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, which is covered here.
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 market; by default, this is 20% 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 have an 8 hour rolling check for maximum losses. The fund will leave the market if it falls 7.5% in a given 8 hour period. Before the fund leaves the market, it will first perform a limit order to try to clear net position, within 2.5% of market price. Anything that cannot be cleared with this limit order will be subject to counterparty-liquidation. The fund will then leave the market and will re-enter the market after 8 hours. All events that would normally require intervention by the insurance fund will instead go into counterparty-liquidation.