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3) Let's say that some entity (X) has $2b of collateral and puts on a $3b short in a contract trading at $1 (so 3b contracts). Markets start to go up in price--eventually they're at $1.33. Now the trader has: position size: 3b contracts = $4b collateral: $1b

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4) X now has a huge position on, and is fairly leveraged--$4b notional, 4x leverage. Another 25% move and the trader is underwater; each 25% move beyond that costs _someone_ -- the exchange, or insurance, or whatever is backstopping it -- about $1b!

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5) The traditional margin model says: reach out to X and warn then to top up, _or else_. But X has at least a business day to top up. If it's a Friday evening, then they have at least 72 hours. Except there's a war going on in Ukraine, and commodity prices are skyrocketing.

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6) By the time the next business day ends, there have been 3 days for volatility. A 25% move bankrupts the trader. A 50% move means that someone's out $1b of insurance. That could happen in 3 days! And, in fact, it did, in Nickel. (Note the weekend gap!)

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7) There are really two problems here. First, the exchange margin calls based on _time_, not _price_. What does that mean? Well, when X reaches 6x leverage on a $4b position, it's time to issue a margin call.

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8) The goal of the margin call: before X runs out of collateral, either (a) X tops up their collateral (b) X reduces their position Once the contract reaches a price of $1.66, X will fully run out of collateral; any move beyond that and X goes _negative_ account value.

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9) Which means--the goal is for X to de-leverage before the contract reaches $1.66. Time is arbitrary! The contract could move 1% in 3 days, or it could move 150%. What matters is the price. You have to close down before contracts hit $1.66.

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10) Say that closing down X's position--buying back 3b contracts--would have 10% impact. The means that, if X isn't going to top up, you have to start reducing their position before the contract hits around $1.50--adding 10% impact to that would impact markets to around $1.66.

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11) So in this hypothetical, you have to begin liquidating X's position when the contract hits $1.50. completely independently of _when_ that happens. If a week later the contract is at $1.35, it's fine. But if a minute later it's at $1.50, it's time to start closing down X.

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12) This is how liquidations work on FTX--we begin de-leveraging a position as soon as it's running too low on collateral, independent of how long it's been. We *have* to--that's the only way we can stop things like this! Sometimes 1 day is too long.

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Official

The LME will reopen its nickel market on Wednesday, more than a week after the exchange suspended trading and canceled about $3.9 billion of transactions as it grappled with an unprecedented short squeeze trib.al/DvBvLjj

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13) Anyway, that's one of the core innovations of digital asset exchanges--real-time margining. The other problem that LME Nickel ran into was the weekend. The exchange wasn't open for a few days, and so the _fastest_ they could margin call was 72 hours.

7:05 AM · Mar 15, 2022Twitter Web App

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14) This exacerbated the original problem--instead of eating 1 day's risk, they were eating 3 days'. Another difference with crypto markets, which operate 24/7--allowing 24/7 margin calculations and de-leveraging.

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15) These are some of the issues at the heart of our

application: comments.cftc.gov/PublicComments

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16) I'll be at the FIA Expo this week to talk about FTX, margin, futures, and our CFTC submission!

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Sybren de Vries

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Realtime margining is not an innovation of dig assets exchanges, has been around for ages mainly on FX and CFD platforms targeting retails, which is also why that is the norm in dig assets.

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Bro can you help me

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you missed the most problematic issue and that's the inability of the exchange to accept (and for the company to deliver) nickel metal to close out the position.

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and

LME currently can only accept Class 1 Nickel. There are few companies that can deliver Class 1 Nickel (in China only Yantai and Jinchuan have the ability to LME warehouses.

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