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Insurance fund

A venue's reserve that absorbs losses when a liquidated position is closed worse than its bankruptcy price, protecting winning traders from clawbacks.

When the liquidation engine takes over a position, it tries to close it in the market. Closing better than the bankruptcy price leaves a surplus, which grows the fund; closing worse leaves a deficit, which the fund pays.

Most venues publish the balance, and it is worth watching. A fund growing steadily suggests liquidations are being handled cleanly; one draining fast during a crash means the next stop is auto-deleveraging, where profitable traders have positions forcibly closed to balance the books.

A fund that grows very quickly is not automatically good news either, since it can mean liquidations are being executed at prices unfavourable to the liquidated trader. Either way it is a venue-level solvency signal that most traders never check.

Related: auto-deleveraging, liquidation, perpetual-futures, exchange-insolvency-risk

Educational only, not advice. Spotted an error? Post in Site Feedback.