All termsLiquidation and Exchange Risk SystemsWorth knowing
Socialized Loss
A socialized loss is a loss allocation mechanism in which certain trading losses that cannot otherwise be covered are distributed among a wider group of market participants according to a platform's rules.
Why it matters to you
Different derivatives platforms handle extreme losses differently. Insurance funds, auto deleveraging and socialized loss mechanisms are all approaches designed to deal with situations where a losing position creates a deficit that cannot be resolved through normal liquidation. Understanding the platform's approach is part of understanding exchange risk.
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