FTX Liquidation Process Flowchart

Normal Trading

Say some account A deposits $1m of collateral to buy $5m of BTC futures. They are currently 5x leveraged, and a 20% BTC move away from bankruptcy. They can trade normally.

Account A:
Position: long $5m
Assets: $1m
Leverage: 5x
Distance from bankruptcy: 20%.

Orderly Liquidation

Now say that BTC drops 11%. A has dropped below Initial Margin Fraction (10%) and can no longer send orders.

Account A Position: long $5m
Assets: $450k
Leverage:11x
Distance from bankruptcy: 9%.
Cannot Send Orders

Now say that BTC drops another 5.5%, or 16.5% total. Account A has dropped below Maintenance Margin Fraction (4%). Liquidation orders are being sent to the market to sell account A’s BTC futures.

Account A Position: long $5m
Assets: $175k
Leverage: 29x
Distance from bankruptcy:3.5%.
Liquidation Orders Sent

Now say BTC drops another 2%, or 18.5% total. Account A has dropped below Auto Close Margin Fraction (2%). The account’s entire position and balances are being sold to the Backstop Liquidity Providers and Insurance Fund.

Account A Position: long $5m
Assets: $75k
Leverage: 67x
Distance from bankruptcy:1.5%.
Auto Closing Against Backstops

Price Gap

Finally, say that instead of the above, BTC gaps down 20.5% total, fast enough that FTX has not liquidated any of its position yet. Account A is now beyond bankrupt.

Account A Position: long $5m
Assets: -$25K
Leverage: N/A
Distance from bankruptcy: -0.5%.
Auto Closing Against Backstops
Insurance Fund Paying Out