Say some account A deposits $1m of collateral to buy $5m of BTC futures. They are currently 5x leveraged, and a 20% BTC move away from bankruptcy. They can trade normally.
Now say that BTC drops 11%. A has dropped below Initial Margin Fraction(10%) and can no longer send orders.
Now say that BTC drops another 5.5%, or 16.5% total. Account A has dropped below Maintenance Margin Fraction (4%). Liquidation orders are being sent to the market to sell account A’s BTC futures.
Now say BTC drops another 2%, or 18.5% total. Account A has dropped below Auto Close Margin Fraction (2%). The account’s entire position and balances are being sold to the Backstop Liquidity Providers and Insurance Fund.
Finally, say that instead of the above, BTC gaps down 20.5% total, fast enough that FTX has not liquidated any of its position yet. Account A is now beyond bankrupt.