prevalent across cryptocurrency exchanges, options platforms, and derivatives markets, establishes a tiered structure dictating permissible leverage based on collateral levels and risk profiles.
Market Depth Influence
Resonance ⎊ Market Depth Influence, within cryptocurrency and derivatives, signifies the proportional relationship between order flow and price movement; a high resonance indicates substantial price impact from relatively small order sizes, characteristic of less liquid instruments or periods of reduced market participation.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Risk Limit System
Calibration ⎊ A Risk Limit System, within cryptocurrency derivatives, functions as a dynamic constraint on potential losses, calibrated to market volatility and portfolio composition.
Maximum Position Size
Limit ⎊ This parameter represents the absolute ceiling on the notional value of a specific derivatives contract an individual entity can hold on a given platform.
Risk Limit
Constraint ⎊ A risk limit defines the maximum acceptable level of potential loss or adverse price movement that a trading position or the entire portfolio is permitted to sustain before mandatory intervention is triggered.