What are Insurance Funds?
Insurance funds are safety nets that protect bankrupt traders from adverse losses and ensure that the profits of winning traders are paid out in full. The primary purpose of an insurance fund is to limit the occurrences of counterparty liquidations. In counterparty liquidations, positions of opposing traders are automatically liquidated to cover for a bankrupt trader’s position. In these situations, opposing profitable positions with high leverage are likely to receive counterparty liquidations. Insurance Funds solve this issue by using the collateral from fees of non-bankrupt users to cover losses of bankrupt users (negative balance accounts).
How do Insurance Funds work?
In cases where a trader in liquidation (defined as collateral < maintenance margin) has less than 0 USDT after all his positions are liquidated, or is otherwise unable to liquidate positions, the trader is bankrupt, and Binance will need to take over the remaining positions.
In the majority of these cases, Binance will use the Insurance Fund to take over the positions and offload them onto the market gradually. The Insurance Fund will collect liquidation fees from users that do not result in bankruptcy. If the insurance fund is unable to accept positions from the liquidations, counterparty-liquidation will occur.
The Insurance Fund will be subjected to the following rules:
The fund will have a maximum net notional position check. The fund will not be allowed to exceed a predefined position notional on the market; by default, this is 100% the size of the insurance fund. Any positions that would increase beyond the max notional will be subjected to counterparty-liquidation. The insurance fund will offload positions according to a preset algorithm. All events that normally require intervention by the insurance fund will instead go into counterparty-liquidation before the fund could take positions.
You can access the insurance fund balance (USDT or BUSD) of BTCUSDT, ETHUSDT, BTCBUSD, ETHBUSD, and all other futures contracts by clicking [Information] - [Insurance Fund History].
Alternatively, you can directly visit Insurance Fund History.