Main conclusions
The funding rate determines the amount of periodic payments between holders of positions in perpetual futures contracts. These fees that traders pay or receive are called funding fees.
If, at the time of the financing round, the price of the perpetual futures contract is higher than the spot price of the underlying asset, then holders of long positions pay a financing fee to holders of short positions. And vice versa: if the spot price is higher than the futures price, then holders of short positions pay holders of long positions.
High funding fees can reduce a trader's profits or increase losses, which may increase the risk of liquidation.
Binance Futures employs a funding rate mechanism by keeping the perpetual futures contract aligned with the spot price of the underlying cryptocurrency to which the contract is linked. In this article, we will take a closer look at the features of funding rates and how this mechanism works during periods of high volatility.
Differences between traditional and perpetual futures
Derivatives contracts are available on Binance Futures that depend on the prices of cryptocurrencies in the spot market. Traditional futures contracts, also known as deliverable futures, have a fixed settlement date (usually every month or quarter). On the settlement date, the contract price and the underlying asset price are equalized and all open positions are settled.
Unlike traditional futures contracts, perpetual futures contracts do not have an expiration date, meaning traders can hold such positions indefinitely. Without a reliable price linking mechanism, contract and spot prices may not match each other.
Binance Futures has a mechanism that maintains a balance between futures prices and index prices in perpetual futures contracts. This is called the financing rate.
The funding rate determines the size of the periodic payments between traders with long positions or short positions in perpetual futures contracts during the funding round.
A funding round is a periodic event in which holders of long and short positions pay each other funding fees. These payments are typically made every eight hours and are called funding fees.
Please note that funding fees on Binance Futures are not awarded to the Binance platform, but to traders. This mechanism is used to maintain a balance between the prices of cryptocurrencies in the futures and spot markets.
How is the financing rate determined?
The funding rate determines which traders pay or receive funding fees, as well as what percentage of their positions will be used for the payout.
When the market is in contango (futures prices are higher than spot prices), the funding rate will be positive. In this case, holders of long positions in perpetual futures contracts will pay a funding fee to holders of short positions.
When the market is in backwardation (futures prices are lower than spot prices), the funding rate will be negative. The holders of short positions in perpetual futures contracts would then pay a funding fee to the holders of long positions.
How to check funding fees
Funding Fee: The amount a trader pays or receives at the time of funding. All information about paid and received commissions is available in the transaction history.
Funding Rate: The rate that determines the direction and amount of the funding fee. The funding rate is based on the difference between the price of a perpetual futures contract and the spot price of the underlying cryptocurrency.
Funding Fee Upper/Lower Limit: The maximum funding fee that can be charged to traders during a funding round (the higher the funding rate, the higher the fee).
Funding Interval: The frequency with which funding fees are paid between traders. Typically these payments are made every eight hours, but during periods of high market volatility the interval may be shorter.
Funding round: a fixed time at which funding fees are paid.
Funding rates, upper/lower limits on funding fees and funding intervals for various futures contracts can be checked on this page.
Correlation with market volatility
Coins with low market capitalization are considered riskier and more volatile in futures contracts due to low liquidity. Low liquidity means that there are not many buyers and sellers in a particular market and trading volumes are reduced, often leading to large price fluctuations.
The futures price of coins with low liquidity and low market capitalization may change dramatically during periods of high volatility. For this reason, Binance Futures is taking additional balancing measures.
Thus, Binance Futures uses various mechanisms to manage risks and maintain stability during periods of high volatility. These measures are aimed at keeping the prices of futures contracts consistent with the prices of the underlying asset in the spot market. Among other things, such measures include:
Increasing the maximum funding fee: Increasing the maximum funding fee allows you to increase the funding rate. This, in turn, will increase the funding fee and lead to more significant adjustments to the price of the perpetual futures contract. Increasing fees also motivates traders to act cautiously and reduce risk during periods of high volatility.
Shorter Funding Interval: By shortening the funding interval, Binance speeds up the funding rate determination and funding fee exchange. This allows the mechanism to more effectively maintain consistency between futures and spot prices.
Moreover, these measures discourage traders from taking excessive risks and encourage them to act cautiously when making trades during periods of high volatility.
What is the impact of high financing fees?
Paying high funding fees can negatively impact traders' trading performance.
Reduced Profit: A high funding fee can reduce the profit of the trader who pays the commission, especially if he holds the position for a long period of time. The higher the financing rate, the higher the financing fee, which means your overall profit will be reduced. If a trader receives a commission rather than pays it, then the funding fee will increase his profit.
Increased risk of liquidation: High funding fees can jeopardize a trader's position in the market. Funding fees are periodically deducted from a trader's margin balance and can therefore significantly reduce the amount of margin available to maintain an open position. If there is insufficient margin to cover the funding fee, the position will be liquidated.
Note
Be careful to monitor the funding rate and commission cap for the perpetual futures contracts you trade, especially during periods of increased market volatility. This will allow you to anticipate changes and adjust your trading strategy before traders pay each other funding fees.
Don't hold positions for too long: Funding fees are charged at regular intervals, so try not to hold positions for too long. If you have no open positions at the time of the funding round, no commission is charged. Holding a position overnight can result in multiple payouts.
Maintain Margin Balance: Make sure you have enough margin to cover your commission costs. A low margin balance can result in liquidation, so it is important to have enough margin to cover funding fees and potential losses.
Funding rates and funding fees play a critical role in maintaining contract prices in the perpetual futures market. Remember to keep an eye on the funding rate, funding fee cap, and funding rounds. In addition, you can adjust the position holding period and control the margin balance to significantly reduce the impact of funding fees on trading performance and reduce the risk of liquidation.
Additional Information
(Support) Introduction to Binance Futures Funding Rates
(Blog) What is the Futures Funding Rate and Why is it Important?
(Support) Liquidation procedure
(Support) What are perpetual futures and quarterly futures