Auto-Deleveraging (ADL)

ADL is a security mechanism built into Deribit's liquidation process that is triggered once standard risk-reduction steps have already been exhausted. Specifically, it activates when an account reaches close-out margin (i.e. when collateral held in the account is no longer sufficient to support open positions or to accommodate liquidations), any available support capacity under the Liquidity Support Program (LSP) has been fully used, and eligible positions still need to be transferred or unwound. In practical terms, ADL functions as a back-stop to resolve distressed positions before losses accumulate, thereby reducing the likelihood that shortfalls flow to the insurance fund or trigger the socialised loss process.

An account becomes distressed as it moves through three escalating stages:

To the extent that LSP capacity is insufficient to restore an account to compliance with the above margin requirements, ADL is triggered. For more information on the Liquidity Support Program, see Liquidity Support Program (LSP).

Under ADL, Deribit automatically closes out remaining positions from the distressed accounts by transferring them to other members who hold opposing positions of the same instrument. Members receiving those positions are allocated a pro-rata share based on their unrealised profit on that instrument within the daily trading window. The transfer is executed at the mark price adjusted slightly in the receiving members' favour, and possibly a fee reward is paid as compensation for having their position closed early and upside limited. In this way, ADL can effectively reduce the size of an opposing position at the transfer price but will never result in a new exposure or forcible move to the opposite side of a relevant market.

As with each preceding liquidation process, ADL runs only as far as necessary. Once the distressed account's positions have been transferred (via the order book, under LSP, or pursuant to ADL) and its margin is sufficiently restored, escalation ceases. If the distressed account remains bankrupt after its positions have been transferred under ADL, the account's shortfall is covered by the insurance fund. Further information can be found in the Deribit Exchange Membership Terms and the Deribit Exchange Rulebook.