Why Do Exchanges Use Tiered Margin Systems?
Exchanges use tiered margin systems to manage the exponentially increasing risk associated with larger position sizes. As a position grows, the potential market impact of its liquidation also increases, making it harder to close without slippage and a deficit.
By requiring a higher Initial Margin percentage for larger tiers, the exchange ensures a larger collateral buffer, reducing the risk to the insurance fund and the entire market.
Glossar
Tiered Margin Systems
Architecture ⎊ Tiered Margin Systems structure collateral requirements based on discrete levels of exposure or risk metrics associated with a trading account or specific asset class.
Tiered Margin
Structure ⎊ Tiered margin represents a risk management protocol employed within cryptocurrency derivatives exchanges, options trading platforms, and broader financial derivative markets, defining variable collateral requirements based on position size and prevailing market volatility.
Initial Margin Percentage
Allocation ⎊ The Initial Margin Percentage is the minimum proportion of the total notional value that a trader must deposit as collateral to open a new leveraged derivatives position.