> For the complete documentation index, see [llms.txt](https://docs-v2.fermilabs.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs-v2.fermilabs.xyz/trading/margin-requirements.md).

# Margin Requirements

Risk management is handled through liquidations. The current implementation uses direct liquidation orders rather than a separate insurance fund or ADL mechanism.

#### Margin Requirements

Two margin thresholds exist per market:

| Margin Type     | Purpose                      | Typical Ratio  |
| --------------- | ---------------------------- | -------------- |
| **Initial**     | Required to open positions   | 10% (1000 bps) |
| **Maintenance** | Minimum to avoid liquidation | 5% (500 bps)   |

Margin requirements are calculated as:

```
required = notional * margin_ratio / 10,000
notional = abs(base_position) * mark_price
```

#### Tiered Leverage

Large positions face higher margin requirements:

```rust
LeverageTier {
    notional: u64,              // Position size threshold
    initial_margin_ratio: u64,
    maintenance_margin_ratio: u64,
}
```

When position notional exceeds a tier threshold, the higher ratios apply.

#### Liquidation Detection

Accounts are checked against maintenance margin:

```rust
equity = collateral + sum(unrealized_pnl)
liquidatable = equity < maintenance_margin + reserved_margin
```

Where:

* `unrealized_pnl = base_position * mark_price - quote_spent`
* `reserved_margin` = margin locked for open orders

#### Liquidation Order Generation

For each under-margined account:

```rust
for position in account.positions:
    if position.base_position != 0:
        order = Order {
            order_id: LIQUIDATION_ORDER_START + counter,  // Bit 63 set
            side: opposite(position.direction),
            price: mark_price,
            quantity: abs(base_position),
        }
```

Liquidation orders:

* Have order IDs starting at `1 << 63` (bit 63 set) for identification
* Are priced at current mark price
* Close the entire position
* Process through the normal matching engine

#### Position Lifecycle

Trades affect positions in three ways:

| Effect       | Condition                            | Behavior                                         |
| ------------ | ------------------------------------ | ------------------------------------------------ |
| **Opening**  | No position or same direction        | Increases `base_position`, adds to `quote_spent` |
| **Reducing** | Opposite direction, partial close    | Decreases position, realizes PnL                 |
| **Flipping** | Opposite direction, exceeds position | Closes position, opens opposite side             |

Realized PnL calculation on close:

```
pnl_per_unit = exit_price - entry_price  // for longs
pnl_per_unit = entry_price - exit_price  // for shorts
realized = pnl_per_unit * quantity_closed
```

#### Reserved Margin

Margin is reserved when orders are placed and released when filled:

```rust
// On order placement
reserve_margin_for_order(account, market, price, quantity)

// On fill
release_margin_reservation(account, required_initial_margin(notional))
```

This prevents over-commitment of margin to multiple orders.


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