What Happens If an Insurance Fund Runs a Significant Deficit?

If an insurance fund runs a significant deficit, it means the fund has been depleted by covering losses from bankruptcies and can no longer fulfill its primary function. In this scenario, the exchange's Auto-Deleveraging (ADL) system is triggered to cover the remaining losses by liquidating profitable counter-traders.

A sustained deficit can damage trader confidence and may prompt the exchange to inject capital from its own reserves or adjust risk parameters to replenish the fund.