A Swap Contract is a derivative product that is similar to a traditional Futures Contract, but has a few differing specifications:
When trading perpetual swap contracts, a trader needs to be aware of several mechanics of the swap market. The key components a trader needs to be aware of are:
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 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.
Funding Rate is positive, longs pay shorts. When it is negative, shorts pay longs. See examples.
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 swap 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.
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.
The swap 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 swap is trading. Each swap’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.
The Funding Rate is next calculated with the Interest Rate Component and the 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.
BitMEX calculates the Funding Rate (F) every minute and then performs a 8-Hour Time-Weighted-Average-Price (TWAP) over the series of minute Funding Rates. This 8 hour TWAP is then the final Funding Rate that will be paid or received at the Funding Interval.
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.
BitMEX imposes caps on the Funding Rate to ensure the maximum leverage can still be utilisted. To do this, two caps are imposed:
BitMEX does not charge any fees on funding; it is exchanged directly peer-to-peer.
Further information and examples of funding calculations are available.