A Swap Contract is a derivative product that is similar to a traditional Futures Contract in how it trades, but has a few differing specifications:
The price of Perpetual Swaps are anchored to spot through various mechanisms. The primary mechanism is Funding.
The Funding is similar to the basis applied to a Futures Contract except in a Swap Contract, buyers and sellers exchange interest payments periodically. This rate is based on a combination of the interest rate differential between the base and quote currencies, and a premium / discount between the swap and Mark Price.
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”. You can also observe the Funding History of all swap contracts here.
The calculation and process for the Funding Rate is described further below.
Funding occurs every 8 hours at 04:00 UTC, 12:00 UTC and 20:00 UTC and these are the times at which payments are exchanged between the buyer and seller of the contract. 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 occurring then you will not pay or receive funding.
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: 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.
Sometimes 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
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.
Further information and examples of Funding Calculations are available.