1. Introduction

Coinbase Bermuda Ltd. ("Coinbase Bermuda"), is an exempted company limited by shares incorporated in Bermuda. Coinbase Bermuda Ltd. is regulated by the Bermuda Monetary Authority and holds a class F digital asset business license under the Digital Asset Business Act 2018 (as amended).

2. Defined Terms

Defines the following terms:

Average Daily Trading Volume (“ADTV”) - 30 day trailing average quantity of the underlying perpetual futures asset. 

Base Initial Margin (“BIM”) - Base Initial Margin represents the lowest initial margin requirement customers of Coinbase Bermuda may post as collateral to open positions. 

Close out Horizon (“CoH) - Close out Horizon is an assumption designed to account for the liquidity impact associated with opening a position relative to the underlying asset ADTV.  It is set as a percentage of ADTV. 

Close out Margin (“CoM”) - Close out Margin is the amount of margin required to avoid having positions sent to the Liquidity Support Program. Close out Margin is calculated as max(⅓ IM, MM -12%). 

Initial Margin (“IM”) - Initial Margin is the amount of margin required to open a position. Initial Margin is calculated as the max (BIM, RP * √ CoH). 

Liquidity Support Program (“LSP”) - Coinbase Bermuda desires to promote backstop liquidity in the products through Liquidity Support Program in return the LSP’s will receive predetermined incentives upon satisfying certain obligations.

Maintenance Margin (“MM””) - Maintenance Margin is the amount of margin required to keep the futures position open. Maintenance Margin is calculated as (IM * ⅔).

Market Value - Market Value is the real time value of the position, quantity * current price of the perpetual futures contract.

Position Size - Position Size is the reference value that margin requirements are applied against, calculated as quantity * execution price when executing a trade. The Position Size changes after settlement occurs to quantity * settlement price and margin percentages are multiplied by this amount to get margin amounts in USDC. At trade execution, this is simply quantity * executed price. After the trade is executed, the Position Size will change at each settlement period, and will be quantity * Settlement price.  

Replacement Price (“RP”) -  input accounting for the potential volatility of the underlying asset using a historical VaR (as defined below) model. 

Settlement Price - Settlement Price is the price determined by Coinbase Bermuda at each 5 minute settlement interval. 

Value at Risk  (“VaR”)  - a statistical model that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame.

3. Scope Of This Policy

This Leverage and Margin Policy (the “Policy”) sets out how we set leverage and margin levels and procedures when you trade in financial instruments with Coinbase Bermuda.

Coinbase Bermuda’s leveraged financial instruments (the “Leveraged products”) are the following:

1. Perpetual Futures on cryptocurrencies.

The purpose of this Policy is to explain the key aspects of leverage trading with margin and how we calculate and monitor your leverage levels and your margin posting obligations when you trade Leveraged Products on the Coinbase Bermuda trading platform. It also outlines the impact on your margin and account where negative market movements occur. 

4. Legal and Regulatory Rules

Coinbase Bermuda is a limited liability company that is registered in Bermuda and offers its Leveraged Products in accordance with its class F digital asset business license under the Digital Asset Business Act 2018 (as amended).

5. Applicability

This Policy applies to Coinbase Bermuda’s execution of orders on behalf of certain categories of advanced retail clients, “professional” clients or institutional clients in accordance with local law.

6. Company Standards

As Trading Leveraged Products carry higher risk than non-leverage trading products, Coinbase Bermuda will act in good faith to: 

1. set leverage levels that we deem appropriate to reflect the level of risk associated with trading in complex financial instruments that are inherently volatile in nature; 

2. to take into consideration the underlying performance fundamentals of the financial instruments on which our Leveraged products are based, including historic volatility, depth of market liquidity and trading volumes, market capitalization of the issuer and country of issuer of the underlying financial instrument, our ability to hedge market risk and the general political and economic environment. We adjust and calibrate the above variables in determining the leverage levels we offer for asset classes or financial instruments

3. to have regard to our own risk management appetite and risk bearing capacity and to have in place policies, procedures and practices to manage our (primarily) market risk emanating from such leverage and margin trading by our clients

4. To apply regulatory requirements and caps where we deem appropriate

7. Acting in Good Faith

Trading leveraged products carries a larger risk than transactions with no leverage. As such, Coinbase will act in good faith when offering leveraged trading products to Clients.   

In order to give Clients the tools to manage their risk, they will have the choice to change (i.e. lower or re-increase) the leverage ratios they trade with via the trading platform, subject to the caps that we may apply based on our internal principles of risk appetite and tolerance. We reserve the right to introduce additional leverage levels.

8. Leveraged Trading and Margin

8.1. What are the most important concepts to consider in Coinbase Bermuda’s margin framework?

Coinbase Bermuda’s margin policy is designed to avoid and mitigate both the occurrence and impact associated with negative equity. Coinbase Bermuda controls margin requirements – for both new and existing positions – and may change the underlying values at its discretion. Margin requirements determine when positions are liquidated and other factors such as available to trade / withdraw balances. In order for trades to be entered into the order book, customers must have sufficient margin to cover Coinbase Bermuda’s requirements. All customers are subject to the same exact requirements covered in this Margin Policy. There are no special considerations or exceptions under any circumstances.

Coinbase Bermuda does not pursue customers for losses in excess of the margin deposited in their accounts (negative margin balances).  Negative margin balances are possible but, should they occur, are primarily absorbed by the insurance fund and clawbacks. Coinbase Bermuda’s risk management framework has been designed to avoid these occurrences and margin is a critical component. As such, margin requirements have been calibrated and will continue to be reviewed factoring in liquidity, volatility, and stress testing scenarios. USDC is the only eligible collateral and, for the avoidance of doubt, all examples and values in the Margin Policy reference USDC. 

Whilst we may from time to time send you notifications of your margin level reaching certain thresholds, you are reminded that under the Term and Conditions Agreement between you and us it is your responsibility to monitor data presented via UI and API at all times the margin level and take relevant actions.

Relevant actions that you can take to restore your margin level include:

1. Closing or hedging some of your open positions.

2. Depositing more funds to increase CM.

Please note that we do not provide advice for the trading decisions and actions you take, including with respect to the actions you may take to address the margin level requirements such as the ones we refer to above.

8.2  What is Leveraged Trading?

Trading on leveraged capital means that you, as a customer, can trade amounts significantly higher than the funds you invest, which only serve as the margin. High leverage can significantly increase the potential return, but it can also significantly increase potential losses.

The maximum leverage can be derived by dividing the Position Size by the initial margin requirement.  Coinbase Bermuda’s initial margin requirement is calculated as follows: max (BIM, RP * √ CoH) – and will be covered in more detail in section 8.3. The Position Size is quantity * executed price at trade execution. 

To illustrate an example, a customer executes 1 BTC quantity at a price of $20,000 and the initial margin requirement is 20%. The Position Size is $20,000 (1 * $20,000) and the initial margin requirement would be $4,000 ($20,000 * 20%). Therefore, the leverage on this position is calculated as 5x ($20,000 / $4,000), meaning, the customers' gains and losses will be magnified by 5x of their $4,000 collateral requirement based on price fluctuations. 

For example, assume the BTC perp appreciates by 10%, the position is now worth $2,000 ($20,000 * 10%). If the customer had no leverage, for example, they purchased $20,000 of BTC spot as opposed to perpetual futures, they would have a return on their spot purchase of $2,000 ($20,000 * 10%) as well. However, since they were required to spend $20,000 to enter the spot position, the return on investment is calculated as 10% ($2,000 PnL / $20,000 spend).  

The same logic applied to the leveraged, perpetual futures example also has $2,000 PnL but the spend is $4,000 of initial margin. The return on investment is calculated as 50% ($2,000 PnL / $4,000 spend) and the leverage enables 5x (50% / 10%) returns. 

The opposite holds true as well, assume the price of the assets decline by -10%. Both positions would have -$2,000 PnL but the return on investment for spot is -10% (-$2,000 / $20,000) while the return on the perpetual futures is -50% (-$2,000 / $4,000). Customers are able to pledge more than the initial margin requirement if they prefer less leverage. In the illustrative example above, the initial margin requirement is 20% but the customer could pledge 50% of initial margin if they prefer less leverage. Customers are not able to pledge less than 20% initial margin in the example with that being said. 

Customers can also derive leverage from the initial margin requirement by dividing 100% by the initial margin requirement. In the example above, the initial margin requirement is 20% and 100% / 20%, or 1 / .20, equals 5x. The “x” is commonly placed after the numerical value because gains and losses are multiplied by 5 times. Initial margin and leverage are inversely related. Lower initial margin requirements translate to higher leverage and vice versa. 

8.3 What is Current Margin (CM)?

For customers with experience trading derivatives, CM is similar to Equity and represents the value of your portfolio / account if all positions were closed based on the prevailing market price(s).  CM can be expressed as a percentage or $ value.  It is calculated by adding collateral and unrealized PnL and dividing the sum by open Position Size, which includes any open limit order that encumbers collateral. CM is an important metric that impacts customers’ buying power and liquidations. As mentioned in Section 8.1., USDC is the only eligible collateral and CM reflects the value of the portfolio / account in USDC.

CM $ = Collateral + Unrealized PnL

Customer B has $4,000 of USDC collateral and no open positions, leading to CM of $4,000. At the moment, CM represents buying power which determines the maximum Position Size Customer B may execute based on the collateral balance in their account : Position Size = CM / Initial Margin %

$4,000 / 20% = $20,000

Customer B can obtain a Position Size of $20,000 when the Initial Margin % for a perpetual futures contract equals 20%. Perhaps Customer B does not want to obtain a Position Size this large and wants to understand CM based on an $8,000 Position Size. 

This can be calculated as: CM % = (Collateral + Unrealized PnL) / Position Size

 ($4,000 + $0) / $8,000 = 50%

What does 50% actually represent from a customer perspective?  

The 50% is relevant to understand available to trade, available to withdraw, and key thresholds tied to margin requirements that indicate liquidation risks. 

Available to trade / Available to withdrawal 

Let’s assume Customer B executes the $8,000 Position Size, important CM items are as follows:

Customer B is free to withdraw $2,400 USDC to a self custodial wallet as the position executed has an IM of $1,600. Customer B may also use the $2,400 as IM on other perpetual futures contracts, or to increase their existing $8,000 Position Size to $20,000. 

Margin requirements

These will be covered in greater detail and conceptually in sections 8.4, 8.5, and 8.6. This section is intended to illustrate how CM interacts with Initial (IM), Maintenance (MM), and Close out Margin (CoM) requirements to manage liquidation risks. Assume the following metrics:

If Customer B’s CM is less than or equal to MM their position would be in scope for automatic, partial liquidations via the liquidation algorithm. If Customer B’s CM is less than or equal to CoM their position is in scope for liquidations via Liquidation Support Program (LSP) participants.  You can determine  the price move needed to reach these levels by simply applying as follows:

Therefore, Customer B’s CM would be 13% or equal to the MM should the price of the underlier decline by -37%. This is important because CM less than or equal to MM triggers liquidations. The same values can be derived for CoM:

These illustrative examples are to highlight the importance of CM as it relates to managing liquidation risks, IM, MM, and CoM are covered in more detail in the sections referenced. 

8.4 What is Initial Margin?

Initial Margin (IM) is the percentage of a financial instrument price that a customer needs to pay for with their own money. IM represents the minimum amount of margin required for a customer to open new positions or increase size on existing positions. IM is calibrated taking into account key concepts such as Base Initial Margin (BIM), Replacement Price (RP), and Close out Horizon (COH). The definition of each concept can be found within Section 2 Defined Terms. 

Coinbase Bermuda’s IM formula is calculated as follows: max (BIM, RP * √ CoH). BIM is set at 20% and, for smaller / liquid Position Sizes, will be the IM customers can expect. For large / illiquid Position Sizes, IM is determined based on our margin model which factors in volatility, liquidity, and stress testing. Customers can enter trade details into the margin calculator provided on Coinbase Bermuda’s website to calculate IM. The calculator also shows the underlying values and assumptions used in the margin calculation so customers can independently determine. 

Customer A has $40,000 of CM in their account and no open positions, they attempt to enter a limit order to buy 5 BTC perps with a limit price of $20,000.  The order would be rejected as the IM requirement of $43,000 exceeds the $40,000 of CM in Customer A’s account. Their Position Size is $100,000, BIM is 20%, RP is 19%, and CoH is 5. The IM required to enter the order is: 

Customer B has $4,000 of margin and executes a market order to buy 1 BTC perp which is filled at $20,000. The market order is permitted as Customer B had exactly $4,000 of margin in their account prior to entering the order. Their Position Size is $20,000, BIM is 20%, RP is 19%, and CoH is 1. The IM required to enter the order is: 

If Customer B's CM is in between IM and MM she won't be allowed to enter positions that would increase risk or collateral requirements. However, she can fund her account or reduce existing positions to be able to trade normally again.  

8.5  What is Maintenance Margin?

Maintenance Margin (MM) represents the minimum amount of margin required for a customer to avoid automatic, partial liquidation. MM is primarily relevant after trade execution. Coinbase Bermuda’s MM formula is IM * ⅔.  Using Customer B’s example from IM, the MM is as follows:

Therefore, Customer B’s margin balance will equal MM, leading to partial liquidation, should the price of BTC decline as follows: 

Customer B would need to pledge additional collateral before the price declines by -7%.  If no action is taken, partial liquidation would take place aiming to close our minimum quantity of future positions that would bring customer B’s current margin above initial margin. Assuming partial liquidation is successful, Customer A’s new Position Size would be calculated as follows: 

When the margin balance is equal to or less than MM, Customer B would be locked out of their account as the liquidation algorithm takes over and attempts to partially de-risk the portfolio.  

8.6 What is Close out Margin (CoM)?

CoM represents the minimum amount of margin required for a customer to avoid having their position assigned to Liquidity Support Program (LSP) participants. Coinbase Bermuda’s CoM formula is calculated as MAX (⅓ IM, MM-12%). Customer B’s CoM is as follows:

Therefore, Customer B’s margin balance will equal CoM, leading to liquidation, should the price of BTC decline as follows: 

Customer B would need to pledge additional collateral before the price declines by -14%.  If no action is taken, the position would be sent to LSP participants for liquidations. LSP liquidations occur outside of the order book and the amount to liquidate depends on the margin balance remaining in the account being liquidated. The formula governing the amount sent to LSPs is:

LSP = MAX ($1,000, (1 - [CM% / CoM%]) * Position Size 

Customer B still has  7% / $1,400 margin balance assuming the -14% decline and the amount to be liquidated is as follows. 

Assuming a -16% price decline the amount to be liquidated is as follows:

8.7 How does Settlement impact margin requirements?

Coinbase Bermuda realizes PnL every 5 minutes by determining a settlement price and applying that price across all live positions.  At settlement, collateral balances are transferred to customers based on their gains and losses referencing the settlement price.  Settling every 5 minutes is important to prevent large balances of unrealized PnL accruing, reducing negative equity risk for all customers in the ecosystem. 

Let’s use an illustrative example to cover the settlement process and the impact from the perspective of two customers executing positions in the opposite direction. In order to do so, we need to cover what happens at trade execution and the 5 minute settlement period. In our example, trade execution is at 9:00 AM UTC, settlement occurs at 9:05 AM UTC, and the IM for both customers is 20%.  

Customer A has an unexecuted, resting limit order to sell -1 BTC perps at a price of $20,000 USDC, and this order represents the best offer in the order book. Customer B wishes to buy 1 BTC perp immediately at the best prevailing price in the order book, so she enters a market order.  When Customer B enters the market order, it is sent to Coinbase Bermuda’s matching engine and filled at a price of $20,000 at 9:00 AM UTC. The customers accounts now look as follows:

They both have absolute positions sizes of $20,000, collateral of $4,000, and $0 unrealized PnL at trade execution. The first settlement in this hypothetical example occurs at 9:05 AM UTC and the settlement price is $20,500. The impact to the key account metrics immediately before the settlement is processed operationally are as follows:

The settlement process is designed to (i) convert unrealized PnL into realized PnL and (ii) determine the margin requirements based on the Position Size using the settlement price.  The impact to key account metrics immediately after the settlement is process operationally are as follows:

At the settlement period, Coinbase Bermuda debits Customer A’s account $500 and credits Customer B’s account $500, turning the unrealized PnL to realized PnL based on the settlement price and resetting unrealized PnL to $0.  This process repeats every 5 minutes and prevents large balances of unrealized PnL accruing and increasing systemic risks. 

8.8 Cross Collateral

The cross collateral feature enables customers to use assets other than USDC (“Non-USDC Collateral”) to open and maintain positions of Leveraged Products. Eligible collateral currently includes USDC, BTC and ETH and Coinbase Bermuda may update the list of eligible assets for the cross collateral feature from time to time.

• Limits. Coinbase Bermuda may place limits on the quantity of a specific Non-USDC Collateral type that is eligible to be used as collateral. Such limits may be determined in Coinbase Bermuda’s discretion both by reference to the Customer’s accounts or the activity of its customers more broadly. The value of such collateral held in excess of these limits will not count toward the customer portfolio total value and such limits shall be reflected in the calculation of the “Available to Trade” field. 

• Haircuts. Coinbase Bermuda may determine and apply collateral haircuts to the valuation of any Non-USDC Collateral in its sole discretion. A haircut is a reduction in the value of a collateral asset that may be used as margin. 

• USDC Borrows. The Customer may elect to use the USDC Borrow feature in connection with its use of the cross-collateral feature described above. The USDC Borrow feature allows Customers to benefit from temporary USDC deficits by Coinbase Bermuda loaning USDC to the Customer provided that sufficient non-USDC assets are available to collateralize such deficits. If the Customer elects to benefit from USDC Borrows then Coinbase Bermuda may automatically engage USDC Borrow where any USDC debits cause a negative USDC balance. 

The Customer must repay any USDC Borrow upon the earlier of:

1. Closing the corresponding Leveraged Product position;

2. Portfolio liquidation due to margin deficiency or default; or

3. Coinbase Bermuda demanding repayment.

Coinbase Bermuda may charge interest on USDC Borrow per the User Agreement including without limitation Section 2.9 (Interest) thereof. Coinbase Bermuda may deduct any outstanding USDC Borrow (together with any interest due) from any liquidation or closing proceeds. Coinbase Bermuda has sole discretion over whether it extends USDC Borrow to a Customer. The Customer remains liable to repay any USDC Borrow (together with any interest due) in USDC.

9. Restricted People and Jurisdictions

Some financial instruments are not eligible for sale in certain jurisdictions or countries. This Policy is not directed to any person, jurisdiction or country which is included in Coinbase Bermuda’s list of restricted people or countries as set out in the Coinbase Bermuda User Agreement. The Policy does not constitute an offer, invitation or solicitation to buy or sell financial instruments.

10. Queries

If you have any feedback, questions, or complaints, contact us via our ‘Customer Support’ webpage at https://help.coinbase.com/international-exchange