Deribit uses an incremental auto-liquidation system. This means that as soon as an account does not have enough equity to maintain its positions (as assessed by the risk engine), a part of the position will be closed. This happens automatically, and there is no preceding ‘margin call’ to ask users to deposit more margin to avoid liquidation. The liquidation system on Deribit is incremental, which means the liquidation engine will first try to liquidate only a part of the position(s) to try to get the maintenance margin below 100% again. If the partial liquidation is successful in reducing maintenance margin requirements to below the account's margin balance again, the liquidation process will stop and any of the positions not yet liquidated will remain open.
Assuming that there is enough market liquidity to make liquidation trades possible, liquidation trades are done in real-time at a speed of 1 round per second, such that the maintenance margin of an account can only be higher than the margin balance for a fraction of a second. As soon as the required maintenance margin is lower than the margin balance of the account, liquidation will stop.
During auto liquidation, a trader has no control over their account and cannot place orders or cancel orders created by the auto-liquidation engine. A trader will regain control over their account only once the maintenance margin requirement is brought back to a level below 100% of the margin balance. This means that once the maintenance margin is higher than 100%, the reduction of the trader's position is solely at the discretion of Deribit. The user cannot influence this process by placing additional closing orders.
Caution
Accounts that are on Portfolio Margin can have futures positions traded to hedge the deltas of the existing positions, including the opening of new futures positions. If the maintenance margin usage then falls below 100% again and the liquidation has stopped, these hedges will remain open and it is the responsibility of the account holder to manage these positions.
Liquidation trades will have an additional liquidation fee charged to them, which is automatically assigned to the insurance fund. For more details on the fees, see the fees page.
Caution
Options bought on Standard Margin can not be liquidated. However, the premium paid on the option plus any positive PNL is locked in the option position and can not be used to cover any position on other instruments. To utilize the PNL of bought options within the rest of the portfolio, portfolio margin is required.
Liquidations on S:SM are confined to the asset for which there is not enough margin available. Other assets are not affected.
For a single position, the liquidation will incrementally close the position while checking with each liquidation trade whether the margin requirements have lowered enough to be covered by the margin balance of the account. Once the margin requirements fall below the margin balance, the liquidation will stop. If the margin balance falls below the maintenance margin requirement again the liquidation process will start again.
In a portfolio with multiple positions the liquidation is a bit more complex and is based on which positions are generating the highest margin usage. Each liquidation is unique, however, in general the liquidations on Deribit on Standard Margin accounts follow the below procedures.
Warning
During the liquidation process, it is up to the discretion of the Deribit risk management team to decide how to handle the user’s portfolio in an attempt to reduce the risk of bankruptcy. While the account is still in liquidation, the user has no control over the process.
Instruments with a settlement currency of either BTC or ETH.
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Positions that contribute to the delta exposure will be liquidated first. If the account delta is negative the positions with a negative delta are liquidated first.
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Futures & perpetual positions will be liquidated before options.
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Call options will be liquidated before put options.
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Earlier expirations will be liquidated before later expirations.
Of course, this process also depends on the availability and liquidity of the instruments that are to be liquidated. A futures position that would be liquidated at a very unfavourable price, due to lack of suitable orders to execute against, might be ignored in favour of options if the options have better liquidity.
Instruments with a settlement currency of either USDC or USDT.
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Positions with the highest maintenance margin will be liquidated first.
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There is no preference of futures & perpetual over options.
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There is no preference of calls over puts.
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There is no preference of expirations.
This process also depends on the availability and liquidity of the instruments that are to be liquidated.
Accounts that are on cross collateral have a similar process for liquidations of the USDC and USDT settlement currencies in an S:SM account. This is because when cross collateral is enabled, all positions are evaluated in USD.
The whole portfolio of positions will be assessed together, and positions with different settlement currencies will be combined. The maintenance margin will be evaluated in USD.
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Positions with the highest maintenance margin will be liquidated first.
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There is no preference of futures & perpetual over options.
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There is no preference of calls over puts.
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There is no preference of expirations.
Assets that have a haircut applied to the cross collateral contribution can have the relative limit for cross collateral breached prior to any position liquidation, and thus the account can be rebalanced prior to the liquidation.
However, in volatile markets and/or with the use of collateral that does not have an haircut applied, the position will be liquidated prior to rebalancing. This does not mean the position is liquidated while margin is available, but only when the USD margin is insufficient to support the position. The rebalancing after a liquidation is merely an administrative transaction.
A simplified example of rebalancing after a liquidation:
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A position is held on an instrument with BTC as settlement currency.
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USDC is used as collateral, and the overall account margin balance is in USD.
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The account does not have enough USD margin to support the position.
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The position is therefore liquidated, in BTC, resulting in a negative BTC margin balance.
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The liquidation algorithm will rebalance any USDC to BTC.
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If after rebalancing the account still carries a negative BTC balance, the insurance fund will be used to cover the negative equity.
In the incremental liquidation process both liquidation trades and rebalancing can occur at the same time.
Whenever the maintenance margin requirement of an account is higher than 100% of the margin balance, the liquidation process will start. During liquidation, open futures and open options positions can be closed. Unlike in standard margin accounts, in portfolio margin accounts the liquidation process can also include delta hedging via the perpetuals or futures. The goal of the delta hedging is to reduce the delta risk of the account, and this process can include increasing the size of some positions, including opening completely new positions.
Warning
During the liquidation process, it is up to the discretion of the Deribit risk management team to decide how to handle the user’s portfolio in an attempt to reduce the risk of bankruptcy. While the account is still in liquidation, the user has no control over the process.
The liquidation process involves analysing the risk matrix to find which instrument is contributing the most to the margin requirements, and then liquidating that instrument. If the attempted liquidation order does not trade, then the algorithm will move to the next highest contributing instrument in the risk matrix.
If it is not possible to reduce positions on the relevant instruments, then the liquidation process will then attempt to reduce the risk by delta hedging on the perpetual and/or futures.
Caution
Accounts that are on Portfolio Margin can have futures positions traded to hedge the deltas of the existing positions, including the opening of new futures positions. If the maintenance margin usage then falls below 100% again and the liquidation has stopped, these hedges will remain open and it is the responsibility of the account holder to manage these positions.
Liquidations on X:PM will use a similar process as on S:PM, however because cross collateral is enabled, all positions are evaluated in USD.
The whole portfolio of positions will be assessed together, and positions with different settlement currencies will be combined. The maintenance margin will be evaluated in USD.
-
Positions with the highest maintenance margin will be liquidated first.
-
There is no preference of futures & perpetual over options.
-
There is no preference of calls over puts.
-
There is no preference of expirations.
Assets that have a haircut applied to the cross collateral contribution can have the relative limit for cross collateral breached prior to any position liquidation, and thus the account can be rebalanced prior to the liquidation.
However, in volatile markets and/or with the use of collateral that does not have an haircut applied, the position will be liquidated prior to rebalancing. This does not mean the position is liquidated while margin is available, but only when the USD margin is insufficient to support the position. The rebalancing after a liquidation is merely an administrative transaction.
A simplified example of rebalancing after a liquidation:
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A position is held on an instrument with BTC as settlement currency.
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USDC is used as collateral, and the overall account margin balance is in USD.
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The account does not have enough USD margin to support the position.
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The position is therefore liquidated, in BTC, resulting in a negative BTC margin balance.
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The liquidation algorithm will rebalance any USDC to BTC.
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If after rebalancing the account still carries a negative BTC balance, the insurance fund will be used to cover the negative equity.
In the incremental liquidation process both liquidation trades and rebalancing can occur at the same time.