Margin requirements in trading and the Arkis Margin Engine

In trading, there are two types of margin requirements: initial and maintenance.

The initial margin is the amount a trader must deposit with their broker to initiate a trading position. The maintenance margin is the amount of money a trader must have on deposit in their account to continue holding their position, which is typically 50% to 75% of the initial margin.

There are various ways to approach portfolio margin calculation. The ultimate goal of every leveraged position is to provide the highest capital efficiency to its user. On the other hand, those providing the leverage should be protected so that if the Liquidation occurs, creditors' capital is protected.

Making the margin calculations too simple and strict leads to a problem of over-collateralized leverage and low capital efficiency. In contrast, simplistic calculations without restrictions will lead to even worse consequences - creditors take a huge risk providing the leverage. Ideally, the margin engine should take into account the following:

  1. Trading and asset management specifics.

  2. Underlying asset dynamics and risks.

  3. Aggregated portfolio risk.

In traditional finance, there are several methodologies to approach margin calculations for a multi-asset portfolio. Standard Portfolio Analysis of Risk (SPAN) is one of them.

In Arkis, our goal is to create a margin engine that takes into account DeFi trading specifics and new types of asset classes (liquidity pools, exotic derivatives) as well as the volatile nature of crypto-assets, and we use the SPAN model as a starting point in our process.

Why centralized?

Proper portfolio risk estimation requires complex computations and scenario simulations that consider asset dependence and correlation. Currently, it’s not feasible to perform these intricate calculations on the blockchain due to computational and cost constraints.

Therefore, while our margin calculation remains centralized, we ensure transparency and accessibility by making its API openly available for public use.

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