Within the Standard Account, Derivatives trading encompasses both Inverse Contracts and USDT Perpetual Contracts. While these contract types differ in settlement currency, the liquidation process remains consistent. In Crypto Derivatives Trading, liquidation means that the entire position will be automatically closed and you will lose all your invested funds to the position, also known as the initial margin.

 

While the initial margin calculation may differ across different Derivatives products, this article aims to provide a detailed understanding of how the liquidation process operates in the realm of Derivatives trading under the Standard Account. For the liquidation process under the Unified Trading Account, please refer to here. 

How can liquidation be triggered?  

In the Standard Account, liquidation occurs when the Mark Price reaches the liquidation price, resulting in the closure of the position at the Bankruptcy Price (equivalent to the 0% margin price level). Essentially, this indicates that the unrealized loss has depleted the initial margin balance below the required Maintenance Margin level.

 

Using USDT as an example, here is a simple illustration.

 

 

Read More

Liquidation Price (USDT Contract)

Liquidation Price (Inverse Contracts)

Bankruptcy Price (USDT Contract)

Bankruptcy Price (Inverse Contracts)

Why Was My Position Liquidated Despite Having A Stop Loss?

Why was my position liquidated when the candlestick did not touch my liquidation price?

Liquidation Comparison: Isolated Margin Mode vs. Cross Margin Mode in a Standard Account

 

Liquidation Process for Derivatives Trading under Standard Account

When liquidation happens, Bybit uses laddered liquidation to reduce the required maintenance margin and avoid full liquidation. The liquidation process is as follows.

 

If the risk limit tier is already at the lowest tier:

1. Cancel all active orders that will increase the position size of the respective trading pair, this will help to release additional margin to save the position in the event of Cross Margin Mode. 

2. If it still doesn’t meet the maintenance margin requirement, that position will be closed at the bankruptcy price via the Liquidation Engine. 

If the risk limit tier is at the second tier or higher:

1. Cancel all active orders that will increase the position size of the respective trading pair while retaining the existing position to release additional margin.

2. The system will initially attempt to lower the risk limit tier to the minimum possible, aiming to decrease the maintenance margin rate necessary for the position, while keeping the position unaffected.

3. If the risk limit tier is still not at the lowest level, the system will then partially close the position by submitting a Fill-Or-Kill (FOK) order of the difference between the current position value and the lower margin tier value to partially close the position.

4. If the position is still subject to liquidation (i.e. does not meet the required maintenance margin level), the position shall be taken over by the liquidation engine and closed at the bankruptcy price.

Example

Let's assume the current market price for BTC is 20,000 USDT and Trader A holds a long position of 200 BTC. At the same time, he placed a long Limit Order for 1,000,000 USDT.

 

Position Value = Quantity × Price = 200 × 20,000 = 4,000,000 USDT 

Risk Limit Tier = Tier 3 (MMR = 1.5%)

Assuming the Mark Price reaches the Liquidation Price, liquidation is triggered. The liquidation process is as follows:

1. The system will first cancel the 1,000,000 USDT value of the active order under BTCUSDT to release an additional margin. 

2. The system will then lower the risk limit tier from Tier 3 to Tier 2, reducing the Maintenance Margin Rate required from 1.5% to 0.5%, while the position is not affected.

3. The system will partially close the positions to reduce the position value to 2,000,000 USDT, meeting the first risk limit tier and reducing the required maintenance margin rate.

 

The liquidation process unfolds in three (3) steps. It halts whenever the position has sufficient initial margin to meet the maintenance margin level.

4. If the position remains in the liquidation process until this point, it will be taken over by the liquidation engine and subsequently closed at the bankruptcy price.