Partial Liquidation of Futures

What is liquidation？
Margin ratio is an indicator used to estimate the users’ assets risk. When margin ratio less than or equal to 0%, forced liquidation will be triggered.

Margin Ratio = ( Equity Balance / Used Margin ) * 100% – Adjustment Factor

Note: Used Margin = Position Margin + Frozen Margin

Huobi Futures implement tiered liquidation，That is, the system will try to reduce the gear corresponding to the Adjustment Factors, so as to avoid the position being liquidated all at once.

IF the liquidation is trigged when the gear corresponding to the Adjustment Factors is 1st level:

1. The system will cancel all current orders for this symbol contract;
2. The long and short positions of the contract of the same period will be self-traded;
3. If the margin rate of the user's position is still less than 0 at this time, it will be liquidated.

IF the liquidation is trigged when the gear corresponding to the Adjustment Factors is more than 1st level:

1. The system will cancel all current orders for this symbol contract;
2. The long and short positions of the contract of the same period will be self-traded;
3. If the margin rate is still less than 0, the system will reduce the adjustment factor for the purpose of forcibly reducing the position to the upper limit of the net position of a certain position, and the margin rate is more than 0;
4. If the margin reduction is forced to the 1st level and the margin rate is still not more than 0, then all remaining positions will be forced liquidated.

There is no charge for partial liquidation.Users cannot perform operations related to this type of contract when the forced liquidation is triggered.

 

What’s adjustment factor?

Adjustment Factor is used to prevent the system's margin call losses. Huobi Futures uses tiered adjustment factor mechanism. The adjustment factor is divided into 5 tiers according to net position. The higher the net position and tier go, the more risk of the account will become.

Example:

Taking the adjustment factors of BTC contract as an example. According to the table below, if a user has 1000 lots of BTC contracts in open interest, Corresponds to the 2nd level. The adjustment factor for 10 leverage multiple, 20 leverage multiple and 5 leverage multiple is 10%, 20% and 5% correspondingly.

Note: The face value of BTC contract is $100 USD/cont, other altcoin contract is $10 USD/cont.

【The above data and indicator contents may be adjusted in real time according to market conditions, and the adjustments will be made without further notice.】

 

What is Estimate Liquidation Price?

The estimate liquidation price is the estimated market price when the margin ratio is equal to or less than 0%. Please note that this price is for reference only. The real-time liquidation price should refer to the last order price when the margin ratio reaches to 0%.

 

Mark Price Calculation

1. Basis fair price of bid and ask middle price

Basis fair price of bid and ask middle price is a relatively reasonable reference price for coin-margined futures, which is calculated based on the current spot index price and arithmetic mean value of the basis of the bid and ask middle price.

Basis Fair Price of Bid and Ask Middle Price = Index Price + MA (Basis of Bid and Ask Middle Price)

• MA (Basis of Bid and Ask Middle Price) = The Arithmetic Mean Value of the Basis of the latest N Bid and Ask Middle Price; thereinto n=60，
• Basis of Bid and Ask Middle Price = (Bid_one Price + Ask_one Price) / 2 – Index Price;

2. Depth weighted fair price

The depth weighted fair price is a relatively reasonable reference price related to the current order book depth of the futures, which is calculated based on the current spot index price and EMA depth weighted middle price basis.

Depth Weighted Fair Price = Index Price+ EMA (Depth Weighted Middle Price Basis)

• EMA (Depth Weighted Middle Price Basis) = (Current EMA Calculated– last EMA Calculated) * Factor + Last EMA Calculated;
• Depth Weighted Middle Price Basis = (Depth Weighted Bid Price + Depth Weighted Ask Price) /2 –Index Price;
• The depth weighted bid price refers to the average bid price when the cumulative amount of open orders from bid_one reaches N conts based on the open orders on current order book. The depth weighted bid price = the average bid price of N conts;
• The depth weighted ask price refers to the average ask price when the cumulative amount of open orders from ask_one reaches N conts based on the open orders on current order book. The depth weighted ask price = the average ask price of N conts.

Note: For the value range of N, please refer to the below chart.

3. Latest EMA

Latest EMA refers to the exponential moving average value of the latest transaction price of current coin-margined futures.

Current Latest EMA = (Latest Price – Last EMA Calculated) * Factor + Last EMA Calculated

• The factor = 1 / 3；

To calculate current EMA, Pn represents the latest price of No. n

Assume P1 = 10000；P2 = 10006；P3 = 10011；then，

(1) EMA1 = P1 = 10000；

(2) EMA2 = ( P2 – EMA1 ) * Factor + EMA1 = ( 10006 – 10000 ) * 1 / 3 + 10000 = 10002；

(3) EMA3 = ( P3 – EMA2 ) * Factor + EMA2 = ( 10011 – 10002 ) * 1 / 3 + 10002 = 10005；

……

The above EMA will be calculated separately for futures with different expiries every 5 seconds, and the system takes the median value of bid and ask middle price basis fair price, depth weighted fair price and latest EMA as the mark price. The formula is as follows: 

Mark Price = Median (Bid and Ask Middle Price Basis Fair Price，Depth Weighted Fair Price，Latest EMA) 

To avoid unnecessary liquidations caused by abnormal mark price, when mark price sharply deviates from the contract price, the system will adjust the mark price accordingly; When mark price exceeds the upper and lower limits of deviation from the latest contract price, only the boundary value will be taken.

Mark Price = Clamp (Mark Price, Latest Price * (1 + Upper Limit of Deviation Factor), Latest Price * (1 – Lower Limit of Deviation Factor))

Currently, only a few contracts adopt the median formula to calculate the mark price, and the others will apply the calculation “Mark Price = Latest EMA”. Details as follows:

【The above data and indicators may be real-time adjusted based on the market data without further announcement.】

 

What is liquidated order price?

The liquidation price is the market price for reference when the margin ratio is equal to or less than 0%. When the margin ratio reaches to or below 0%, liquidation will be triggered and the trading system will take over the positions with a limit order price. Since the taken-over positions won’t go through the match system, the price of the taken-over positions will not display on the market (K-line chart). Please note that the liquidated order price is different from the liquidation price. For liquidated order details, you can go to Huobi Futures APP and click [ ? ]  or go to web page and click “Details” in “Order History”.

Example on APP:

Example on web page:

Details of liquidated orders:

Examples on the concept above:

Xiao Ming has 20 BTC in account equity. He opened long 15000-lot BTC quarterly contract at the price of 8000USD/BTC(100USD/lot). Assuming there was 10X in leverage, 14% in adjustment factor, the corresponding gear is the 3rd level. Do not corresponding transaction fees as well, what will happen to Xiao Ming’s positions when the last BTC quarterly contract reaches 7330.12 USD?

Let’s have a look the calculation for different elements.

1.Unrealized Profit and Losses

• According to the order direction-open long, the formula is Unrealized P/L for long position= ( 1 / Average position price – 1 / last order price ) * order quantity * contract face value
• Therefore, the calculation for Xiao Ming’s Unrealized P/L is: ( 1 / 8000 – 1 / 7330.12 ) * 15000 * 100 = –17.1351BTC    
• In this case, when the price of BTC quarterly contract reaches 7330.12 USD, Xiao Ming’s unrealized profit and losses is –17.1351BTC

2.Xiao Ming’s account equity

• Formula: Equity = Deposit + realized profits / losses + unrealized profits / losses
• Xiao Ming’s equity is 20 + 0 + ( – 17.1351 ) = 2.8649BTC 
• Therefore, when the price of BTC quarterly contract reaches 7330.12 USD, Xiao Ming’s account equity is 2.8649BTC.

3.Position Margin

• Formula: Position Margin = ( Contract Value * Position Quantity ) / Last Order Price / Leverage
• Xiao Ming’s position Margin is ( 100 * 15000 ) / 7330.12 / 10 = 20.4635BTC 
• Therefore, when price of BTC quarterly contract reaches 7330.12, Xiao Ming’s current position margin is 20.4635BTC 

4.Is liquidation triggered？

• Formula: Margin Ratio = (Equity Balance / Used Margin ) * 100% – Adjustment Factor
• Xiao Ming’s margin ratio is ( 2.8649 / 20.4635 ) * 100% – 14% = 0%
• In this case, the EMA price according the EMA formula is 7330.10     
• As explained above, when the margin ratios calculated according to both the last price and the EMA go to or below 0, Xiao Ming’s order will be liquidated
• Therefore, Xiao Ming’s order is liquidated when the price of BTC quarterly contract reaches 7330.12 USD

5.What will happen after liquidation？

• After the  liquidation  triggered, the system detects that Xiao Ming's net position is 15,000 and the scale corresponding to the adjustment factor is the 3rd gear. Then the system will try to recalculate Xiaoming's margin rate using the maximum value of the 2nd gear of 9999 sheets as the remaining position amount and the corresponding adjustment factor of 10%;
• Position Margin = ( 100 * 9999 ) / 7330.12 / 10 = 13.6409 BTC
• Realized profits / losses of positions that be takeovered：( 1 / 8000 – 1 / 7228.91 ) * （ 15000 – 9999 ）* 100 = –6.6680 BTC
• Unrealized profits / losses of positions that not be takeovered：( 1 / 8000 – 1 / 7330.12 ) * 9999 * 100 = –11.4222 BTC
• Account equity = 20 + （– 6.6680 ） + ( – 11.4222 ) = 1.9098 BTC
• Therefore, if Xiao Ming only holds 9999 BTC contracts, the margin rate of his position = ( 1.9098 / 13.6409 ) * 100% – 10% ＞ 0%
• At this time, the system will taken over more than 15000 – 9999 = 5001 contracts beyond the second level by the system at the takeover price, it means that the releases partial liquidation of Xiao Ming's partial liquidation.

6.How about the Liquidation Orders Price（Takeover Price）？

• As mentioned above, when liquidation is triggered, the trading system will take over the order with a limit order price when the account equity goes to 0, Let us calculate the liquidated order price（takeover price）. At first we set the liquidated price to x, and then set the specific value to see:
• Because ( 1 / 8000 – 1 / x ) * 15000 * 100 = –20 BTC
• So x = 7228.91
• That the price is 7228.91 USD when Xiaoming's account equity is 0. At the same time, this price is also the price at which the system takes over Xiao Ming's 5001 positions. The liquidated order price will not be displayed on the K-line;
• After the tiered force liquidation, Xiao Ming's remaining position is 9999 BTC quarterly contracts, and relevant operation authority will be restored.

（The above is a reasonable example use, the specific settings or related migration are subject to the platform announcement）

 

Insurance fund

Insurance fund is set up to cover the societal losses (i.e. losses attributed to unfilled liquidated orders) or to settle incidents in contracts trading.

For each digital asset contract, there is a corresponding insurance fund, and the same digital asset contracts of different periods share one insurance fund. For example, weekly, bi-weekly, quarterly and bi-quarterly BTC contracts all share the same insurance fund of BTC contracts.

The sources of insurance fund are mainly from Huobi Futures and the premiums after forced liquidations. Once forced liquidation triggered, the system would take over users’ positions and close them by placing orders on order book. The premiums generated by liquidated positions will be injected into corresponding insurance fund. In terms of initial trade or under special situations, system will manually transfer the premiums (generated by liquidated positions) into exchange account, supplementing insurance fund.

Use of insurance fund: settlement and delivery on everyday 16:00(GMT+8), if there were margin call losses attributed to unfilled liquidated orders, system would first use insurance fund to meet the losses. Clawbacks will only occur if the insurance fund are not enough to cover the system's total margin call losses.

 

Clawback

When the market fluctuates severely, the user is subjected to liquidation, and the transaction cannot be concluded at the liquidation price, resulting in loss greater than the margin, the platform will adopt the “clawback” system. Clawbacks will only occur if the insurance fund does not have enough funds to cover the system's total margin call losses.

 

Full account clawback system

Huobi Futures uses a "full account clawback" system to calculate the clawback rate. The system's margin call losses from all three contracts (like weekly, bi weekly and quarterly contracts) will merged and clawbacks will be calculated according to each user's entire account profits, instead of calculating each contract's margin call losses and clawbacks separately. Only users that have a net profit across all three contracts for that day will be subjected to clawbacks.

Clawback coefficient = System's losses / Profit across all contracts

For example:

The system's total margin call losses = weekly losses + bi-weekly losses + quarterly losses + bi-quarterly losses= 0BTC – 100BTC – 20BTC = – 120BTC

If system's losses + insurance fund >= 0, then clawback rate = 0

If system's losses + insurance fund <0, then clawback rate = (system losses + insurance fund) / net profit across all contracts

For example:

System's losses: –120BTC

Insurance fund = 100BTC

Profit across all contracts = 40,0000BTC

Clawback rate =| ( –120BTC + 100BTC ) / 40,0000BTC | = 0.005%

Clawback amount for the users who gained net profit of all contracts = (profit from weekly contract + profit from bi-weekly contract + profit from quarterly contract + profit from bi-quarterly contract) * clawback rate.

The clawback amount will be deducted from the profit automatically.

If a user has a total profit of 2 BTC for the weekly, bi-weekly, quarterly and bi-quarterly contracts, then the amount needs to be shared is 2*0.005%=0.0001 BTC.

 

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