What is Cross Margin Isolation? на сайте Nedvio

Cross margin isolation is a risk management feature offered on crypto margin trading platforms and exchanges. It allows traders to manage their risk across all their open positions rather than on a per-position basis.

With cross margin isolation, a trader’s entire margin balance is shared between all their open positions. This means that if the margin level of one position falls below the liquidation level, the margins from other positions can be used to prevent liquidation.

Cross margin effectively isolates a trader’s entire portfolio from liquidation risk, rather than isolating each position. This gives traders more flexibility in how they use their capital across multiple trades.

How Cross Margin Isolation Works

On exchanges with cross margin isolation, traders do not assign margin to specific positions. Instead, their entire margin balance forms a pooled amount that covers all positions.

The exchange calculates a trader’s total margin level as:

(Equity + Unrealized P/L) / Total Position Value.

If this margin level falls below the liquidation level, typically around 15-20%, the trader’s positions will start to get liquidated.

With cross margin, liquidations begin with the position that has the largest loss. The exchange closes parts of this position in order to bring the trader’s total margin level back above the liquidation threshold.

If closing the losing position does not restore the margin level, other profitable positions will start to get liquidated as well. This continues until the trader’s account equity meets the maintenance margin requirements once again.

Benefits of Cross Margin Isolation

The main benefits of using cross margin isolation are:

• Lower liquidation risk — With per-position margining, a single trade getting close to its liquidation level can trigger a margin call. With cross margin, liquidity across positions is shared, making liquidations less likely.
• More efficient use of capital — Traders can allocate capital across multiple positions without needing to assign fixed margin amounts per trade. Their entire balance provides protection, allowing better leverage utilization.
• Ability to hedge positions — Traders can hold both long and short positions to hedge their bets. With per-position margin, this is difficult as separate margin requirements would need to be met.
• Easier risk management — Cross margin simplifies risk management as traders only need to watch their overall margin level rather than individual position risks.

Limitations of Cross Margin Isolation

While cross margin isolation has its benefits, there are some limitations to consider as well:

• Potential for large, correlated losses — Since margins are pooled across all positions, traders with highly correlated trades can experience outsized losses if the market moves against their portfolio.
• Less control over leverage — With fixed margin per position, traders have more control over how much leverage they use on each trade. Cross margin makes this harder to manage.
• Risk of cascade liquidations — If margin levels get too low, cascade liquidations can rapidly eliminate an entire portfolio. Per-position margin makes it easier to close troubled positions in isolation.
• Requires strict risk management — Cross margin places responsibility on the trader to manage risk through position sizing and hedge correlations. Without discipline, losses can snowball rapidly.

Implementing Cross Margin Isolation

Major exchanges like Binance, OKEx, and Huobi offer cross margin isolation. To use it:

1. Select cross margin account — On account settings, choose cross margin rather than isolated margin account type.
2. Deposit funds — Fund the account wallet with enough capital to meet margin requirements for planned positions.
3. Open positions — Buy and sell as desired across any trading pairs, without needing to assign margin.
4. Monitor margin level — Watch the total account margin level and take actions before it reaches the liquidation zone.
5. Manage risk — Use stop losses, hedge correlations, limit position sizes, and top up margin to lower liquidation risk.

Conclusion

Cross margin isolation can be a useful tool for experienced traders with robust risk management strategies. By sharing margin across all positions, it provides higher leverage, capital efficiency and makes hedging easier. However, poor risk controls can also amplify losses in a cross margin account. Traders should weigh its advantages and disadvantages closely.