System Stress, Market Makers, and the Largest Crypto Liquidation Ever: Regulatory Lessons
Mete Feridun
15 October 2025
On the night of October 10–11, right after traditional markets had closed, U.S. President Trump’s comments threatening a sharp increase in tariffs on China triggered an immediate “risk-off” move across global markets. The timing was crucial: the remarks came within minutes of market close, when liquidity was already thin, and they explicitly referenced a “massive tariff hike on China.” Bitcoin plunged from around $121,000 to nearly $106,000 within minutes, while altcoins saw even sharper collapses. Within 24 hours, this snowballed into one of the largest leverage liquidations in crypto history, wiping out roughly $19 billion in leveraged positions according to analytics platforms.
During the turmoil, several altcoins on Binance briefly appeared to trade near zero. This anomaly, absent on other exchanges for the same pairs, sparked debate over Binance’s order-book microstructure and user interface display precision. In the following days, Binance acknowledged that some price prints showing “zero” were due to decimal-place constraints and tick-size resolution in the trading interface.
What made this episode remarkable was not merely the macro shock itself but how a single news catalyst cascaded through a highly leveraged, weekend-thin market and exposed exchange-specific fragilities. Within minutes, roughly $19 billion in positions were liquidated, while depth on certain order books evaporated and prices collapsed to the lowest permissible decimal increment.
In other words, this was not a standard “bad news caused a sell-off” scenario. It was a perfect storm of high leverage, thin liquidity, cascading liquidations, and automated system responses. Even hedge funds described it as “a night when no one slept,” underlining the event’s scale and systemic character.
Market makers (MMs) are supposed to maintain orderly markets by providing two-sided quotes, tight bid-ask spreads and sufficient depth, while keeping their exposure delta or gamma-neutral through offsetting positions in derivatives or options markets. In extreme volatility, two mechanical breakdowns can occur.
The first breakdown involves the hedging side. When liquidations accelerate, pressure on the exchange’s insurance fund increases. To contain counterparty risk, the system may trigger Auto-Deleveraging (ADL), automatically reducing or closing profitable and/or highly leveraged positions on the winning side. The logic and thresholds of this process are described in Binance’s own documentation.
The second breakdown concerns quotation risk limits. Once an MM’s hedge positions are forcibly reduced through ADL, their exposure becomes unhedged. To protect capital, they widen spreads, thin order sizes and, if risk limits are breached, activate a kill switch, withdrawing quotes entirely. While rational from a firm-level risk management perspective, collective withdrawal of liquidity can hollow out the order book, sending prices tumbling to the lowest tick allowed.
Binance’s own Square post on ADL and liquidation protocol page outline how these mechanisms work in principle. To conclusively determine how they operated that night, however, one would need access to the full order-book snapshots, quote cancellation logs, and risk-trigger timestamps, data only an independent audit could reveal.
The most immediate outcome was a complete breakdown in price discovery, particularly in altcoins. In market microstructure terms, such events create lasting damage: persistent widening of spreads, thinner depth, and higher “liquidity premia.” Institutional participants are likely to grow even more cautious toward non-BTC/ETH assets. The incident also reinforced the perception that crypto markets remain vulnerable to systemic liquidity shocks, as highlighted by mainstream financial outlets.
Another outcome was renewed awareness of platform risk. Discrepancies between displayed and actual prices, temporary de-peggings, and service interruptions undermine trust in the integrity of trading interfaces. Transparent communication, compensation frameworks, and credible post-mortem reports become crucial. Even during the recovery phase, analyses continued to warn that structural fragilities persisted.
From a regulatory standpoint, the key is not conspiracy but design failure, identifying where the system broke and how to prevent repetition.
Transparency and Data Retention are the first pillars. Exchanges must retain microsecond-level order-book snapshots, quote withdrawal reasons, and risk-limit triggers for forensic review. Decimal precision and tick-size settings must be pre-disclosed, and any exceptions clearly documented.
Second, regulators should enforce minimum quoting standards and withdrawal protocols for market makers. Rules should define measurable thresholds, minimum quote sizes, maximum spreads, and conditions for temporary suspension. Exchanges must report when MMs invoke kill-switches and outline re-entry plans. Multi-MM architectures should be encouraged to prevent a single liquidity provider’s failure from collapsing an entire market.
Third, insurance fund and ADL governance require oversight. Fund size should be dynamically stress-tested against leverage concentration and volatility. Critical thresholds should be publicly visible. ADL triggers, sequencing criteria, and user impact must be transparent and externally auditable.
Fourth, user protection mechanisms must improve. When display precision or latency creates inconsistencies between interface and trade engine, an automatic alert and circuit breaker should activate. “0.0000” readings should carry clear warning labels such as “display limit reached.” Post-incident compensation templates, fixed communication timelines, and mandatory third-party audit reports would help rebuild user confidence. Globally, institutions like the IMF have already highlighted how crypto-market fragilities amplify financial stability risks.
This was not merely about manipulation or bad actors, it was a complex interplay of macro shocks, weekend illiquidity, excessive leverage, pressure on insurance and ADL systems, market-maker risk limits, and exchange-specific design choices. The collapse of price discovery and the “zero price” confusion revealed how fragile crypto’s microstructure can still be.
The path forward lies in measurable market-maker obligations, multi-provider liquidity architectures, transparent ADL governance, robust and stress-tested insurance funds, interface–engine consistency, and fast, verifiable compensation processes. Only through these reforms can future shocks be absorbed without eroding market quality or inflicting disproportionate harm on retail participants.
This blog has originally been published at Finextra
What does the EC’s postponement of the FRTB mean for the industry?
Mete Feridun
14 August 2024
Last month, the European Commission (EC) adopted a Delegated Act (DA) to postpone the application date of the Basel III fundamental review of the trading book (FRTB) standards in the European Union (EU) for the banks’ calculation of their own funds requirements for market risk until 1 January 2026.
The EC essentially considered that the implementation of the FRTB rules should converge as much as possible across jurisdictions to ensure a level playing field among internationally active banks. Because the United States has not yet provided clarity on when and how it would finalise its implementation of the Basel III standards, the EC decided to postpone FRTB by a further year.
During the one-year postponement period, firms would continue to use their current (pre-FRTB) methodologies to calculate their own funds requirements for market risk. In parallel, the FRTB Standardised Approach will be used for the output floor calculation. This means that firms would need to continue reporting these elements to competent authorities based on the current reporting requirements.
More specifically, the existing reporting templates for market risk, as they are laid down in Commission Implementing Regulation (EU) 2021/451 and Implementing Regulation (EU) 2021/453, will continue to apply until 1 January 2026. As to the specific disclosure requirements for the own funds requirements for market risk, tailored to the FRTB framework, the EC clarifies that the new disclosure requirements would also be postponed by one year.
Regarding the output floor, the EC expects that EU banks currently using an internal model approach for capital purposes calculate the output floor for the market risk component of the own funds requirements on the basis of the comparison between the outcomes of the current Internal Model-based Approach and the FRTB Standardised Approach. This also means that EU banks that are currently using the standardised approach for capital purposes would need to compare its outcome with the FRTB Standardised Approach unless they are not subject to the current interim reporting requirements.
On the other hand, the EC reminded that the new requirements introduced by the banking package on the Banking Book (BB) - Trading Book (TB) boundary will become applicable from 1 January 2025, inviting the EU regulators and supervisors to take action in this area to avoid a staggered implementation of the different elements of the FRTB framework.
In response, the European Banking Authority (EBA) published a no-action letter on the BB-TB boundary, recommending that competent authorities should not prioritize any supervisory or enforcement action concerning the amendments to the provisions setting the boundary between the two books, or those defining internal risk transfers between them.
The EBA’s main concern appears to be that the front-loaded application of the revised provisions on the boundary and internal risk transfers, compared to the rest of the FRTB framework, which is not yet implemented in the EU for capital purposes, would subject institutions to an operationally complex, fragmented and costly two-step implementation. Furthermore, The EBA also considers that a front-loaded application of the boundary provisions would lead to global institutions being subject to very different regulatory requirements depending on where the risk management is performed, thus resulting in a fragmentation of the regulatory framework.
The publication of the DA was conveniently accompanied by a set of question and answers on some aspects of the postponement, including the use of the alternative Standardised Approach in the context of the Output Floor calculations, and more importantly, the application of the revised BB-TB boundary. In addition, the EBA's no-action letter was accompanied by a document outlining its considerations of technical questions and issues arising from the postponement. Firms in scope would be well-advised to review these documents carefully and to inform their competent authorities of additional material issues identified as recommended by the EBA.
This blog has originally been published at Finextra
What does Basel IV mean for EU banks? A quick review of the challenges and opportunities
Mete Feridun
19 May 2024
The finalisation of Basel IV marks a significant milestone in the ongoing evolution of global banking regulation. These comprehensive reforms, concluded by the Basel Committee on Banking Supervision in 2017, introduce critical changes across various dimensions, including risk measurement, capital adequacy, and reporting requirements. In the European Union, Basel IV translates into substantial amendments to the Capital Requirements Regulation (CRR III) and Capital Requirements Directive (CRD VI), embedding the final Basel III framework into EU law with specific regional adjustments.
Last month, the European Parliament has passed the EU Banking Package, including amendments to Directive 2013/36/EU, known as the Capital Requirements Directive or CRD VI and Regulation (EU) No 575/2013, the Capital Requirements Regulation 3 (CRR3), signaling for the banks that have put off their preparations to start their preparation. As banks brace for the phased implementation of these rigorous standards, the path forward demands strategic planning, substantial investments in technology, and robust risk management practices to navigate the complex regulatory landscape and ensure compliance while maintaining competitiveness in the global market.
To begin with, Basel IV leads to changes in capital requirements, with an increase in Tier 1 Minimum Required Capital (MRC) for EU banks. Overall, the increase in Tier 1 MRC for EU banks under the implementation of Basel IV signifies a shift towards stronger capital buffers and enhanced risk management practices to promote financial stability and resilience in the banking sector. The implementation of the final Basel III standards under the EU-specific scenario is expected to raise Tier 1 MRC, driven by factors such as the output floor, operational risk, and market risk. These changes in capital requirements reflect the impact of Basel IV on the regulatory landscape for EU banks, necessitating adjustments to meet the new standards and ensure compliance with the updated framework.
This means that EU banks will need to ensure they have sufficient Tier 1 capital to meet the increased Tier 1 Minimum Required Capital (MRC) requirements under Basel IV. This may involve raising additional capital through various means such as issuing new shares or retaining earnings. Also, with changes in capital requirements driven by factors like the output floor, operational risk, and market risk, EU banks will need to enhance their risk management practices. This includes improving risk measurement models, monitoring operational risks more closely, and managing market risk exposures effectively.
Inevitably, adapting to the new Basel IV standards may incur additional compliance costs for EU banks. This could involve investments in technology, staff training, and regulatory reporting systems to meet the updated requirements. Overall, the increase in Tier 1 MRC may impact the competitiveness of EU banks compared to their global counterparts. Banks that effectively manage the transition to Basel IV and maintain strong capital positions may have a competitive advantage in the market. This means that the EU banks will need to incorporate the impact of Basel IV into their strategic planning processes. This includes assessing the implications of higher capital requirements on business strategies, capital allocation decisions, and overall risk appetite.
Basel IV also introduces changes to market risk regulations, particularly through the Fundamental Review of the Trading Book (FRTB). Overall, the changes to market risk regulations under Basel IV, including the FRTB, will require EU banks to enhance their risk management capabilities, adjust their capital planning strategies, manage compliance costs, and make operational changes to meet the new regulatory requirements effectively. FRTB redefines the boundary between the banking book and the trading book, introduces new standardized and internal model approaches, and enhances risk-sensitive rules for capital absorption. New templates capture detailed information on instruments and positions under different approaches.
Changes to the FRTB framework can have several impacts on EU banks. To begin with, the redefinition of the boundary between the banking book and the trading book, along with the introduction of new standardized and internal model approaches, will require EU banks to enhance their risk management practices. Banks will need to improve their ability to measure and monitor market risk exposures more accurately. Furthermore, the implementation of the FRTB under Basel IV may lead to changes in capital requirements for EU banks. The new risk-sensitive rules for capital absorption could result in adjustments to the amount of capital banks need to hold to cover market risks.
It should also be considered that adapting to the new market risk regulations and implementing the FRTB framework may incur additional compliance costs for EU banks. This includes investments in technology, data management, and risk modeling capabilities to comply with the enhanced requirements. But more importantly, EU banks will need to make operational changes to ensure they can capture detailed information on instruments and positions under the different approaches mandated by Basel IV. This may involve updating systems, processes, and reporting mechanisms to meet the new regulatory standards. Banks should consider these as an opportunity as effective implementation of the FRTB requirements and management of market risks in line with Basel IV standards may enhance their competitive positioning. Strong risk management practices and compliance with regulatory standards can contribute to a bank's reputation and stability in the market.
Furthermore, Basel IV significantly impacts banks' risk measurement and models, requiring adjustments to comply with the new standards. Banks with legacy IT, data, and reporting systems may face cost pressures as they update their systems to meet the new requirements. This means that banks with legacy IT, data, and reporting systems may face significant cost pressures as they need to update their systems to comply with the new risk measurement standards under Basel IV. This could require investments in technology infrastructure, data management systems, and reporting tools to meet the enhanced requirements. Implementing new risk measurement models and adjusting existing systems to comply with Basel IV can pose operational challenges for EU banks. This may involve redesigning processes, training staff on new systems, and ensuring data accuracy and consistency across the organization.
Again, adapting to the new risk measurement and modeling requirements of Basel IV may lead to increased compliance costs for EU banks. This includes expenses related to system upgrades, staff training, and regulatory reporting to ensure alignment with the updated standards. Hence, banks that effectively navigate the challenges of updating their risk measurement and modeling systems under Basel IV may enhance their competitive position. Banks that can efficiently implement the necessary changes and maintain robust risk management practices may differentiate themselves in the market.
Basel IV also introduces changes in reporting areas, including shadow banking, crypto assets, non-performing exposures, and ESG. Banks will need to adapt their systems to collect, analyze, and report the necessary data in these areas. This will require banks to adapt their systems to collect, analyze, and report data related to these new reporting areas, which may require enhancements to data collection processes, data management systems, and analytical capabilities to ensure accurate and timely reporting. In particular, adapting to the new reporting requirements for shadow banking, crypto assets, non-performing exposures, and ESG can pose compliance challenges for banks. Ensuring that the necessary data is collected, analyzed, and reported in accordance with regulatory guidelines may require additional resources and expertise.
On the other hand, the inclusion of new reporting areas in Basel IV highlights the importance of effective risk management practices in these areas. Banks will need to assess and manage risks associated with shadow banking activities, crypto assets, non-performing exposures, and ESG factors to comply with regulatory requirements and safeguard their financial stability. Needless to mention, implementing changes in reporting areas under Basel IV may necessitate operational adjustments within banks. This could involve updating reporting systems, training staff on new reporting requirements, and establishing processes to ensure data accuracy and completeness in the identified areas. From a strategic standpoint, it is imperative that banks incorporate the impact of changes in reporting areas into their strategic planning processes. Understanding the implications of reporting on shadow banking, crypto assets, non-performing exposures, and ESG factors can help banks align their business strategies and risk management practices with regulatory expectations.
From a time-planning perspective, it should be noted that the deadline for implementing the Banking Package – Capital Requirements Directive VI (CRD VI) and Capital Requirements Regulation 3 (CRR3) in the EU is 1 January 2025, whereas the date for the first application of reports based on the Basel III requirements in the EU, as part of the European Banking Authority's (EBA) two-step sequential approach to amend Pillar 3 disclosures and supervisory reporting ITS is 31 March 2025, as announced in its December roadmap. This means that implementation will not be a one-off event, but an ongoing process for some time, that banks must prepare for. These key dates mark significant milestones in the implementation of Basel IV and the regulatory changes affecting banks in the European Union, emphasizing the importance of compliance and readiness for the new standards and reporting requirements.
With substantial changes to capital requirements, risk measurement models, market risk regulations, and reporting standards, banks must adapt to ensure compliance and maintain competitiveness. The increase in Tier 1 Minimum Required Capital, the introduction of the Fundamental Review of the Trading Book, and new reporting areas, including shadow banking and ESG, necessitate robust risk management and substantial investments in technology and systems. EU banks must incorporate these regulatory changes into their strategic planning, aligning their business strategies, capital allocation, and risk appetite with the new standards.
While the transition to Basel IV may incur additional compliance costs and operational challenges, it also offers banks the opportunity to strengthen their risk management practices and enhance their market position. Banks are urged to take proactive steps now to navigate these reforms effectively, ensuring they are well-prepared to meet the new regulatory landscape and capitalize on the benefits of a more resilient and stable financial system.
This blog has originally been published at Finextra
Bank of England and HM Treasury's response to Digital Pound consultation: What is next?
Mete Feridun
26 January 2024
The Bank of England (BoE) and HM Treasury published a response to their joint consultation paper on 25 January 2024, setting out their assessment of the case for a retail central bank digital currency (CBDC). The consultation paper, which was published last year in February, marked the start of the design phase of the project. The consultation sought feedback from the public on a set of design proposals for a digital pound and judged it likely that a digital pound would be needed in the future.
In their joint response, the BoE and HM Treasury clarifies that it remains “too early to decide whether to introduce a digital pound”, but they judge that further preparatory work is justified so that they can respond to developments in the payments space and “reduce materially the lead time if there is a future decision to introduce a digital pound”. It is understood that upon completion of the design phase, which is expected to be next year, the Bank and the Government will take a more concrete decision as to whether to proceed to build a digital pound or not. The joint response clarifies that "if the decision was taken to do so, a digital pound would only be introduced once both Houses of Parliament had passed the relevant legislation".
The BoE and HM Treasury also clarified their positions in a separate response to the Technology Working Paper of 25 January 2024, which set out a high-level approach to technology design considerations and proposed an illustrative conceptual technology model for a digital pound. The BoE and HM Treasury set out a set of design principles, explaining that the design proposition in the Consultation Paper “remains the right basis” for further exploration of a digital pound during the design phase. However, they also acknowledge that "further work is required to flesh out a detailed proposition".
Although the consultation paper sought to provide certain assurances that measures would be put in place to ensure the public would have confidence in using a digital pound, it appears that respondents’ concerns remain with respect to the BoE, as operator of the digital pound infrastructure, having access to personal data. In the joint response, the BoE and HM Treasury reiterate that private-sector digital pound wallet providers, Payment Interface Providers (PIPs), "would anonymise personal data before transactions are processed and settled by the Bank". They also repeat that they would refrain from pursuing "government or central bank-initiated programmable functions". Going one step further, they set out a range of further measures that would govern a digital pound, if the decision were made to introduce it. In a nutshell, the core design feature of a digital pound would be privacy.
Accordingly, HM Treasury and the BoE express four legislative and policy commitments that the BoE and the Government would not have access to users’ personal data – and legislation introduced by the Government for a digital pound would guarantee users’ privacy. In addition, the BoE has committed to exploring technological options that would prevent it from accessing any personal data through its core infrastructure. Also, the BoE and the Government would not program a digital pound – and legislation introduced by the Government for a digital pound would guarantee this. Finally, the Government has legislated to safeguard access to cash, ensuring that it would remain available even if a digital pound were launched.
The BoE and HM Treasury's joint response sets out the steps that will follow during the design phase. Before any launch of a digital pound, the Government has committed to introducing primary legislation, which is expected to guarantee users’ privacy by preventing the BoE from accessing any personal data through the Bank’s core infrastructure. This means that a digital pound would only be launched once both Houses of Parliament had passed the relevant legislation. So it is understood that, as the design phase progresses, there would be further public consultation if the Government decides to introduce primary legislation in the future.
Responding to the concerns about the implications of a digital pound for access to cash, the BoE and HM Treasury also reminded that the Government has legislated to safeguard access to cash, explaining that cash would remain available even if a digital pound were launched. The clear message is that a digital pound would complement, not replace, cash. Providing reasurrances on that front, they explain that the Financial Conduct Authority (FCA), and the Payment Systems Regulator (PSR) will also take part in safeguarding access to cash. Indeed, the Government legislated in 2023 to provide the FCA with powers to protect access to cash across the UK, and the regulator is already consulting on how it plans to protect access to cash.
While no decision has yet been taken on whether to introduce a digital pound, the BoE and HM Treasury explain that the design phase comprises four major "workstreams" including the blueprint for a digital pound, proofs of concept, engagement with the stakeholders and further costs and benefit analysis. This suggests that further work in this space will focus on experimentation and proofs of concept with the private sector, developing a blueprint for a digital pound based on a set of design principles, engaging with all stakeholders on the future of money, and conducting an assessment of the costs and benefits of the digital pound.
This blog has originally been published at Finextra
