Futures trading is attractive in how it is funded. A trader needs to only fund the margin requirements to open a futures contract, which is more attractive to traders seeking profit in less changeable markets. Utilizing leverage, a trader has the possibility of increasing its profits or losses by a much larger magnitude.

The amount of money that a trader has to deposit in the futures market is called a margin and is required by your broker in order to open the futures position. A trader will not have any ownership of the underlying assets.

On the other hand, the amount of the margin required is usually between 3-12% of the notional value of the contract, which makes this attractive to traders who want to limit the risk of crypto assets deposited to exchanges and leverage the profit.

On June 12, 2020, Huobi Futures launched a brand new locked margin optimization function. Two of the benefits of the locked margin for market participants are:

• Regarding opening positions, it improves fund utilization and reduces position margin

Used margin↓= position margin↓ + frozen margin

Available margin↑ = account equity – used margin↓

Using the locked margin mechanism, the available margin increases, thereby improving the fund utilization.

• Regarding liquidation, the risk becomes lower

Margin ratio↑ = ( Equity Balance / Used Margin↓ ) * 100% – Adjustment Factor

As a result, the used margin is reduced, thereby increasing the user’s margin ratio. This has the added benefit of limiting liquidation risk.

How it works

It is important to fully understand how the futures margin operates in order to maximize capital efficiencies. A small change can be magnified substantially into a significant loss or gain. So let’s begin with an examination of how Huobi Futures locked margin mechanism works.

In some special cases, a savvy trader can hedge their position and trade in multiple directions holding long or short at the same time. The same quantity of long and short positions hedges perfectly and only net positions bring risks.

• Previous to the implementing of the locked margin mechanism, the system  calculated the margin from long and short positions separately and added them together;
• After implementing the locked margin mechanism, the system only calculates the margin from part of the total long and short positions.

The locked margin mechanism can reduce the position margin, thus improving the trader’s fund utilization. 

Locked margin calculations

In the formula below you can see how the locked margin is calculated:

Locked margin = Total long and short position margin- Total locked margin of the same type futures *Optimization ratio for the same type futures – Total locked margin of all types futures* Optimization ratio for all types futures

The optimization ratio is between 0~2. When it is 0, there is no exemption. When it is 1, one direction’s margin is exempted (since the same type long and short position perfectly hedges). When it is 0~1, part of a direction’s margin is exempted. (since different types of futures’ prices are different, they are not perfectly hedged).

Currently, the optimization ratio for the locked margin of the same type of futures is 100%, and the optimization ratio for the locked margin of all types of futures is 50%.

Here’s an example of how it plays out in real-life:

Let’s start with an example. Consider trader John initiated long and short positions of the four types of BTC contracts with 10x leverages, and the BTC contract face value is $100 USD. Now we can calculate John’s locked margin through the following steps. A table below describes the details of their respective positions:

Now we can calculate the locked margin required according to the formula:

Total long position margin of all types of futures = 1.8108 + 1.2060 + 1.5018 + 3.0000 = 7.5186 BTC;

1. Total short position margin of all types of futures = 1.0060 + 0.8040 + 2.0024 + 2.5000 = 6.3124 BTC;
2. Total long and short position margin = 7.5186 + 6.3124 = 13.8310 BTC.
3. Total locked margin = min (7.5186, 6.3124) = 6.3124 BTC;
4. Total locked margin of the same type of futures = min (1.8108, 1.0060) + min (1.2060, 0.8040) + min (1.5018 + 2.0024) + min (3.0000, 2.5000) = 5.8118 BTC;
5. Total locked margin of all types of futures = 6.3124－5.8118 = 0.5006 BTC;
6. Locked margin = 13.8310－5.8118 * 100%－0.5006 * 50% = 7.7689 BTC.

As shown above, without the locked margin mechanism, the total margin required is 13.831 BTC, while with the mechanism only 7.7689 BTC.

In Summary

It is essential for successful investors to have an arsenal of instruments and strategies ready to apply as the market continuously changes, adapts and adjusts events and news from around the world. Huobi Futures developed a powerful mechanism any investor able to use to either hedge open position and/or trade in several time frames and opposite directions (long or short) simultaneously.

As demonstrated, the locked margin mechanism is a great innovation for the futures traders that reduces the required position margin, improves fund utilization, and reduces the risk of liquidation.