Liquidation Process

MUFEX uses mark price to avoid liquidation caused by low liquidity or market manipulation.

Under isolated margin, when position margin decreases to the maintenance margin level, the position is liquidated. Please take note that if a trader holds long and short positions simultaneously under isolated mode, it may happen that both positions get liquidated under extreme market movement since long and short positions are independent.

Under cross margin mode, when available balance decreases to 0 and position margin decreases to maintenance margin level, the position is liquidated. Please take note that when holding hedged positions of both long and short under cross margin mode, only the net long or net short position may be liquidated. A fully hedged position will not be liquidated.

Larger positions may raise the margin requirement.

When liquidation happens, MUFEX uses partial liquidation to reduce the required maintenance margin to avoid full liquidation. The liquidation process is as follows.

Traders under the lowest margin tier

  1. Cancel all active orders of this contract;

  2. If it still doesn’t meet the maintenance margin requirement, that position will be closed at the bankruptcy price by the Liquidation Engine.

Traders under second or higher margin tier

The liquidation engine will try to lower the margin tier to lower the margin requirement:

  1. Cancel outstanding orders for the contract while retaining the existing position, releasing a portion of the frozen margin to determine if the maintenance margin requirement is met.

  2. Gradually reduce the position and downgrade the tier by closing out positions in higher tiers one by one, releasing the margin frozen in higher tiers down to the minimum tier, thus avoiding further liquidation.

  3. If the position is still in a liquidation state, the liquidation engine takes over the position at the bankruptcy price.

When liquidation is executed at the bankruptcy price, the following scenarios may occur:

  • If the position can be executed in the market at a price better than the bankruptcy price, the remaining margin will be added to the insurance fund.

  • If the position cannot be executed at a price better than the bankruptcy price, the deficit will be covered by the insurance fund. Finally, if the insurance fund is insufficient to cover the deficit, the liquidation position will be taken over by the automatic deleveraging system and go through the automatic deleveraging process.

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