Introduction to Perpetual Futures        

Futures Trading Basics        

  1. Why Trading Futures?        

Margin Trading        

  1. Margin Balance & Maintenance Margin        
  2. Stop Loss Pool        
  3. Margin Used(Cost)        
  4. Available Balance        
  5. Unrealized P&L        
  6. Force Liquidation        

Other Rules        

  1. Margin Rate        
  2. Funding Rate        
  3. More About Funding Rate        
  4. Maximum Unilateral Freezing        

Contract Specifications        

 

Introduction to Perpetual Futures

The BXB perpetual futures is a derivative contract whose underlying are cryptocurrencies. It’s a “Futures” like instrument, that traders can profit from the price appreciation of the cryptocurrencies by buying contracts or profit from the decline in the price of the cryptocurrencies by short-selling contracts. However, perpetual futures at BXB has the following characteristics that makes it a more advanced instrument than traditional futures:

  1. NO EXPIRATION DATE. Traditional futures always have an expiration date, that all trader’s positions would be forced to close and settled. Traders usually do what they called Roll Over to switch from the front month contract that is close to expiration to another contract in a further-out month. BXB perpetual futures has no expiration date so traders can hold their positions as long as they want (unless force liquidation).
  2. CROSS MARGIN. In the derivatives space, margin refers to the amount needed or maintain to enter into or hold a leveraged position. There are many margin mechanisms. The Cross Margin that BXB adopts is more convenient and efficient, that margin is shared among all the open positions over different contracts. The cross margin mechanism utilizes the full amount of funds in the account to avoid liquidations.

In addition, BXB Perpetual Futures offers:

  1. USDT AS SETTLEMENT CURRENCY. Taking BTC perpetual futures as an example, whereas in some other platforms BTC is usually used as the settlement currency, BXB perpetual futures adopts the USDT as the settlement currency. This allows traders conveniently calculating their P&L. For example, if a trader buys a perpetual future at the contract price of 4000, and when that contract price rises to 4100, the trader will gain 100 USDT profit (contract size not considered here for simplification).
  2. UP TO 100X LEVERAGE. BXB perpetual futures provide trading leverage which is up to 100X. Leverage is determined by the Initial Margin and Margin Used, and they specify the minimum fund trader must hold in account to enter and maintain positions. Leverage is not a fixed multiplier but rather a minimum fund requirement.
Futures Trading Basics

 

Let’s take an example for comparison between buying BTC and using BTC Futures.

Why Trading Futures?

Suppose the BTC price is 10000 USDT now, and a trader buys 0.01 BTC. So the cost is

10000 * 0.01 = 100 USDT

The next day BTC price rises up to 11000. So the profit is

(11000 - 10000) * 0.01 = 10 USDT

And the return% is the profit divided by the cost

10 / 100 = 10%

On the other hand, if the trader buys a BTC Future with 100X leverage when the BTC price is 10000 USDT, the cost is

10000 * 0.01 * 1% = 1 USDT

  1. 1% is the Margin Rate, corresponding to 100X leverage
  2. The 1 USDT cost is also called Margin Used.

The next day BTC price rises up to 11000. So the profit is

(11000 - 10000) * 0.01 = 10 USDT

And the return% is the profit divided by the cost

10 / 1 = 1000%

  Buying BTC directly Buying BTC futures
Trader’s Cost / USDT 100 1
Trader’s Profit / USDT 10 10
Trader’s Return 10% 1000%

Comparison between Buying BTC and Using Futures

Using BTC futures enable traders use much less fund in investment, thus allowing traders to earn much return (that’s a 100 times bigger) compared to buying BTC!

However, traders must keep in mind risk control is very important since futures can also magnify losses.

Suppose instead of rising up to 11000 USDT, the BTC price next day drops to 9500 USDT. The cost would remain the same in both cases. For buying BTC directly, the loss would be

(9500 - 10000) * 0.01 = -5 USDT

And the return% is the loss divided by the cost

-5 / 100 = -5%

For buying BTC Futures, the loss would be the same

(9500 - 10000) * 0.01 = -5 USDT

And the return% is the loss divided by the cost

-5 / 1 = -500%

 

  Buying BTC directly Buying BTC futures
Trader’s Cost / USDT 100 1
Trader’s Loss / USDT -5 -5
Trader’s Return -5% -500%

Comparison between Buying BTC and Using Futures

If the traders don’t have enough USDT in the account, futures position would be forced to close, which we called Force Liquidation.

That’s why risk control is very important in futures trading. traders need monitor their balance to make sure they have enough funds in the account. In other words, a trader's Margin Balance must be over Maintenance Margin (or Stop Loss Pool must be over zero) to prevent their positions from being liquidated. And this mechanism is what we called Margin Trading. We will introduce more about these concepts in the following chapter.

Margin Trading

Next we will go deeply into the Margin Trading concepts.

 

Total Balance
-Frozen Balance
-Unrealized Loss
Margin Balance
- Cost/Margin Used
Available Balance

 Structure of Balance

MarginBalance & Maintenance Margin

Margin Balance is the core concept in leverage trading. It works like Net Asset in accounting context. If Margin Balance is less than or equal to the required level, named Maintenance Margin(see more at Margin Rate), or equivalently, when Stop Loss Pool(see more at Stop Loss Pool) is less than or equal to zero, all futures positions would be forced to close.

Margin balance is equal to remaining of your Total Balance of USDT asset minus the Frozen Asset & Unrealized Loss.

Margin Balance = Total Balance - Frozen Balance - Unrealized Loss

             -Total Balances. The total amount of USDT asset you hold.
             -Frozen Balances. The amount of USDT asset that belongs to you but unable to be spent due to the following sources:
                    -Trading Orders you placed but not be filled or canceled yet. (see more at Maximum unilateral freezing)
                    -Withdrawal of USDT that are in process.
            -Unrealized Loss. Works like “Debt”. The amount of USDT of investment loss for your open positions of perpetual futures. This value is equal              to zero if you have Unrealized Profit or have no positions on perpetual futures. (see more at Unrealized P&L)

Margin Balance is heavily influenced by Unrealized Loss. When market goes against trader, causing too large Unrealized Loss, Margin Balance would decrease quickly. When Margin Balance decreases below Maintenance Margin, Force Liquidation would be executed.

Margin balance and Maintenance Margin are not directly displayed in BXB. Instead, BXB provides a much easier indicator, Stop Loss Pool, to help traders monitor their capital adequacy.

Stop Loss Pool

Stop Loss Pool is introduced for quickly monitor trader’s capital adequacy.

As mentioned above, when Margin Balance drops below Maintenance Margin(see more at Margin Rate), all futures position would be forced to close by the exchange(see more at Force Liquidation). Traders always have to keep their margin balance above the maintenance margin to prevent force liquidation. Calculation of Margin Balance and Maintenance Margin and are not so easy. In order to quickly help clients to better and quickly evaluate his/her own capital adequacy, BXB provides an indicator for traders called Stop Loss Pool.

Stop Loss Pool = Margin Balance - Maintenance Margin

So we can see that

Stop Loss Pool > 0 is equivalent to Margin Balance > Maintenance Margin

Keeping Stop Loss Pool over zero is very important. When Stop Loss Pool is less than zeroForce Liquidation would be triggered.

Margin Used(Cost)

Margin Used(Cost) is the accumulated amount of initial margin for trader’s current open positions of perpetual futures. It’s also called “Cost” in margin trading context because this part of funds is occupied so traders cannot use it to open new futures positions until they close positions.

BXB applies Margin Rate(see more at Margin Rate) mechanism to determine the cost of the position that the cost will always be a percentage of the average open price of perpetual futures contract. That percentage is called Initial Margin Rate (see more at Margin Rate).

     Margin Used(Cost) = Average Open Price of Positions x Contract Size x Initial Margin Rate x Number of Positions

For example:

  • The Initial Margin Rate is 1% and contract size is 0.01 BTC per contract.

  • The trader buys a contract at 3100 USDT, then the Margin Used/Cost would be 0.31 USDT (3100 USDT/BTC * 0.01 BTC/contract * 1% * 1 contract = 0.31 USDT).

  • Then the trader buys another 2 contracts at 3400 USDT, then the Average Open Price of Positions is 3300, Margin Used/Cost is 0.99 USDT (3300 USDT/BTC * 0.01 BTC/contract * 1% * 3 contract = 0.99 USDT).

In the above example, the average open price of positionsis 3300 USDT, so the average Cost is 0.33 USDT. When the trader sells 1 contract, the Margin Used/Cost would be reduced to 0.66 USDT, as follows:

        Then the trader sells 1 contracts at 3800 USDT, the average cost stays 0.33 USDT, then the Margin Used/Cost is 0.33*2=0.66 USDT for 2 open positions.

 

Available Balance

Available Balance is the remaining of Margin Balance minus Margin Used. It can be regarded as trader’s current usable asset for placing new orders and withdrawal.

Available Balance = Margin Balance - Margin Used

Available Balance is NOT always above zero. It is heavily INFLUENCED by trader’s Unrealized Loss. When Available Balance is less than or equal to zero, traders cannot open new futures position.

When market goes against trader, causing too large Unrealized Loss, both Available Balance and Margin Balance would decrease quickly. When Margin Balance decreases below Maintenance Margin, Force Liquidation would be executed.

Unrealized P&L

The value of trader’s open positions of perpetual futures varies as the price of perpetual futures changes, causing profit and loss. Since this value is not realized in “Cash” but just on account, we call this value Unrealized P&L (short for Unrealized Profit & Loss). If Unrealized P&L is above zero, we call it Unrealized Profit, if it’s below zero we call it Unrealized Loss.

Unrealized P&L = (Market Price -Average Open Price of Positions) x Contract Size x Number of Positions

If you have positive positions (i.e. you buy a BTC futures), you have unrealized profit when the futures market price is above your average open price of positions, and unrealized loss when the futures market price is below your average open price of positions. Vice versa for the case of having negative positions (i.e. you sell a BTC futures).

Force Liquidation

Force Liquidation would be executed when trader’s Stop Loss Pool ≤ 0or Margin Balance ≤ Maintenance Margin(see more at Margin Rate). The goal of Force Liquidation is to release more funds to increase your Margin Balance or close positions to decrease Maintenance MarginIt would be executed as the following procedures:

  1. BXB would cancel all trader’s unfilled orders that freeze USDT asset (Open orders that freeze other cryptocurrencies like BTC and ETH wouldn’t be affected) to release USDT cash to increase Margin Balance. If Margin Balance is then above Maintenance Margin(or Stop Loss Pool > 0), the Force Liquidation would be terminated; otherwise it would go to step 2.
  2. BXB would close all trader’s perpetual futures’ positions using market orders to decrease maintenance margin (Trade price would be 2% within last price ). What’s more trader would be charged of Force Liquidation Fee (number of forced closed positions * average open price of positions * Contract Size * 0.1%) and it would be deposited to Insurance Fund.(Insurance Fund is used to compensate for traders’ loss when trader having negative asset balance due to force liquidation)

BXB provides Risk Notification Email System to notify traders for insufficient margin. It would be triggered by monitoring trader’s Stop Loss Pool/Cost ratio.

  1. Force Liquidation Warning Email: When the ratio of Stop Loss Pool & Total Cost of Positions drops to or below 30% (StopLossPool / Cost < 30%), the trader would receive a risk warning email. Traders would receive only 1 Force Liquidation Warning Email for one hour, to prevent receiving too many emails when market is volatile.

image1

  1. BXB Forced Liquidation Notice: If the trader’s Stop Loss Pool drops to or below zero, that means the margin balance is below or equal to the Maintenance Margin, and force liquidation would be executed.

image3

Traders always have to remember to keep their Stop Loss Pool over Zero to prevent force liquidation.

Other Rules

Margin Rate

BXB applies Margin Rate mechanism that initial margin and maintenance margin required will always be a percentage of the trade price of perpetual futures.

Also the value of the Margin Rate would INCREASE when trader’s has very large open positions. This is called Ladder Margin Ratio.

Taking BTC perpetual futures as example:

 

Number of Positions +

Number of Open Order Volumes

Initial Margin Rate Maintenance Margin Rate
<1000 1.0% 0.5%
[1000,2000) 2.0% 1.0%
[2000,3000) 3.0% 1.5%
[3000,4000) 4.0% 2.0%
... ... ...

 * Maintenance margin rate is always equal to 50% x Initial Margin Rate

Example:

  • The trader holds 200 BTC perpetual Future buy positions(Contract Size is 0.01), and the average open price of position is 6000. At this time, the trader’s margin used  = 6000 x 200 x 1% x 0.01 BTC = 120 USDT, maintenance margin = 120 x 50%= 60 USDT
  • Now the trader buys another 900 contracts BTC perpetual Futures at the price of 6600. At this time, the number of positions held by the trader will be 1100 (>1000), so the initial margin rate will be 2.0% and maintenance margin rate would be 1%. Therefore, the trader’s margin used = (6600 x 900 + 6000 x 200) x 2% x 0.01 BTC= 1428 USDT, maintenance margin = 1428 x 50%= 714 USDT

Funding Rate

Futures’ price must be close to the price of spot market as to be a meaningful investment tool. This is guaranteed by Price Convergence. In traditional market, as the futures get closer to expiry, the prices of the futures contract and the spot contract will naturally converge due to settlement. BXB Perpetual Futures adopts a different Price Convergence Mechanism. Everyday at 4:00:00, 12:00:00 and 20:00:00 (UTC+8) known as Funding Timestamps, for each perpetual contract BXB will calculate it’s Funding Rate (a rate measuring the spread between spot contract and perpetual futures) and fundings may happen to traders.

The calculation of Funding Rate can be divided into the following 2 steps:

  1. Calculate Spread Rate of the contract

 Spread Rate = (Marking Price of Futures / Marking Price of Spot) -1

       2. Calculate Funding Rate

    • If the Spread Rate of the contract is above 0.1% at funding timestamps, traders holding buy/sell positions will be charged of/receive funding.
                                                                           Funding Rate = min(Spread Rate - 0.1%, 0.25%)
    • If the Spread Rate of the contract is below -0.1% at funding timestamps, traders holding buy/sell positions will receive/be charged of funding.

Funding Rate = max(Spread Rate + 0.1%, -0.25%)

                  c. If the Spread Rate of the contract is between ± 0.1% at funding timestamps, no funding would happen.

        Funding Rate = 0

Notice: Funding Rate can be either positive or negative.

When we have the Funding Rate, traders can calculate the exact amount he/she will receive or be charged at  timestamps.

Funding Amount = abs(Position Size * Contract Size * Marking Price of Spot * Funding Rate)

Fundings in different scenarios.

  Funding Rate > 0.1%  Funding Rate within±0.1% Funding Rate < 0.1%
Holding Buy Positions Be charged of Funding Amount No Fundings Receive Funding Amount
Holding Sell Positions Receive Funding Amount No Fundings Be charged of Funding Amount

 

Traders can always check the estimated Funding Rate at BXB Desktop Client/App, as shown in the following. 

image2

In a situation like the above, if the trader has 2 positions of BTC perpetual futures, he/she is expected to receive (2*0.01*10604*0.25%)=0.5302 USDT on the next funding timestamp. If the trader has -3 positions of BTC perpetual futures, he/she is expected to be charged of  0.7953 USDT on the next funding timestamp

More About Funding Rate

  1. How to calculate Marking Price of Spot/Futures?

Marking Price of Spot/Future is the volume-weighted average price(VWAP) of the 15 minutes data before the funding timestamp moment. They are the Fair Prices BXB used to calculate Spread Rate and Funding Rate.

  1. How Funding Rate help price convergence?

When funding rate is small, Marking Price of Spot and Futures are at “convergence state”, therefore no funding will occur; When funding rate is away from zero, an arbitrage opportunity would occur and traders can take advantage of that by buying when it’s negative and selling when positive, therefore contribute to the convergence of the Spot and Futures prices.

Maximum Unilateral Freezing

Trading system would freeze some of trader’s asset while trader have unfilled orders. In order to improve capital utilization efficiency, BXB applies Maximum Unilateral Freezing when traders placing both selling orders and buying orders. In detail,

      1. When trader has both selling orders and buying orders, for each of buy direction and sell direction:

          a. Calculate the Maximum Possible Positions the trader could have.

          b. Pick the appropriate New Initial Margin Rate corresponding to the Maximum Possible Positions.

          c. Calculate the Frozen Amount:

                          Ⅰ.If the direction is the same as the direction trader’s current positions,

                               Frozen Amount = Total Order Volume * Average Order Price * New Initial Margin Rate * Contract Size + Margin Used Adjustment

                           Ⅱ. If the direction is opposite to the direction of trader’s current positions,

                                      ① Total Order Volume ≤ number of current positions,

          •   Frozen Amount = 0

                                      ② Total Order Volume > number of current positions,

          •  Frozen Amount = (Total Order Volume - number of current positions) * Average Order Price * Contract Size *  New Initial Margin Rate

       2. Pick the maximum of the two to be the Final Frozen Amount.

Notice: Margin Used Adjustment is the adjustment due to change of Initial Margin Rate. It is equal to (New Initial Margin Rate -  Current Initial Margin Rate) * current number of positions * contract size * average open price of position. It’s zero if Margin Ratio stays the same when positions turns to maximum possible positions.

Example:

  • The trader holds 500 BTC perpetual long contract positions, and the average open price of positions is 6000.
  • The trader places another 600 buy orders of BTC perpetual Futures at the price of 6100, and it’s an open order. At this time, the maximum possible positions for buy is 1100, the applicable initial margin rate is 2.0%, thus the Frozen Amount for Buy= (600 x 6100 x 2% + 500 x 6000 x (2% - 1%)) x 0.01 BTC = 1032 USDT
  • The trader places another 1200 sell orders of BTC perpetual Futures at the price of 7000, and it’s an open order. At this time, the maximum possible positions for sell is -700(net sell), the applicable initial margin rate is 1.0%, thus the Frozen Amount for Sell = 700 x 7000 x 1% x 0.01 BTC = 490 USDT
  • According to the principle of maximum unilateral freezing, the trader’s frozen amount would be 1032 USDT.

Contract Specifications

BXB has released Perpetual Futures for BTC and some other cryptos. Take BTC as an example, the contract specification is as follows.

Contract Code FBTC
Margin Mechanism Cross Margin
Initial Margin Rate 1.0%
Maintenance Margin Rate 0.5%
Interval for Margin Rate Change 1000 (Margin Rate adjusts every 1000 contracts more held)
Initial Margin Rate Change 1.0% (Initial Margin Rate increases 1% for every 1000 contracts more held)
Maintenance Margin Rate Change 0.5%  (Maintenance Margin Rate increases 1% for every 1000 contracts more held)
Funding Timestamps 4:00:00, 12:00:00, 20:00:00 (UTC+8)
Contract Size 0.01 BTC/Contract
Unilateral Transaction Fee 0.025% (Paid in BXT)
Corresponding Spot Market BTC/USDT Market at BXB
Minimum Order Size 1
Maximum Order Size 1000
Position Limit 1000
Order Price Range for Maker* Last Price ± 30%
Order Price Range for Taker* Last Price ± 2%
Ticksize 0.1 USDT

Contract Specifications for BTC Perpetual Futures

Maker:
When a trader places a limit order that goes on the order book partially or fully, any subsequent trades coming firm that order will be as a “maker.”
These orders add volume to the order book, helping to "make the market," and are therefore termed the "maker" for any subsequent trades.


Taker:

When a trader places an order that trades immediately, by filling partially or fully, before going on the order book, those trades will be "taker" trades.
Trades from Market orders are always Takers, as Market orders can never go on the order book. These trades are "taking" volume off of the order book, and therefore called the "taker."