Gemini offers the ability to set maximum leverage limits on each derivatives account. This leverage setting impacts that amount of Initial Margin that is required to support positions. The Margin Maintenance Limit is a function of this Initial Margin and determines that point at which the positions in the account would need to be closed through liquidations. As the Initial Margin requirement is increased as the maximum leverage is decreased, so too is the Margin Maintenance Limit. A higher Margin Maintenance Limit results in a higher (for long positions) or lower (for short positions) Estimated Liquidation Price. Therefore, it might seem counterintuitive to get liquidated on a smaller price movement, when the decision was made to reduce the risk being taken by reducing the leverage.
The counter to this is that whilst an account with lower maximum leverage would get liquidated on a smaller move, there is an expectation that this liquidation would not result in the account balance being at or near zero, post liquidation.
The maximum leverage curve is calibrated such that Gemini expects to be able to close the position without there being any loss on the account, noting that should this not be possible the Insurance Fund manages this shortfall. If less leverage is used, there is more Margin Maintenance Limit for the same size position. This position should therefore be closed and the account be above zero. So whilst the account may be liquidated on a smaller move, the expectation is that the account value will not be zero at the end of the liquidation and there is still some ability to re-enter positions at a later date with the residual capital.
Example:
Two customers each deposit GUSD 1,000 into their derivatives accounts. One account uses Max Leverage at 100x, the other has capped their Max Leverage at 20x. For the benefit of this example we will ignore trading fees.
Both accounts buy 1 BTCGUSD perpetual at 10,000.
Max Leverage 100x Account
Position: 1 BTCGUSD Perpetual
Margin Assets Value: 1,000
Mark Price: 10,000
Notional Position: 10,000
Initial Margin: 100
Margin Maintenance Limit: 50
Estimated Liquidation Price: 9,050
When the Mark Price reaches the Estimated Liquidation Price the Margin Assets Value will hit the Margin Maintenance Limit of 50. The Zero price is 9,000 and this is the price at which Gemini expects to be able to close the position based on the current price of 9,050, leading to a loss of 50 GUSD and the account balance will be 0.
Mark Price: 9,050
Unrealized P&L: -950
Margin Assets Value: 50
Zero Price: 9,000
Liquidation Price: 9,000
Balance post liquidation: 0
Max Leverage 20x Account
Position: 1 BTCGUSD Perpetual
Margin Assets Value: 1,000
Mark Price: 10,000
Notional Position: 10,000
Initial Margin: 500
Margin Maintenance Limit: 250
Estimated Liquidation Price: 9,250
When the Mark Price reaches the Estimated Liquidation Price the Margin Assets Value will hit the Margin Maintenance Limit of 250. The Zero price is again 9,000. However, as above Gemini expects the cost of closing a position of this size to be 50 from the current price, which is 9,250.
Mark Price: 9,250
Unrealized P&L: -750
Margin Assets Value: 250
Zero Price: 9,000
Liquidation Price: 9,200
Balance post liquidation: 200
The account with the lower leverage now still has 200 GUSD left in it that it can choose to re-enter a position at a new point in time.