The Insurance Fund's main purpose is to reduce the number of counterparty liquidations. To do so the Fund uses the collateral from non-bankrupt clients' fees to compensate losses when their balances fall below zero.
If the balance of a trader in liquidation (defined as collateralized maintenance margin) is less than 0 USDT after they liquidate all of their holdings, or if the trader is unable to liquidate positions, the trader is considered bankrupt, and Changelly PRO will have to take over the remaining positions.
If the number of such situations on the platform is high, Changelly PRO will take over the positions and slowly dump them onto the market by means of the Insurance Fund. The Insurance Fund will collect liquidation fees from non-bankrupt traders. Counterparty liquidation will occur if the insurance fund is unable to take holdings from the liquidations.
The Insurance Fund will be operating in accordance with the following rules:
1. The fund will have a maximum net notional position check.
2. The fund will not be allowed to exceed a predefined position notional on the market; by default, this is 100% the size of the insurance fund.
3. If a position or positions would increase beyond the max notional, the insurance fund will not be able to take holdings from the liquidations, therefore such positions will be subjected to counterparty-liquidation.
4. The insurance fund will offload positions according to a preset algorithm. All events that would normally require actions by the insurance fund will instead go into counterparty-liquidation before the fund could take positions.
If the Insurance Fund cannot cover the losses, they can be covered by means of Auto-Deleveraging, also known as ADL. It is a feature that covers the losses of some traders by the profit of others.
The ADL mechanism operates in case of significant price movements and is applied to the traders who don’t have enough margin collateral to cover their losses.
An indicator near an open contract position (ranging from 0 to 4) shows how likely it is for the position to be used in the ADL procedure (see the screenshot below).
If all indicator cells near the open position are active, and there is a market situation when the liquidation loss cannot be covered, the loss of the opposite side will be automatically covered by this contract. The situations when the ADL procedure needs to be activated are, luckily, rather rare.