What Is the Difference between “Auto-Deleveraging” and Using an Insurance Fund?

The insurance fund is the primary buffer, absorbing losses from liquidations that fail to execute at a price better than the bankruptcy price. It is the first defense against negative equity.

Auto-Deleveraging (ADL) is a secondary, last-resort mechanism. ADL is triggered only when the insurance fund is depleted or insufficient to cover a large loss.

It automatically reduces the open positions of profitable traders to cover the deficit left by the bankrupt trader, effectively socializing the remaining loss among the most profitable counterparties.