What Is the Role of ‘Liquidation’ in Triggering the Use of the Insurance Fund?

Liquidation is the forced closure of a leveraged position when a trader's margin falls below the maintenance margin level. When liquidation occurs, the exchange's risk engine takes over.

The insurance fund is used if the exchange cannot close the liquidated position at a price equal to or better than the bankruptcy price. In this scenario, the insurance fund covers the resulting deficit, preventing the loss from being passed on to other traders via ADL or socialized loss.