The Insurance Fund is designed to use the collateral from fees on non-bankrupt clients to cover losses when the client accounts go below 0 in value. The primary purpose of the Insurance Fund is to limit occurrences of counterparty-liquidation.
In the cases where a trader in liquidation (defined as collateral < maintenance margin) has less than 0 USDT after all liquidation or is otherwise unable to liquidate positions, the trader is bankrupt, and Binance will need to take over remaining positions.
In the vast majority of these cases, Binance will use the insurance fund to take the positions, and offload them onto the market slowly. The insurance fund will collect up to 0.5% fees from clients in liquidations that do not result in client bankruptcy. If the insurance fund is unable to accept positions from the liquidations, then the counterparty-liquidation will occur.
The Insurance Fund will be subject to the following rules:
The fund will have a maximum net notional position check. The fund will not be allowed to exceed a predefined position notional on the market; by default, this is 100% the size of the insurance fund. Any positions that would increase beyond the max notional will be subject to counterparty-liquidation. The insurance fund will offload positions according to a preset algorithm. All events that would normally require intervention by the insurance fund will instead go into counterparty-liquidation before the fund could take positions.
All perpetual futures contracts on Binance Futures share a common insurance fund, with the exception of BTCUSDT and ETHUSDT, that have their own insurance fund.