A risk fund is used to prevent a trader's position from being automatically closed. The fund is used to improve the price of unexecuted close orders and to compensate for the loss of the closeout position in order to reduce the risk of being taken over by the automatic position reduction system. The increase in the amount of the risk fund comes from the fact that a close order is executed in the market at a price better than the breakeven price.
The role of the Risk Fund
MEME uses the Risk Fund and the ADL system to deal with short positions, with the Risk Fund serving to reduce the occurrence of ADLs.
Margin trading triggers a forced closeout when the margin level of a position falls below the maintenance margin. If the position cannot be settled at a price better than the breakeven price, this results in the loss of the position exceeding the starting margin invested by the trader (i.e. a covered position). In this case, the risk fund is used to cover the loss of the position that was closed.
Mechanism and application of risk funds
Each position has a corresponding Closeout Price and a Breakeven Price, which is the price at which the position's margin reaches the Maintenance Margin Requirement. In MEME, when the Margin Markup price reaches the position's Closeout Price, the position will be forced to close. And the forced close is settled using the latest market price of MEME. The Breakeven Price is the price corresponding to a position that has lost all of its starting margin.
When a forced close occurs, in the case of a long position, for example, if the position can be closed at a price better than the Breakeven Price, the remaining margin of the position will be added to the Risk Fund.
Also in the case of a long order, for example, if the opposite happens and the position is forced to close at a price worse than the Breakeven Price, the system will withdraw the amount from the balance of the Risk Fund to cover the loss of the position. If the Risk Fund is not sufficient to cover the loss of the position, the position will be automatically closed out and taken over by the system.
MEME forced closing mechanism: when the order is in the forced closing status of the underlying risk limit, the system will close all positions and the remaining funds from the forced closing will go to the Risk Fund.