Insurance Fund

An insurance fund is a reserve of assets held by a derivatives exchange to cover losses resulting from liquidated positions that cannot be closed at a positive value. It serves as a primary line of defense against the risk of bankruptcy for the platform or its users.

The fund is typically built from the excess collateral collected during the liquidation process, where positions are closed at a price better than the user's bankruptcy price. When a liquidation occurs, if the system cannot close the position without creating a deficit, the insurance fund absorbs the difference.

This ensures that winning traders receive their full profits without being impacted by the defaults of losing traders. It is a fundamental tool for maintaining platform solvency during market crashes.