The maintenance margin is a fundamental concept in leveraged trading. It represents the minimum margin level a trader must maintain to keep a position open. If the margin ratio of a position falls to or below 100%, a forced liquidation, also known as a margin call, is triggered.
This system is designed to protect both the trader and the exchange from excessive losses. By automatically closing positions that are under-collateralized, the platform mitigates the risk of debt accumulation.
What Is the Maintenance Margin Ratio?
The maintenance margin ratio is the minimum margin percentage required to maintain an existing leveraged position. It acts as a critical risk management threshold.
Calculating the Margin Ratio
The formula for calculating the margin ratio varies depending on the margin mode you are using:
- Isolated Margin Mode:
Margin Ratio = (Position Margin + Unrealized P&L) / (Face Value * Contract Quantity * Mark Price * (Maintenance Margin Rate + Taker Fee Rate)) - Cross Margin Mode (Single Currency):
Margin Ratio = (Contract Account Balance + Unrealized P&L) / (Face Value * |Net Quantity| * Mark Price * (Maintenance Margin Rate + Taker Fee Rate))
Note: Net Quantity = Long Contract Quantity - Short Contract Quantity. - Cross Margin Mode (Multi-Currency):
Margin Ratio = (Contract Account Balance + Unrealized P&L of All Currencies) / (Maintenance Margin + Liquidation Fee of Each Currency)
For each currency, theMaintenance Margin + Liquidation Fee = Face Value * |Net Quantity| * Mark Price * (Maintenance Margin Rate + Taker Fee Rate).
The Purpose of a Tiered Maintenance Margin System
Exchanges implement a tiered maintenance margin system to enhance market stability. The primary goal is to prevent massive liquidations of large positions from causing significant market impact and substantial auto-deleveraging (ADL) losses.
Under this system, the maintenance margin requirement increases as a trader's open position grows larger. Consequently, the maximum effective leverage available to a trader decreases with larger position sizes. This mechanism encourages responsible leverage use and protects the overall market ecosystem from volatile price swings caused by large-scale liquidations. 👉 View real-time trading tools
How User Position Tiers Are Determined
The method for calculating your position size and corresponding margin tier depends on your selected margin mode:
- In Isolated Margin Mode: The total quantity of all positions (both long and short) for a specific contract is calculated to determine the tier. However, the maintenance margin rate is calculated separately for each direction (long/short) of that contract.
- In Cross Margin Mode: The total quantity of all positions across all contracts and directions is aggregated to determine your tier. Your maintenance margin rate is then calculated based on this entire portfolio value.
Liquidation Logic & Risk Fund Mechanics
Understanding the liquidation process is crucial for managing risk in futures trading.
1. The Liquidation Trigger: Liquidation is triggered solely based on the margin ratio. When a position's margin ratio falls to or below 100%, the forced liquidation process begins.
2. Estimating Liquidation Price: Most platforms provide a calculator tool to help traders estimate their liquidation price. It is vital to remember that this is only an estimation. In cross margin mode, especially with multiple currency positions, accurately calculating a single liquidation price is complex because it depends on the mark price of all held positions.
3. The Tiered Liquidation Process: To minimize market disruption, many exchanges use a tiered liquidation mechanism. Instead of closing an entire position at once, the system will first liquidate only a portion of it. If the remaining position still does not meet the maintenance margin requirement for its new, smaller size, the process repeats until the margin level is restored or the entire position is closed.
4. Bankruptcy Price: When a position is liquidated, the engine takes over the position at its bankruptcy price—the price at which the initial margin is entirely lost. The position is then closed via a market order. This bankruptcy price is not displayed on the price chart.
5. The Role of the Risk Fund: The risk fund is a capital reserve used to cover any losses from liquidations that occur at worse prices than the bankruptcy price (known as "socialized losses" or "auto-deleveraging").
- Sources of Funds: The fund is typically capitalized by the exchange and is supplemented by any excess remaining from a liquidation order that closed at a better price than the bankruptcy price.
- Settlements: The fund is usually settled on a regular basis (e.g., daily at 16:00 UTC+8), with gains or losses from liquidations being added or withdrawn.
Platforms may update these rules and mechanisms periodically to optimize performance and security. It is a good practice to regularly review the official trading rules for the latest information.
Frequently Asked Questions
What exactly triggers a liquidation?
A liquidation is triggered when your margin ratio drops to 100% or below. This ratio is a measure of your equity relative to the required maintenance margin for your open positions.
How can I avoid being liquidated?
You can avoid liquidation by maintaining a healthy margin level significantly above 100%. This can be done by depositing additional funds into your margin account, closing losing positions partially, or using stop-loss orders to manage risk proactively.
What is the difference between isolated and cross margin liquidation?
In isolated margin, only the collateral allocated to that specific position is at risk. In cross margin, your entire account balance acts as collateral for all open positions, meaning a losing trade in one market can affect other positions.
Why does the maintenance margin rate change?
The rate changes based on your position size due to the tiered system. Larger positions are assigned to higher tiers, which require a higher maintenance margin rate to account for their greater potential market impact if liquidated.
What happens to the money from liquidated positions?
Liquidated positions are closed by the exchange. If the position closes at a price better than the bankruptcy price, the excess is added to the risk fund. If it closes at a worse price, the risk fund covers the difference.
Where can I find the current tier rules for my trades?
The specific maintenance margin rates and the contract quantities for each tier are listed in the official trading rules of your exchange, typically found in a section labeled "Position Tiers" or "Leverage & Margin Tiers." 👉 Explore more trading strategies