Liquidation & Position Tiers

Dear KCEX Users,

In-depth Explanation of Forced Liquidation and Risk Management Mechanisms

We are here to provide you with a comprehensive overview of the forced liquidation mechanism and risk management strategies on the KCEX platform, ensuring your safety and stability throughout your journey in the world of digital currency trading.

1. Understanding Liquidation:

Commonly referred to as "Margin call," forced liquidation occurs when the margin rate of your futures position ≥ 100%. In accordance with established rules, the system initiates forced liquidation, also known as "liquidation." The calculation of the contract margin rate depends on your margin and unrealized profits or losses, while considering factors like the maintenance margin rate and trading fee rate. It is essential to review the trading page to understand the specific maintenance margin rate for each futures trading pair.

Isolated Margin Mode:  position margin + unrealized profit and loss <= maintenance margin + liquidation fee, triggering liquidation when the margin ratio reaches 100%.

Cross Margin Mode: The total equity of the cross margin account (excluding isolated margin, unrealized profit and loss, and all order margin) <= cross maintenance margin + liquidation fee, triggering liquidation when the margin ratio reaches 100%.

Liquidation Process:

When liquidation is triggered, the system will execute a stepwise liquidation method based on the user's position tier, avoiding the complete liquidation of all positions and controlling user risk.

1. Order Cancellation: In cross margin mode, all current orders under the account will be canceled; in isolated margin mode, if auto margin addition is enabled, all current orders for the current futures will be canceled. If the margin ratio is still greater than or equal to 100% after canceling orders, proceed to the next step.

2. Long/Short Self-Dealing: Perform self-dealing forced reduction of positions with both long and short directions in cross margin mode (only cross margin mode liquidations will have this step). After completing long/short self-dealing, if the margin ratio is still greater than or equal to 100%, proceed to the next step.

3. Stepwise Liquidation: If the user's position is at the lowest risk limit, proceed to the next step. If the risk limit tier of the user's position is greater than 1, it needs to be downgraded, i.e., part of the position at the current tier will be taken over by the liquidation engine at the bankruptcy price, thereby reducing the risk limit tier. Then, continue to calculate if the margin ratio is greater or equal to 100% with the reduced maintenance margin ratio; if it still meets the liquidation conditions, continue the downgrade process until reaching the lowest tier.

4. Complete Liquidation: If the position is at the lowest tier but the margin ratio is greater than or equal to 100%, the remaining positions will be taken over by the liquidation engine at the bankruptcy price. (The liquidation takeover process does not go through the matching system, so the bankruptcy price will not be displayed in market transaction records and K-line charts.)

Treatment after positions are taken over by the liquidation engine:

1. When a user's position is taken over by the liquidation engine at the bankruptcy price, 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.

2. If the position cannot be executed at a price better than the bankruptcy price, the insurance fund will cover the shortfall. Finally, if the insurance fund is insufficient to cover the shortfall, the liquidated position will be taken over by the automatic reduction system.

Position Tier Explanation:

To avoid significant risk of massive losses from single high-leverage large positions exploding during volatile market movements, and if the insurance fund is depleted, the automatic reduction system may be triggered, thereby posing additional risk to other traders. Therefore, KCEX adopts a position tier mechanism, i.e., the system uses a stepwise margin model for risk control, meaning the higher the leverage, the smaller the position limit. And the larger the position, the higher the maintenance margin rate.

Maintenance Margin Rate:
The user's maintenance margin rate is calculated based on the size of the user's position, not the leverage adjusted by the user, meaning the maintenance margin rate is not affected by leverage. The system sets multiple position tiers based on the futures's risk level, with different tiers applying different maintenance margin rates, the larger the position, the higher the maintenance margin rate. (Details of each futures's position tiers can be viewed in [Futures Information] - [Position Tiers].)

The maintenance margin directly affects the position's liquidation price. Therefore, we strongly recommend users to close positions or add margin themselves before the margin balance drops to the maintenance margin level to avoid liquidation.

Please note, during abnormal price fluctuations and extreme market conditions, the system will take additional measures to maintain market stability, including but not limited to:

- Adjusting the maximum allowed leverage for futures

- Adjusting position limits for different tiers

- Adjusting maintenance margin rates for different tiers

2. Position Tier Mechanism Example
Taking the BTCUSDT perpetual futures as an example:

Suppose the position tier list for the BTCUSDT perpetual futures is as shown above (these values are for illustration purposes only; for specific accurate values, see the position tier conditions of each futures):

(1) The leverage multiple determines the maximum position limit a user can hold

When a user adjusts the leverage to 100x, it corresponds to the first tier in the position tier list, hence the user can hold a maximum position of 30 BTC.

When a user adjusts the leverage to 50x, it corresponds to the second tier in the position tier list (33 < leverage ≤ 50), hence the user can hold a maximum position of 36 BTC.

(2) The maintenance margin rate is determined by the current position holding

User A buys 16 BTC of the BTCUSDT perpetual futures at a price of 10,000 USDT, with a leverage of 50x. At this time, the user's position holding = 16 BTC, corresponding to the first tier in the position tier list (holding range: 0 ~ 30 BTC), hence the user's position maintenance margin rate is 0.5% for the first tier.

Subsequently, as the price of the BTCUSDT perpetual futures rises, User A continues to add 15 BTC to the position, making the position holding = 31 BTC, which corresponds to the second tier in the position tier list (holding range: 30 ~ 36BTC), hence the position maintenance margin rate rises to 1%.

At this point, if the user's position reaches a liquidation state, it triggers liquidation. Since it is in a higher tier, stepwise liquidation is triggered. The system will first liquidate 1 BTC of the position (part of the current tier), and after liquidation, the position holding will drop to 30 BTC, thus the position tier drops from the second tier to the first tier, and the maintenance margin rate also drops from 1% to 0.5%. The system then continues to assess the remaining position; if it still is in a liquidation state, then the remaining entirety of the position will be liquidated, otherwise, the remaining position will be preserved.

3. Other Relevant Illustration:

Interpreting Estimated Liquidation Price:

When mark price reaches the estimated liquidation price, forced liquidation will be triggered. If there are multiple positions in cross mode, the estimated liuquidation price is then for reference only, as it will vary constantly when market fluctuates. In isolated mode, the positions for different pairs are independent, so the liquidation of one position does not impact the positions of other pairs. Please note that this price is provided as a reference, and actual liquidation is still based on the margin rate.

For short positions: Estimated Liquidation Price = (Isolated Margin Balance + Position Size * Open Price) / (Position Size * (Maintenance Margin Rate + Taker Fee Rate + 1))

For long positions: Estimated Liquidation Price = (Isolated Margin Balance - Position Size * Open Price) / (Position Size * (Maintenance Margin Rate + Taker Fee Rate - 1))

Insurance Funds' Function:

Insurance Funds are designed to cover losses resulting from liquidations that couldn't be fully closed due to insufficient margin. When a user's position is forcibly liquidated, the system takes control of the position and executes the liquidation in the market. The profits generated from these transactions are channeled into the respective futures' Insurance Funds. During initial trading or special circumstances, the system may transfer assets to the Insurance Funds account to bolster risk reserves.

Flexible Use of Insurance Funds:

In cases of underfunded positions after forced liquidation or the inability to close positions, KCEX takes over the remaining positions. The platform will utilize the insurance fund and auto-deleveraging mechanism to cover the underfunded part.

Our commitment remains steadfast in providing a secure and transparent environment for digital currency trading. For any inquiries, please feel free to reach out to our customer service team.

Thank you for your continued support and trust in KCEX.

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Enjoy trading on KCEX,
The KCEX Team