Auto-Deleveraging (ADL)
Auto-deleveraging is a derivatives risk mechanism that can reduce profitable opposing positions when losses cannot be fully covered through normal liquidation processes.
✦ Key Insight
It can affect profitable traders during extreme market stress even when their own position is healthy.
✕ Common Misconceptions
ADL rules, ranking methods, and triggers are exchange-specific.
Detailed Explanation
In Practice
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Liquidation
Liquidation is the forced reduction or closure of a leveraged or collateralized position when required risk or collateral thresholds are breached.
Leverage
Leverage allows a trader to control a position larger than the capital committed to support it.
Open Interest
Open interest is the total number or notional amount of derivative contracts that remain open and have not been closed or settled.
Maintenance Margin
Maintenance margin is the minimum collateral or account equity a leveraged position must maintain to remain open under a venue's rules.
Insurance Fund
An insurance fund is a pool maintained by some derivatives venues to absorb certain losses arising from liquidations that cannot be closed at favorable enough prices.