Overview

A Perpetual Contract is a derivative product that is similar to a traditional Futures Contract, but has a few differing specifications:

• There is no expiry or settlement.
• Perpetual Contracts mimic a margin-based spot market and hence trade close to the underlying reference Index Price.
  • This is in contrast to a Futures Contract which may trade at significantly different prices due to basis.
  • The primary mechanism to tether to spot price is Funding.

Mechanics of a Perpetual Contract Market

When trading perpetual contracts, a trader needs to be aware of several mechanics of the market. The key components a trader needs to be aware of are:

1. Position Marking: Perpetual Contracts are marked according to the Fair Price Marking method. The Mark Price determines Unrealised PNL and liquidation prices.
2. Initial and Maintenance Margin: These key margin levels determine how much leverage one can trade with and at what point liquidation occurs.
3. Funding: Periodic payments exchanged between the buyer and seller every 8 hours. If the rate is positive, then longs will pay and shorts will receive the rate, and vice versa if the rate is negative.
   • You will only pay or receive funding if you hold a position at the Funding Timestamp.
4. Funding Timestamps: 04:00 UTC, 12:00 UTC and 20:00 UTC.

Traders can observe the current funding rate for a contract on the bottom left hand side of the Trade tab under “Contract Details”. Similarly one can view this rate in the individual “Contract Specifications”. Historical rates are in the Funding History.

Funding

Funding occurs every 8 hours at 04:00 UTC, 12:00 UTC and 20:00 UTC. You will only pay or receive funding if you hold a position at one of these times. If you close your position prior to the funding exchange then you will not pay or receive funding.

The funding you pay or receive is calculated as:

Funding = Position Value * Funding Rate

Your position value is irrespective of leverage. For example, if you hold 100 XBTUSD contracts, funding is charged/received on the notional value of those contracts, and is not based on how much margin you have assigned to the position.

When the Funding Rate is positive, longs pay shorts. When it is negative, shorts pay longs. See examples.

Funding Rate Calculations

The Funding Rate is comprised of two main parts: the Interest Rate and the Premium / Discount. This rate aims to keep the traded price of the perpetual contract in line with the underlying reference price. In this way, the contract mimics how margin-trading markets work as buyers and sellers of the contract exchange interest payments periodically.

Interest Rate Component

Every contract traded on BitMEX consists of two instruments: a Base currency and a Quote currency. For example, on XBTUSD, the Base currency is XBT while the quote currency is USD. The Interest Rate is a function of interest rates between these two currencies:

Interest Rate (I) = (Interest Quote Index - Interest Base Index) / Funding Interval
where
  Interest Base Index = The Interest Rate for borrowing the Base currency
  Interest Quote Index = The Interest Rate for borrowing the Quote currency
  Funding Interval = 3 (Since funding occurs every 8 hours)

Note: Under each Contract Specification page, the source borrow market is stated for each Interest Index.

Premium / Discount Component

The perpetual contract may trade at a significant premium or discount to the Mark Price. In those situations, a Premium Index will be used to raise or lower the next Funding Rate to levels consistent with where the contract is trading. Each contract’s Premium Index is available on the specific instrument’s Contract Specifications page and is calculated as follows:

Premium Index (P) = (Max(0, Impact Bid Price - Mark Price) - Max(0, Mark Price - Impact Ask Price)) / Spot Price + Fair Basis used in Mark Price

To learn more about the Impact Bid Price and Impact Ask Price, please read Fair Price Marking.

Final Funding Rate Calculation

BitMEX calculates the Premium Index (P) and Interest Rate (I) every minute and then performs a 8-Hour Time-Weighted-Average-Price (TWAP) over the series of minute rates.

The Funding Rate is next calculated with the 8-Hour Interest Rate Component and the 8-Hour Premium / Discount Component. A +/-0.05% dampener is added.

Funding Rate (F) = Premium Index (P) + clamp(Interest Rate (I) - Premium Index (P), 0.05%, -0.05%)

Hence, if (I - P) is within +/-0.05% then F = P + (I - P) = I. In other words, the Funding Rate will equal the Interest Rate.

This calculated Funding Rate is then applied to a trader’s XBT Position Value to determine the Funding Amount to be paid or received at the Funding Timestamp.

Funding Rate Caps

BitMEX imposes caps on the Funding Rate to ensure the maximum leverage can still be utilized. To do this, two caps are imposed:

1. The absolute Funding Rate is capped at 75% of the Initial Margin - Maintenance Margin. If the Initial Margin is 1% and the Maintenance Margin is 0.5%, the maximum Funding Rate will be 75% * (1% - 0.5%)= 0.375%.
2. The Funding Rate may not change by more than 75% of the Maintenance Margin between Funding Intervals.

Funding Fees

BitMEX does not charge any fees on funding; it is exchanged directly peer-to-peer.

More Information

Further information and examples of funding calculations are available.