In case the currency pair price on the market (Mark Price) equals the Liquidation Price for a certain contract, this contract will be liquidated.
Before the contract is liquidated, the system will try to close it at the current Market Price:
1. First the system will use part of the margin collateral to cover the loss. In case a part of the collateral remains, it will be returned to the trader.
2. If the loss cannot be covered by margin collateral, the position will be covered by the Insurance Fund.
3. If the Insurance Fund cannot process the position, the system will try to cover the loss with the ADL procedure.
To avoid liquidation, a trader can either close the contract before the liquidation or increase the margin collateral for this contract.
The mechanism also takes potential funding and penalties into account. Hence, if the Funding Rate has increased, and the trader used a high Leverage and they don’t have enough collateral to deduct the Funding Fee from, the position can also be liquidated. Upon liquidation, a penalty of 0.3% of the position volume is deducted from the trader’s account.
Liquidation Price is a dynamic parameter, so in case of any changes on the market or in your position data, the Liquidation Price will change as well. It is calculated as follows:
Pe - entry price
Mp - position margin
Q - position quantity
fliq = liquidation fee
rf - funding rate
n - funding rate
rmm - maintenance margin rate