Margin, liquidation and market risk controls

Isolated first, cross-margin only with controls#

Isolated margin is intended to constrain the collateral supporting an individual position. Optional cross-margin would allow an eligible account to share backing across positions, which can improve capital efficiency but also connect losses that were previously separated.

The proposed eligibility path includes risk and identity checks. The brief does not publish maintenance ratios, initial-margin levels, portfolio offsets or collateral haircuts. Documentation should not invent these numbers or imply that the current portfolio has passed a real margin engine.

Marks and funding depend on index quality#

Daily mark-to-market is proposed for the initial market model. Perpetual-style products would use index-based funding, capped by circuit breakers. A final implementation must define when marks apply, how funding accrues, which side pays and how stale or disputed observations are treated.

A funding cap does not remove market risk. If the reference is unreliable or liquidity disappears, a position may still be difficult to unwind. Risk controls should share the index confidence state rather than assuming that a published number is always fit for liquidation.

The proposed liquidation sequence#

The design prefers partial liquidation before full liquidation if an account remains undercollateralized. This is a policy direction, not a deployed algorithm. A production rule needs to define the amount to close, execution venue, slippage limit, fees, retry behavior and treatment of remaining debt.

A liquidation is not a substitute for provider delivery. Position collateral, provider collateral and workload failure obligations are related but distinct. The system must track which event created a loss before applying a particular reserve or slashing rule.

1. 1
   Detect

   Apply a valid mark and defined collateral test

2. 2
   Reduce

   Attempt permitted partial position reduction

3. 3
   Reassess

   Recalculate collateral and execution outcome

4. 4
   Escalate

   Apply full liquidation or the specified loss procedure

Insurance is bounded, not a guarantee#

Provider collateral, protocol fees and NMESH staking are proposed contributors to a backstop. Its capital, withdrawal rules, eligible losses and priority of claims need explicit definition. A label such as insurance does not establish licensed coverage or unlimited reimbursement.

The brief flags correlated provider outages and insufficient reserves. Stress tests should examine simultaneous non-delivery, index disruption, thin liquidity and declining collateral value. The purpose is to understand a loss boundary before the treasury or buyer is forced to discover it during an incident.

What must happen before real-money activation?#

The investor brief requires formal risk modeling, stress testing, legal review and independent audit. It also calls for low initial limits, manual provider approval and transparent disclosures. Production product availability depends on the chosen jurisdictions and operating model; this documentation makes no legal eligibility determination.

Operational metrics should include liquidation rate, insurance coverage, concentration, reconciliation breaks and dispute outcomes. Fixture equity and P&L in the current portfolio are interface examples, not assets, performance or proof that a risk system is running.

• Read index failure handling ↗
• Review activation milestones ↗