Perpetual Futures Trading Guide

• Account assets (positive balances) - the total balance of assets held in a VALR sub-account, including any assets that have been purchased using borrowed funds
• Account debt (negative balances) - the total balance of borrowed funds in a VALR sub-account. This includes unrealised losses on futures positions and the value of futures positions at mark price.
• Account equity - the net balance in a VALR sub-account once the debt has been deducted from account assets, adjusted for futures unrealised PnL
• Account margin fraction - account equity in reference currency (weighted) divided by account debt in reference currency, adjusted for futures positions
• Auto-close margin fraction - account margin fraction below which an account’s debt and assets are transferred to our backstop program or the insurance fund, leaving the account with no further assets, debt, equity or positions
• Auto-deleveraging or ADL - a last resort for closing down bankrupt positions where the positions of accounts that are bankrupt are closed against profitable positions to limit further loss
• Balance in reference - the value of a balance converted to an equivalent reference currency value based on the mark price of the asset, adjusted for collateral weighting
• Collateral - the sum of account equity that can be reserved to borrow funds or collateralise futures positions
• Collateral weighting - a haircut applied to the mark value of an asset  to adjust its value when used as collateral for futures positions and spot debt
• Cross margin - a margin system where all the assets in an account that qualify as collateral (i.e. have a collateral weighting greater than 0) count towards collateral and are ultimately at risk of liquidation as the account’s spot debts and futures loss accumulate to approach the same value as the account assets.
• Free collateral - the value of account balances in reference currency that are not currently reserved to collateralise existing debt and/or positions
• Final PnL - the true profit or loss on a position as measured by the difference between open price and close price
• Index price - a fair market price for a particular trading pair calculated as a central price from an index of constituents
• Initial margin - the percentage of the order total that is required and will be reserved in account equity to take on a debt or futures position
• Insurance fund - a fund set up by VALR which can take on the debt and assets to close a margin position without impacting the order book and which can cover any losses incurred by positions that may have otherwise gone into a negative equity position
• Isolated margin - a margin system where only the initial margin for a leveraged trade is at risk of liquidation
• Leverage - a multiplier that can be used to calculate the maximum amount that can be borrowed against account equity
• Leverage multiple - the account debt in reference / account equity in reference (weighted)
• Liquidation - the act of forcing the closure of positions or selling off account assets to repay account debt
• Maintenance margin - account margin fraction below which an account will enter liquidation
• Margin - the amount of account equity that can be applied to a borrowed amount or to a futures position.
• Margin fraction - account equity in reference currency (weighted) / [account debt + positions in reference currency + unrealised perpetual losses]
• Mark price – a price used to value a futures position at its current value, calculated as the index price of the underlying spot market appropriately adjusted for the fair value of the perpetual contract. More details below.
• Market price - the median of best bid, best ask and last traded price of a trading pair
• Max leverage – the maximum multiplier on weighted account equity that can be leveraged for futures or spot debt
• PnL - Profit and loss
• Position at mark - The current value of a position held expressed as mark price * quantity
• Position at open - The opening value of a position held expressed as average entry price * quantity
• Position at session open - The previous valuation of a position held expressed as final mark price of the previous session * quantity.
• Reference currency - the currency into which all assets and debts are converted for margin calculations. Currently USDC
• Reducing order - an order that reduces the quantity of a position
• PnL session - each 24-hour day is split into 6 equal 4-hour sessions, at the end of which PnL is realised, starting from 00:00 UTC

We note that the glossary above may differ from the definitions contained in the Futures Terms of Service due to the simplified nature of the glossary.  In the event of any discrepancies, please rely on the definitions contained in the Futures Terms of Service.

Perpetual futures defined

Futures contracts are agreements to buy or sell a particular asset at a predetermined price on a specified future date.  Typically, futures contracts have an expiration date.  However, perpetual futures contracts have no expiry.

Because these contracts never expire, they utilise a mechanism called a "funding rate" to ensure that the price of the perpetual contract stays close to the underlying spot price.  In simple terms, if the futures price is higher than the spot price, those who are long (buyers) will pay funding to those who are short (sellers) and vice versa.  This mechanism encourages traders to balance the market.

Even though perpetual futures don't expire, traders can close their positions anytime.  The profit or loss is settled in real time into the trader's account upon closure.

Perpetual futures tend to track the spot price of the underlying asset closely.  This makes perpetual a good instrument for those who want exposure to an asset without holding it directly.

How perpetual futures trading works on VALR

When a futures order is matched, a position is opened, and account equity is collateralised equal to the initial margin requirement.

We’re going to present an example below.  Let’s say that your VALR account looks like this and you are trading on a 5x pair:

We buy exposure to 1 bitcoin through the BTCUSDC PERP pair.  The logical steps in this process are:

1. Place an order for 1 BTC on the BTCUSDC PERP pair that is matched, let’s say that happens at a mark price of 20,000;
2. A position is created with an average mark price of 20,000 and quantity of 1, the value of the position is, therefore 20,000;
3. 4,000 USDC in collateral is locked for this position (equal to 20% of the position at open);
4. The position will then incur unrealised losses if the mark price of BTCUSDC PERP drops below 20,000 and earn unrealised profit if the mark price increases above 20,000.

The account will look as follows after the trade:

Measurement of profit and loss

We settle futures PnL in the quote currency of linear perpetual pairs.  Profit and loss is ultimately settled through account balances as the difference between open price and close price multiplied by the quantity of the position. 

While a position remains open, unrealised PnL is measured based on the difference between mark price and entry price multiplied by quantity. Unrealised PnL is realised into account balances at every session close in order to afford accounts in profit the opportunity to access their profits, almost in real time.  The ultimate PnL on a position depends on the price at which the position is actually closed on VALR’s exchange.

Please note that this may mean that differences arise between unrealised PnL and final PnL upon closing a position.  This can happen where the futures contract is trading at a price that is very different from the mark price.

The impact of unrealised profit and loss

Unrealised PnL is calculated every 5 seconds based on movements in mark price.  Position at mark is compared to position at session open to calculate incremental PnL for the session in question.  PnL remains unrealised until the earlier of position closure (whether partial or full) and the end of the PnL session.

The value of unrealised PnL is incorporated into account equity such that margin fraction improves or deteriorates for unrealised profit or loss respectively. Unrealised losses are further included in account debt. 

If the mark price moves down to 18,000, we have incurred unrealised loss equal to 2,000 ((18,000 - 20,000) * 1)

The account will look as follows after the mark price is updated:

Note: you will notice that we have over-collateralised for unrealised loss by reserving $2,400 ($2,000 loss plus initial margin thereon of $400).  Further due to the mark price reduction, the collateral required to maintain the futures position alone has decreased from $4000 to $3600. This is done in case you require debt to make your unrealised loss whole when PnL is realised.

Realisation of PnL at the end of a PnL session

Assuming a position is held between PnL sessions, the value of unrealised PnL becomes realised at the end of the session.  This results in accounts in profit earning PnL that they can access for whatever purpose, while accounts incurring loss actually pay that loss from their collateral.

If the mark price remains at 18,000 by session close, my unrealised loss of 2,000 is converted to realised loss which impacts my account balances.

My account will look as follows after this change:

Note: now that PnL has run and been realised, collateralised balances are updated and reserved collateral reflects an accurate picture of the account’s current state. We have released the collateral that might have been required if the account had to borrow realised loss because it is now clear that no debt is required. 

Closing positions (partial and full)

Positions are measured based on their base currency quantity (refer to specific contract specifications at the end of this document).  When a position has been opened, any orders in the opposite direction for less than the quantity of the position are reducing orders and will result in final PnL as well as a reduction in position quantity.  

Partial reductions reduce the position and realises final PnL for the quantity that is closed. 

The final PnL on positions is calculated as:

LONG: (close price - open price) * quantity - trade fees to open and close position

SHORT: (open price - close price) * quantity - trade fees to open and close position

Using collateral that is different to the settlement currency

Linear futures are settled in the quote currency of the perpetual pair.  When an account incurs realised loss on futures positions, it is necessary for that account to pay that loss to accounts in profit in the settlement currency.  If the account with a realised loss does not hold sufficient balance in the settlement currency to cover losses, any loss over and above spot balance of the settlement currency is made whole by automatic conversion of the balances that are held by the account as locked collateral into the settlement currency. This occurs in preference of highest collateral weighting.  

Every hour, each perpetual contract has a funding payment where longs pay shorts if the contract is trading at a premium to the index, and shorts pay longs if the contract is trading at a discount to the index.  Funding payments are made in the quote currency of perpetual pairs and are added to/deducted from the account's balance each hour.

Positive funding rates denote cases where longs are expected to pay shorts, while negative funding rates denote cases where shorts are expected to pay longs. 

Funding payments are calculated as:

1. Compute the 24 hour time weighted average market price of the future
2. Compute the 24 hour time weighted average index price for underlying spot market(s)
3. Calculate: [(future - index) / index] / 24
4. Apply that rate to every position as funding rate * position quantity * mark price

We apply a minimum and maximum on funding rates as follows:

• If the rate is less than 0.0001% per hour, set funding rates to 0
• If the rate is greater than 1% per hour, set funding rates to 1%

VALR does not charge any fees on funding; funding is exchanged directly peer-to-peer.

Indices

We measure unrealised PnL based on movements in the mark price. The mark price is defined as the fair value adjusted index of spot prices from the most liquid trading venues for a particular pair.  In certain instances cross rates are calculated through multiple markets as a proxy for direct spot trading pairs.

All inputs into the index are equally weighted and outliers are excluded. 

Index inputs and mark price methodology can be found at the end of this document.

How we define leverage

On VALR, leverage is measured based on the total amount that can either be borrowed for spot debt and/or collateralised for futures positions.  To illustrate with an example, say you have an account with a balance of 1 BTC and nothing else.

On a pair with maximum leverage of 5x, an account can borrow a maximum to buy a further 5 BTC spot against collateral (ignoring collateral weightings).  Here you have an equity balance of 1 BTC and debt equal to 5x your collateralised equity balance.

If the 1 BTC is instead used purely for futures trade, then it is possible to gain exposure to a 5 BTC long or short position by collateralising 1 BTC in account equity (ignoring collateral weightings).

Applying collateral weightings

To calculate the collateral in a sub-account, all currencies in that sub-account are converted at mark price and multiplied by a collateral weighting.

The list of assets that can be used for margin, along with their collateral weightings, can be found here or queried via the currencies endpoint on our API: https://api.valr.com/v1/public/currencies.  

This means that, in practice, if you’re leveraging against BTC as collateral, you will not be able to leverage a full 5x the balance in reference, but rather 95% * 5 of the balance in reference.   

Isolating to a sub-account

Collateral is limited to the particular sub-account that is being used for trading with leverage, whether for spot margin or futures positions.  The equity in a different sub-account or the main account cannot be applied to cover a debt or futures position in a different sub-account.  This allows for flexibility in deciding when to isolate your leverage activity to a specific amount of capital.

Measuring leverage

The leverage multiple or margin fraction of an account is dynamic and will change based on movements in the mark price of collateral assets, spot debt and futures positions.  So how do we keep track of an account's current leverage, max leverage and funds reserved for leverage?

1. Balances in reference - the weighted balances in USDC of all qualifying assets held in a VALR account.  Assets with a 0 collateral weighting will have a 0 contribution to the asset balance in reference.  Assets with a weighting of 0 will not be sold to cover debt nor liquidated in the event of auto-close.
2. Total borrowed in reference - the balance of all spot debt converted to USDC in a VALR account.  This is not weighted and represents the current value of all debt in USDC currency so that the balance can be compared easily with asset balance in reference.
3. Total positions in reference -  the value of positions at mark
4. Unrealised PnL on positions - the value of unrealised PnL on positions
5. Unrealised loss on positions - if #4 is less than 0, then it is the absolute value of that figure. Otherwise 0.
6. Margin fraction - (#1 - #2 + #4) / (#2+#3+#5).  Margin fraction can also be considered your equity-to-debt ratio as a percentage.

When thinking about the above measures of leverage it is important to keep in mind some important thresholds:

1. Initial margin fraction = the initial amount of equity required to place an order divided by the total amount of the debt or futures position.  This equals 20% for an account with a max of 5x leverage because you require 1 part equity to 5 parts of debt and/or position.
2. Maintenance margin fraction = the % margin fraction below which your account is at risk of liquidation.
3. Auto-close margin fraction = the % margin fraction below which your account will be closed out through our backstop liquidity program or the insurance fund.  The entire position will be liquidated, leading to a loss of any excess equity for that particular account.

We use the above measures to monitor an account’s leverage over time and initiate liquidation when necessary. Margin fraction requirements for a specific pair can be seen under the relevant Pair Details. Margin fraction requirements for an overall account can be seen under the Leverage tab.

VALR’s margin engine measures balances based on assets actually held.

VALR’s margin engine constantly evaluates the amount that can be borrowed based on the assets actually held in an account. 

Our margin engine makes no assumptions regarding what assets will be held in an account after an order has been matched.  This means that when placing orders, please keep in mind that the value of the collateral is based on assets actually held and that when orders match and the mix of assets in the account changes, the value of collateral in a new currency will be re-evaluated.  

The implication is that collateral weighting might change depending on order matching.

Limits

Placing orders with leverage

The total quote value that can be placed for limit orders is bound by the value of collateral converted to reference after collateral weighting.

Price bands

Futures pairs have price bands, meaning that trade matches can only take place within 5% of the mark price of the contract, except in the rare scenario where a trade match is further away than 5% away from mark price but will result in an orderbook movement closer to mark price. 

Position and debt limits

For risk mitigation purposes we have a few limits. Please refer here for more details.

• We enforce limits on the total position a single account can hold.
• We enforce a global limit on spot debt across all currencies as well as a specific limit per currency.

When an account falls below its maintenance margin, the value of its equity has dropped far enough that the risk that assets in the account won’t cover the losses on positions is beyond acceptable limits.

Up-to-date margin information is available in real-time from both the UI and the VALR API. This is the source of truth for how healthy your account is when using leverage.

VALR aims to liquidate accounts well before there is a risk of permanent loss while also keeping markets in an orderly state.  We achieve this by gradually closing out positions.

The liquidation process is currently set up in 2 distinct stages that aim to keep an account above maintenance margin for as long as possible, reducing the impact of liquidation orders on our order books and allowing customers the opportunity to take action to reduce positions.

We don't currently push any notification for margin levels when at risk of liquidation. This is something that we will consider in the future.

Stage 1: Account falls below maintenance margin

If an account falls below maintenance margin, the account is now in liquidation.  During liquidation, the account holder cannot place or cancel orders and VALR’s liquidation engine is now in control of the account.  The following process is followed in this situation:

• All open orders for the account are cancelled in full;

Check whether the account is now above maintenance margin; 

If no, proceed to (b)

• Place an immediate or cancel (IOC) order for 10% of the total value of the largest position by pair, 3% deep from the same side of the order book.  That order size is currently bound to min $100 and max $25,000 per order;

Check whether the account is now above maintenance margin;

If no, proceed to (c)

• Place an IOC order for 10% of the total position size, 3% deep from the same side of the order book;

And so on until the account is above maintenance margin. 

Stage 2: Account falls below auto-close margin

If account margin fraction drops further to below auto-close margin then the account is “bankrupt” and stage 2 liquidation is enforced, which uses auto-deleveraging (ADL) to close positions for the bankrupt account and transfers any remaining assets and spot debts to the insurance fund.

In order to conduct ADL, all accounts with futures positions on one side of a contract are ranked from highest to lowest according to their leverage and profitability.

The rank is calculated as: PnL Percent * Margin Ratio.

PnL Percent: Unrealized PnL  / Account Equity

Margin Ratio:( (1 + MM%) * Spot Debt + (1+MM%) * Negative Unrealised PnL + MM% * Position at Mark)) / Total Assets

Leverage PnL: PnL Percent × Margin Ratio

Liquidation Priority Rank: Rank from highest to lowest value

For selected accounts that will be be closed out via ADL, the following process occurs:

1. Take the quantity of the bankrupt position;
2. Take the highest ranking position on the other side of the book;
3. Close the bankrupt position against the highest rank position on the other side of the book at mark price;
4. Check if the bankrupt position has been fully closed, if not then reperform the same process with the next highest rank position on the other side.
5. Proceed to enforce steps (a) - (d) for each futures position for the bankrupt account
6. Once all positions have been closed, transfer remaining collateral assets and spot debts to the insurance fund, leaving the bankrupt account with 0 balances.

Once ADL is complete, affected accounts are free to open new orders.

Please note that we are currently engaging with market makers to enter a backstop liquidity provider program with attractive margins to support our ability to close out positions with minimal impact on the market and other traders. Once we have sufficient demand, backstop provisioning will slot in ahead of the current “Stage 2”  liquidation and will apply from 3% to 1% with ADL taking place at <1%.

Index price represents the fair spot market price of a pair and is calculated as a central price from a range of constituents. Amongst other things, it is used to calculate the fair value of spot balances in the reference currency.

Please refer here for the index price sources

Mark price represents the fair market value of a futures contract. It is calculated by applying certain adjustments to the spot index price of the underlying pair as follows: 

Mark price = median (Market price, Price1, Price2)

where: 

Market price = median(best bid, best offer, last traded price) of the futures contract

Price1 = Index price * (1 + Estimated Funding rate * Remaining time till Funding payment / Length of Funding interval)

Price2 = Index price + 5 minute average futures basis (time weighted average difference in price between the futures market price and underlying index price)