Funding cost is the core operating mechanism of perpetual contract. It’s used to ensure that the current market price can always anchor global spot price.
In the trading of perpetual contract:
- The buyers and the seller of the contract will pay or collect funding cost once every 8 hours;
- Timestamp of funding cost: UTC 4:00(UTC+8 12:00), UTC 12:00(UTC+8 20:00) and UTC 20:00(UTC+8 04:00);
- If funding cost rate is positive, long positions will pay funding cost to short positions. If funding cost rate is negative, short positions will pay funding cost to long positions
- Traders only need to pay or collect funding cost in case of hold a position at the above timestamps.
- If any trader has its position liquidated before the designated timestamps of funding cost, the trader doesn’t need to pay or collect any funding cost.
Funding cost is the core operating mechanism of perpetual contract.
The calculation formula of the funding cost to be collected or paid by you is as follows:
Funding cost = funding cost rate * position value
The value of your position has nothing to do with leverage. For example, if you hold 100 BTCUSDT contracts, funding cost will be charged / collected as per the nominal value of those contracts rather than based on the margin that you allocate to your position.
Calculation of Funding Cost
Funding cost rate consists of two parts: interest rate and premium/discount.
The purpose of such rate is to ensure that the trading price of perpetual contract follows underlying reference price closely. In this way, swap contract is similar to margin trading spot market where buyers and sellers exchange funding cost rate on a regular basis.
The interest rate depends on the borrow-lending rate of monetary base and pricing currency.
Interest rate (I) = (pricing interest rate index - basic interest rate index) / the interval of funding cost rate
Sometimes, the price of perpetual contract has significant premium or discount compared with marked price. In such case, premium index will be used to raise or lower next funding cost rate for it to match with the trading level of current swap contract. Corresponding calculation is as follows:
Premium index (P) = reasonable basis of ( Max(0, depth weighted buying price - marked price) - Max(0, marked price -depth weighted selling price)) / spot price + marked price
After determining premium index, we set a buffer limit of 0.05% to funding cost rate, so:
Funding cost rate (F) = premium index (P) + clamp (interest rate (I) - premium index (P), 0.05%, - 0.05%)
When I-P is within the range, funding cost rate F = I. in such case, we call it “normal value”, which means that funding cost rate is within the most stable range.
Limit of Funding Cost
The platform caps funding cost rate to ensure that the highest leverage can be used. In order to achieve so, we add two limits:
- Absolute upper limit of funding cost rate is 75% of (initial margin - maintenance margin). If initial margin is 1% and maintenance margin is 0.5%, maximum funding cost rate will be 75% * (1% - 0.5%) = 0.375%.
- The change of funding cost rate within the interval of funding cost shall not exceed 75% of maintenance margin.
Relation Between the Platform and Funding Cost
The platform does not charge any funding cost. Instead, funding cost is charged among users.