# Automatic Deleveraging (ADL)

Automatic Deleveraging (ADL) is a critical risk management mechanism that activates when the insurance fund becomes insolvent and can no longer absorb liquidated positions. This documentation explains when ADL is triggered, how the process works, and how accounts are selected for deleveraging.

# Explanation

# What is Automatic Deleveraging?

Automatic Deleveraging (ADL) is a last-resort risk management mechanism that forcibly closes positions against other traders when the insurance fund can no longer fulfill its role. Unlike standard liquidations where the insurance fund absorbs the losing positions, ADL directly impacts other traders in the system by forcibly closing their profitable positions.

# When ADL is Triggered

ADL is triggered when the current marked price of the instrument reaches the insurance fund's bankruptcy price for that instrument.

Note that: unlike regular account liquidations, ADL can be triggered when the mark price is exactly equal to the bankruptcy price, not just when it falls below it. This allows the system to cap the mark price precisely at the bankruptcy level to initiate ADL without requiring the insurance fund to have a negative equity.

# Key Differences from Standard Liquidation

The ADL process differs from standard account liquidation in several important ways:

1. No Intermediate Checks: Once ADL is triggered, the entire process must be completed without intermediate checks. Unlike liquidations, the process doesn't stop if the insurance fund becomes solvent during execution.

2. No Liquidation Price Concept: The insurance fund has no margin requirement, so there is no concept of a liquidation price—only a bankruptcy price.

3. Forced Position Closure: ADL forcibly closes positions against other traders' opposite positions, even if there are no matching orders in the order book.

# Reference

# ADL Workflow

The ADL process follows these sequential steps:

1. Insurance Fund Bankruptcy Detection: System detects that the insurance fund has reached bankruptcy (zero equity).

2. Open Order Cancellation: All open orders on the insurance fund are canceled.

3. Account Selection for Deleveraging: Accounts with positions opposite to the insurance fund's positions are ranked according to the selection criteria.

4. Forced Position Closure: The insurance fund's positions are forcibly closed against the selected accounts at the current mark price until the insurance fund has no more open positions.

# Account Selection Criteria

Accounts are selected for deleveraging based on a strict priority order:

1. Leverage (Highest to Lowest): Accounts with the highest leverage are selected first.

2. Profitability (Highest to Lowest): Among accounts with the same leverage, those with the highest profits are selected first.

3. Balance (Lowest to Highest): Among accounts with the same leverage and profitability, those with the smallest account balance are selected first.

4. Account Number (Highest to Lowest): If all above factors are equal, newer accounts (higher account numbers) are selected first.

This selection process ensures that the most leveraged and profitable positions bear the impact of ADL before more conservative traders.

# Price Determination

During ADL, positions are closed at the current mark price. In a mark price cap scenario, this is equal to the insurance fund's bankruptcy price.

# Account Selection Example

Current state:

• Insurance fund position: Short 35 BTC
• Entry price: $38,000
• Balance: $10,000
• Current mark = Bankruptcy price = $40,000 (pnl = -$10,000)

Accounts would be selected in the following order: