Liquidations
Pacifica employs a robust, three-tiered liquidation process to manage positions that fall below the required maintenance margin. This multi-step approach is designed to minimize market disruption while ensuring that traders’ collateral is used effectively to cover losses.
Three-Tiered Liquidation Process
Initial Liquidation Attempt: Positions are first liquidated by sending market orders into the orderbook. If enough of the position is closed to restore the required margin levels, any remaining collateral remains with the trader.
Backstop liquidation: If the orderbook liquidity is insufficient to absorb the entire position without severely impacting the market, the position (along with remaining collateral) is transferred to the Pacifica backstop liquidation vault. The vault systematically manages position closure to minimize market disruption.
Auto-Deleveraging (ADL) (last resort): Under extreme scenarios—such as very large positions significantly exceeding market liquidity—Pacifica employs Auto-Deleveraging, automatically closing opposing traders’ profitable positions based on risk priority to maintain overall market health.
Any collateral remaining after liquidation fees and slippage are deducted is returned to the user’s account. If liquidation losses exceed the collateral available, losses are first absorbed by the liquidation vault, and in extreme scenarios, covered by ADL.
Enhanced Settlement Safeguards at Pacifica
To further protect the platform and its users, Pacifica has implemented advanced risk-control measures within its liquidation and settlement processes:
Dynamic Margin Requirements: Pacifica dynamically adjusts initial and maintenance margin requirements based on the ratio of open interest relative to orderbook liquidity. This mechanism increases margin requirements when large positions push liquidity constraints, ensuring that sufficient collateral is maintained.
Note: These dynamic margin requirements do not affect existing open positions; they only apply to new orders and subsequent margin adjustments.
Withdrawal Restrictions During Extreme Volatility: To prevent scenarios where traders withdraw collateral that might otherwise cover liquidations, Pacifica employs volatility-based withdrawal caps using an Exponentially Weighted Moving Average (EWMA) approach. During extreme market movements, traders may temporarily be unable to withdraw certain collateral amounts, reducing risk to the liquidation vault.
These proactive measures ensure that Pacifica’s liquidation process remains robust and fair, protecting traders from cascading liquidations and maintaining overall market stability.
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