What Happens If the Liquidation Engine Cannot Fully Close the Position in Time?
If the market moves rapidly against the liquidated position, the liquidation engine may not be able to fully execute the closing orders before the account balance reaches zero. This results in a deficit, meaning the account owes the exchange money.
In this scenario, the insurance fund is utilized to cover this shortfall. This action prevents the loss from being passed on to other traders through the Auto-Deleveraging system.
Glossar
Continuous Liquidation Engine
Engine ⎊ A continuous liquidation engine is an automated system employed by derivatives exchanges to manage risk by forcibly closing leveraged positions that fall below maintenance margin requirements.
Close out Period Exposure
Duration ⎊ Close out period exposure quantifies the market risk incurred by a non-defaulting party or a Central Counterparty (CCP) from the moment a counterparty default is declared until the resultant portfolio is fully hedged or liquidated.
The Liquidation Engine
Engine ⎊ The Liquidation Engine is a critical, high-speed automated system at the core of a derivatives exchange's risk management infrastructure.
Stablecoin Fully Backed
Collateralization ⎊ A stablecoin fully backed represents a cryptographic construct designed to maintain a stable value, typically pegged to a fiat currency, through a one-to-one reserve of underlying assets held in custody.
Fully Diluted Basis
Calculation ⎊ The fully diluted basis represents a comprehensive calculation of a cryptocurrency project's market capitalization, accounting for all tokens that will eventually be released into circulation.
Fully Funded Requirement
Collateralization ⎊ A fully funded requirement within cryptocurrency derivatives signifies the pre-funding of margin obligations, differing from traditional derivatives where margin is posted post-trade.
Risk Engine Parameters Tuning
Purpose ⎊ Risk engine parameters tuning involves the systematic adjustment and optimization of the various inputs and thresholds that govern an exchange's or clearinghouse's risk management system.
Partial Position Close
Action ⎊ A partial position close involves executing a trade to reduce the size of an existing open position without exiting it entirely.
Close to the Strike Price
Definition ⎊ An option is considered close to the strike price when the current market price of the underlying asset is approximately equal to the option's exercise price.
Liquidation Engine Operations
Operation ⎊ Liquidation Engine Operations describe the automated, high-speed process executed by a derivatives exchange or decentralized protocol to forcibly close a leveraged position when the trader's margin balance falls below the required maintenance level.