Overview of DPE
The Dynamic Profit Equalisation System (DPE) is the margining method BitMEX uses for speculative derivative instruments. Speculative derivative instruments on BitMEX offer up to 25x leverage.
High leverage instruments are high-risk. During fast moving markets, it is possible that some traders may go bankrupt. To ensure a zero sum system, BitMEX developed the DPE system. Traders can withdraw realised profit from the system subject to an adjustment.
Profits are held until settlement or rebalancing of a particular contract. The system loss is calculated, and trader’s profits are adjusted proportionally. Using BitMEX’s state-of-the-art trading engine, BitMEX is able to calculate the projected loss percentage in real-time, giving traders the chance to make trading decisions based on the anticipated systemic loss.
Advantages over “Socialised Losses”
- BitMEX’s DPE system offers a real-time estimate of the projected loss rate. This number is featured prominently in the order controls.
- Long-running BitMEX contracts are rebalanced weekly, which allows traders to withdraw or reinvest profits weekly rather than monthly or quarterly.
System Loss Calculation
A system loss occurs when the loss on a position exceeds the margin pledged. At the weekly contract settlement or rebalance, the total system loss is calculated and a profit adjustment is calculated.
Profit Adjustment = Total System Loss / Total System Profit
Traders A buys 1 contract from B at 100 USD. Each side pledges 4 USD of initial margin.
The price rises to 110 USD.
A’s profit = 10 USD
B’s loss = 4 USD (B can only lose his initial margin)
System loss = 6 USD
Profit Adjustment = 6 USD / 10 USD = 60%
A’s realised profit = 10 USD * (1 - 60%) = 4 USD
Contract Settlement & Rebalance
When a contract expires, the profit adjustment for that contract will be calculated. After realised profits are adjusted, users may withdraw their profit or re-leverage it on another BitMEX instrument.
Each Friday at 12:00 GMT profits on contracts that have not expired are rebalanced. All unrealised pnl is realised at the weekly rebalance price. BitMEX calculates the system loss if any, and then adjusts realised profits accordingly. The weekly rebalance price is the 12:00 GMT print of the contract’s underlying index + the contract’s fair basis (please refer to the section below Fair Price Marking for details on the fair basis calculation).
After a contract has been rebalanced, realised profit may be withdrawn. If you had an open position, your position will remain and the entry price will equal the rebalance price.
Trader A is long 1 contract at 100 USD.
The weekly rebalance price is 104 USD.
On this rebalance, there is a 5% profit adjustment from bankruptcies. A realises a profit of 3.80 USD.
A is still long 1 contract, but now at 104 USD. A can choose to keep the 3.80 USD as margin on this position to protect against liquidation, to withdraw it, or to reinvest it.
BitMEX will specify an initial and maintenance margin for each contract. For example, a contract with 25x leverage will have a 4% initial margin and 1% maintenance margin. If the maintenance margin level is breached, the trader will be liquidated at their bankruptcy price.
Upon liquidation, BitMEX will assume the position and attempt to liquidate the position. If BitMEX is unable to liquidate the entire position, a limit order at the bankruptcy price will be placed in the order book. All losses due to bankrupt positions will be included in the Total System Loss.
If BitMEX is able to liquidate the position at better than the bankruptcy price, the additional funds will be used to offset losses on other bankrupt positions. If there are not bankrupt positions to offset, the leftover Bitcoin will be used to offset losses in the next contract.
Fair Price Marking
To protect traders, DPE contracts are subject to fair price marking. The Mark Price will equal the Fair Price for the purposes of Position Value and Unrealised PNL.
Fair Price Marking does not affect Realised PNL. The Fair Price helps prevent unintended liquidations when a market is oscillating quickly due to manipulation.
The Fair Price is calculated as follows:
Mark Price = Fair Price
Fair Price = Indicative Settlement Price + Fair Value
Indicative Settlement Price = The last traded price on Bitfinex (XBT) or a weighted volatility calculation (BVOL)
Fair Value = Indicative Settlement Price * % Fair Basis * (Days Until Expiry / 365)
% Fair Basis is an annualised percentage number set by BitMEX. The number will be adjusted from time to time by BitMEX. BitMEX will choose a
% Fair Basis so that the mark price resembles the last traded price of the futures contract, but that will not always be the case.
Fair Price Example
% Fair Basis = 20%
Days Until Expiry = 30
Indicative Settlement Price = 100 USD
Mark Price = 100 USD * (1 + 20% * 30 / 365) = 101.64 USD
Trader A buys 1,000 XBTM15 contracts for 102 USD.
Position Value = 101.64 USD (the mark price) * 1,000 Contracts * 0.00001 XBT Multiplier = 1.0164 XBT
Unrealised PNL = (101.64 USD - 102 USD) * 1,000 Contracts * 0.00001 XBT Multiplier = -0.0036 XBT
Trader A sells 1,000 XBTM15 contracts for 103 USD.
Realised PNL = (103 USD - 102 USD) * 1,000 Contracts * 0.00001 XBT Multiplier = 0.01 XBT
The Mark Price does not affect Realised PNL. Maintenance margin calculations are based on the Position Value, therefore the Mark Price affects the amount of margin needed for an open position.