OKEx released a statement today detailing the forced liquidation of an “enormous long position” in futures on July 31st. They also informed users that their risk management system might be triggered. They stated that they will be injecting 2500 Bitcoin [BTC] into their liquidation insurance fund from their own capital pool to offset the potential market risk.
On 31st July, a Bitcoin whale wished to liquidate a $460 million long position. After trying to prevent the client from opening the position to reduce market risks, OKEx froze the account. This was then followed by a drop in the price of Bitcoin due to market movement, which caused the liquidation of the account.
This means that, due to OKEx’s clawback policy, futures traders on the platform may have to pay around 18% of their profits to cover the shortfall from liquidating the position. In OKEx’s own words, their policy is described as:
“When the insurance fund cannot cover the total margin call losses, a full account clawback occurs. In such case, only users who have a net profit across all three contracts for that week will be subject to the clawback. We will take a portion of the profit in equal percentage from all profited traders only to cover the difference between the liquidated price and settled price.”
They also addressed the rumors of them being involved in the manipulation of the clawback system. OKEx stated that most of the price movements similar to this are caused by these forced liquidation orders.
OKEx promised to implement a “series of risk management enhancements” as described in their roadmap. These include measures such as an anti-manipulation policy through new margin ratio formulae, a mark price, a tiered margin system and optimization of insurance fund usage.
The anti-manipulation policy is set to be released on August 4th and will deploy different measures on different modes of margins on the platform. This includes a change to the cross-margin mode, which enforces higher margin ratios for bigger market positions.
The fixed-margin mode is also affected, with maximum limits on opening positions per account to prevent market risks created by opening very large positions.
The margin ratio formula has also been changed to include the average price of open positions for fixed margin ratios and to include withholding margins on working orders for cross-margin rations.
|Existing Margin Ratio Formula||New Margin Ratio Formula|
|Fixed Margin Ratio||(Margin + UPL)/Position Margin – Adjustment Coefficient||Equity Balance/Position Margin – Adjustment Coefficient|
|Cross-Margin Ratio||(Fixed Margin + UPL) * Avg Price of Open Positions / (Contract Face value * Holding Positions)||Equity Balance / Position Margin + Withholding Margin of working orders)|
It is to be noted that if a trader’s margin ratio breaches 10% for the 10x leverage or 20% for the 20x leverage, the margin call will be triggered. This is opposed to how it was previously, with the margin call only being triggered at 0%.
OKEx also aims to introduce a solution known as mark price that will be utilized to calculate the unrealized profit and loss, margin ratio and similar reference figures. More importantly, forced liquidation will occur when the marked price reaches the estimated liquidation price. Explaining the need for this measure, they said:
“Mark price is the Spot Index Price plus EMA (futures market price – spot index price). The methodology of the mark price formula is to construct a reasonable price for the futures market by taking reference of the spot index price plus recent price data.”
The final change made to the system was the introduction of a tiered margin system, which adjusts margins to the size of a user’s positions. This reduces the chance of a socialized clawback occurring. Liquidation algorithms will be modified, minimizing the size of forced liquidation positions and potential market impact.
The insurance fund is optimized to cover any shortfalls in unfilled forced liquidation orders, like the one that occurred on 31st July. The engine that executes this will then take over forced liquidation and aggressively route it to the market. In case the fund is depleted, socialized clawback will occur on Fridays.
They ended their statement by saying:
“We will continue to make our best efforts to accelerate the optimization of our futures trading platform and also the enhancement of the risk management framework.”
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