The compulsory liquidation system is a risk management system that cooperates with the position limit system and the price limit system. When the trading margin of exchange members or customers is insufficient and not replenished within the specified time, or when the positions of members or customers exceed the specified limit, or when members or customers violate the rules, the exchange will forcibly close the open positions held by them in order to prevent the risk from further expanding. This is the compulsory closing system.
According to the Measures for Risk Control and Management of China Financial Futures Exchange, compulsory liquidation will occur in the following five situations: (1) The balance of members' settlement reserve is less than zero and cannot be replenished within the prescribed time limit; (2) The position exceeds the position limit standard and fails to close the position within the prescribed time limit; (3) Being punished by CICC for compulsory liquidation due to violation of regulations; (4) According to the emergency measures of CICC, the liquidation should be forced; (5) Other positions should be closed by force.
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According to the different subjects of compulsory liquidation, compulsory liquidation can be divided into exchange compulsory liquidation and brokerage compulsory liquidation. Commonly used in spot gold and futures trading.