OKEx blowout exposes soft underbelly of lightly regulated cryptocurrency transactions
How the bad example of Hong Kong-based trading venue, the world’s second-largest digital exchange, shows just what a minefield crypto can be
In late July, an unidentified trader took up an unusually large position of 4.16 million bitcoin futures listed on Hong Kong-based OKEx, one of the world’s largest cryptocurrency venues.
The position, with a total notional value of US$416 million (HK$3.26 billion), triggered the risk management system at OKEx, setting off a chain of events that ultimately left futures traders with unrealised gains to give up about 18 per cent of their profits, according to calculations by Bloomberg.
The episode, which attracted attention in cryptocurrency circles, underscored the risk of trading in a lightly regulated market, where highly leveraged transactions thrive without the investor-protection buffers seen in conventional bourses for equities, currencies or fixed-income financial products.
In a conventional futures market, brokerages rather than the exchanges are required to ensure that their clients have sufficient margin deposits, and have the proper risk management and documentation in place on margin calls, or when forced liquidation kicks into action.
That wasn’t the case at OKEx, ranked the second-largest exchange in the world by traded value among fee-charging venues tracked by Coinmarketcap.com, according to Bloomberg.
The exchange’s team asked the client - who put in the long position order at 2am local time - to liquidate part of his long position to reduce risk. When the client refused to cooperate, the exchange said it froze his account to prevent any further build-up of positions.
Soon after, the price of bitcoin fell, causing the forced liquidation of his account as the required maintenance margin ratio wasn’t met.
As OKEx’s own insurance fund was not enough to cover the losses from the margin call, it utilised its “socialised clawback mechanism,” whereby the exchange would take a portion of the profit in equal percentage from other traders - all of whom had short positions - to cover the shortfall.
A clawback only happens at OKEx when the insurance fund does not have enough capital to cover the system’s total margin call losses. The exchange allows traders to leverage their positions by as much as 20 times.
The shortfall reportedly reached 1,200 bitcoin, valued at US$9 million. The exchange had to inject 2,500 bitcoin from its own capital pool into the insurance fund to limit the scale of the clawback.
After the incident, OKEx said it would enhance its risk management measures to prevent similar cases from recurring. It would change its margin system and liquidation procedures so that clawbacks are less frequent.