BSX RiskMatrix

Waterfall approach to risk to ensure BSX stays solvent during volatile markets

BSX has built a robust and battle-tested risk engine to maintain that the exchange is solvent and fair for all traders on the platform. Since BSX is portfolio margined by default, your positions can share collateral meaning your risk of getting liquidated is greatly reduced. BSX follows a three-step, waterfall approach when a trader's Account Equity is at or below their Portfolio Maintenance Margin.

  1. Liquidation

Liquidations are the first line of defense for the exchange and take place when a trader's account equity has dropped below their portfolio maintenance margin level. When this takes place, BSX’s liquidation engine will liquidate the trader's position directly on the order book.

  1. Insurance Fund

If a trader's account equity turns negative then the insurance fund will be the first line of defense to get the trader's account back to 0. The insurance fund is initially seeded by the BSX team and will then be capitalized by liquidation penalties traders incur when their positions are liquidated.

  1. Auto-Deleveraging (ADL)

BSX will employ the Auto-Deleveraging process as the last line of defense to keep the exchange solvent. Auto-deleveraging (ADL) is the final step taken during liquidations and only takes place when the Insurance Fund cannot backstop bankrupt accounts. During an ADL process, BSX will de-lever the highest profitable or highest levered traders on the exchange. The funds taken during a de-leverage are used to pay back negative equity accounts so the exchange can remain solvent.

ADL Calculations

The ADL engine is constantly working in the background and ranking traders' accounts based on their profit and leverage. Traders with the most profit and leverage will be at the front of the queue for deleveraging. The following is the calculation used when determining which accounts to deleverage:

i=traderi = \text{trader}

\text{PnL %}_i = \frac{max(0, \text{Unrealized PnL})}{max(1, \text{USDC Balance})}

Margin Ratioi=Maintenance Margin)(USDC Balance+Unrealized PnL)\text{Margin Ratio}_i = \frac{\text{Maintenance Margin})}{(\text{USDC Balance}+\text{Unrealized PnL})}

\text{ADL Score}_i = \text{PnL %} * \text{Margin Ratio}

ADL Rankingi=rank(user.ADL Scorei)Total User Count\text{ADL Ranking}_i = \frac{rank(user.\text{ADL Score}_i)}{\text{Total User Count}}

This waterfall approach is a critical process for leveraged trading exchange to ensure that the amount that a trader loses is not greater than the amount they posted as collateral for that position and that any accounts that go into bankruptcy can be paid back and made whole.

Liquidation Process

The liquidation process on BSX begins once a trader's Account Equity ≤ Portfolio Maintenance Margin. When this happens the trader's liquidation risk is also at 100% or greater and that is when BSX’s liquidation engine will kick in. The following is the process the liquidation engine will take when liquidating the position:

  1. Traders account goes into liquidation mode and is taken over by the liquidation engine. In this mode, the trader is not able to open any new orders, and all their open orders are canceled.

    1. If the trader account equity can go back above the portfolio's initial margin level then the liquidation will be stopped

  2. The liquidation engine will begin incremental liquidations of the trader's position(s) directly onto the book using a liquidation time-spaced algorithm. Right now this is done by a BSX liquidation bot but we plan on democratizing this bot soon. Every notional amount of the position(s) that is liquidated will incur a liquidation fee

    1. If a trader's account equity can go back above the portfolio's initial margin level then the liquidation will be stopped. In this case, only a partial liquidation was completed

  3. If the position(s) is not able to be liquidated through the book and a trader's account goes into bankruptcy, the liquidation engine will call on the insurance fund to perform a trade and make the trader's account whole. In this situation, a liquidation fee is also charged

  4. If the insurance fund runs is not able to backstop traders bankrupted accounts then the third and final step of the waterfall structure will start. This process is called Auto-Deleverging (ADL) which is the last line of defense to keep the exchange solvent.

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