What Is the Role of the ‘Risk Limit’ in Preventing Large ADL Events?
The risk limit system sets tiered margin requirements based on a trader's position size. As a position grows larger, the maintenance margin requirement increases.
This mechanism forces large traders to hold more collateral, making them less likely to be liquidated and creating a larger buffer to cover losses, thereby reducing the chance of an ADL event.
Glossar
Margin Requirements
Collateral ⎊ Margin requirements represent the equity a trader must deposit with a broker or exchange as a good faith measure, securing potential losses arising from leveraged positions within cryptocurrency, options, and derivative markets.
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.