Lets learn about forced liquidation

What is forced liquidation

The so-called forced liquidation refers to the forced liquidation of a position by a third person (future exchange or futures company) of the position holder, which is also called liquidation or cut-off. There are many reasons for forced liquidation in futures trading, such as the failure of customers to increase margin in a timely manner, violation of regulations and policies such as trading position restrictions, and temporary changes in trading rules. The common one is undoubtedly that customers are forced to liquidate due to insufficient trading margin. Specifically, it means that the margin required by the client for holding a position contract is insufficient and the futures company’s notice has not been complied with. When margin calls are made in a timely manner or positions are actively reduced, and the market situation is still developing in a direction that is not conducive to holding positions, the futures company may forcibly close some or all of the customer’s positions to avoid increased losses. Forced liquidation is a link in futures trading that causes more disputes.

Applicable conditions for forced liquidation

For the futures company, if the customer does not issue a margin call, the futures company has the right to force liquidation, but it is subject to certain restrictions when exercising this right. According to Article 41 of the "Interim Regulations on Futures Trading Administration" and other regulations, the following conditions are required for forced liquidation: 1. The client's trading margin is insufficient, the risk control has exceeded the bottom line, and the market conditions continue to develop in an unfavorable direction. This is the basic premise for futures companies to implement compulsory liquidation in order to protect their own interests and prevent losses from expanding. 2. Correctly fulfill the obligation of notification of the demand for deposit. This is a necessary procedure for futures companies to implement compulsory liquidation. Third, the time and amount of margin call must be reasonable. In accordance with Article 39 of the Provisions of the High People's Court on Several Issues Concerning the Trial of Futures Dispute Cases, futures companies should avoid the expansion of customer churn, and should not cause greater losses to customers, and the amount of liquidation must be equivalent to Increase in profits. Can't close the customer's position too much. If the liquidation amount is too large, it shall be deemed as excessive liquidation, and the futures company shall be liable for compensation for the excessive liquidation.

Guangxi Haidu Investment Development Co., Ltd. reminds you that in the case of severe market fluctuations, investors' full trading is the chief culprit leading to forced liquidation. Therefore, investors should reasonably control their positions in the process of futures trading, and do not try to avoid them by "biting into a fat man". The tragedy of being forcibly liquidated by a futures company.