# Account balance limits

This is categorised as an [account metric](/xnUSdbbaQS-wn0KmIYRh-Q).

Under the [Trade Credit Clubs](/Q93p0MdKRr-D07uK3iAVHg) proposal, each member has two types of account balance limit; 'trading' limits $L_t^\pm$ and 'clearing' limits $L_c^\pm$. The trading limits specify how far into credit or debit a member can go between [central clearing](/V16aQr1MT8ep0oM3Y4RSyQ) settlement payments, which are mediated by the club's 'system' account. The clearing limits determine the value to which [account balances](/R1iAIsZoRRmJgIV4NlHQZw) must be brought by the settlement process. See the 'System payment amounts' section under [late payment](/iIVkdpz_S76a_6FexHZWAw) for an example of how these work in practice.

For a discussion of the potential for members to profit from imposing excessive risks on others by gaming these limits, see [parasitic strategies](/fNhqlAK8TNqmDiXtEuLUWg).

## Types of limit

### Positive clearing limit

This limit specifies how much credit (measured in MCU) a member is willing to hold indefinitely. A large value of $L_c^+$ means that the member is less likely to require fiat payment from the system account at the end of each settlement period, corresponding to a greater degree of late fiat payment [de-risking](/vlzc8wOPTsu18oMWc64wpw?both).

However, the member's exposure to [systemic risk](/H3VYE7o3QwWqkw3dw4l3GQ) (defined as the potential for any event that results in a loss of MCU value relative to fiat, e.g. club collapse) is directly proportional to its MCU holdings. There is therefore a trade-off between increased convenience associated with the less frequent requirements for fiat payment from the system account and exposure to systemic risk.

There is therefore no incentive for a member to push for an ever-increasing value of $L_c^+$; their optimum account balance will be the global minimum of the sum of these sources of risk, subject to other variables.

The corollary of this is that increasing trust in the network (proportional to a decrease in perceived systemic risk) is rewarded; an increase $L_c^+$ directly benefits the member by reducing the frequency with which they have to interact with the system account at all, and benefits the rest of the club by the increased provision of [liquidity](/hZgux1eRScGqbyOi--DU1Q) (provided the increase in $L_c^+$ is matched by an increase in the magnitude of some other member's value of $L_c^-$, which is directly implied; if the member trusts the network, then they trust that other members are creditworthy down to a lower value of $L_c^-$ (or that the [fiat buffer system](/d2m7xva0QzOZ80y2uBvBVg?both) is effective)).

### Positive trading limit

A high value of $L_t^+$ gives a member increased scope to make large purchases, but if this has been accumulated from other members who have gone below their agreed values of $L_c^-$ it is a risky holding (as explained below, a member is only considered creditworthy up to their agreed value of $L_c^-$ for any time horizon longer than a single settlement period). Furthermore, the requirement to balance buying and selling means that a core principle of mutual credit is that no member should be allowed to accumulate and hold onto very large balances, as this deprives other members of the liquidity they need to trade.

### Negative clearing limit

Negative limits allow a member to spend credits before they have earned them and therefore offer a source of liquidity. They are also necessary for the sum of all balances in the club to add up to zero.

The negative clearing limit $L_c^-$ specifies the minimum balance that a member must return to at the end of each settlement period, and as such represents the long-term creditworthiness of the member; if it is secured by a centrally-held deposit (perhaps contributing to the fiat buffer) or other collateral then they can hold a balance equal to $L_c^-$ in perpetuity without imposing unsecured risk on other members (although this would constitute a violation of their commitment to balance buying and selling over the long-term).

There is an obvious incentive to obtain a large magnitude of $L_c^-$, as it means that more credit can be spent before fiat payment to the system account is required to settle. It should be determined largely by objective measures such as turnover but will also have some scope for negotiation when the member joins the club, and as they build up a good [reputation](/5FokSVvRSjChYIPN2PuhcA) or in line with changes in its [trade volume](/lmbNe7bZSoK3KBR2u4dHgw). All other club members are interested parties in negotiations to establish or change this limit, and again there may be merit in a requirement to back this risk with a deposit at the central clearing account or some other form of collateral.

Visibility of each member's balance to all other members and the club service partner should provide a check on persistent maxing out of the limit (i.e. violating the commitment to a long-term balance of buying and selling).

### Negative trading limit

There is a further increase in flexibility associated with a large value of $L_t^-$, as it enables spending before selling beyond what a member is considered creditworthy for over the long-term (as quantified by $L_c^-$).

As with $L_c^-$, this provides an obvious incentive to obtain the largest possible magnitude of $L_t^-$. A member that utilises their negative trading limit is effectively imposing the (unsecured) risk on all other members of the club that they will delay or default on their fiat settlement payment; whilst the difference between $L_c^-$ and $L_t^-$ is essentially the risk the other members are willing to accept over each settlement period as the cost of provisioning liquidity to the member, if a balance below $L_c^-$ becomes habitual then the member is not only free-riding through unsecured borrowing from the club as a whole, but also draining liquidity by grossly violating the commitment to balance buying and selling over the long-term.

Furthermore, if this behaviour becomes endemic to the club it becomes a source of [systemic risk](/H3VYE7o3QwWqkw3dw4l3GQ) due to widespread and potentially self-reinforcing loss of confidence in the willingness of all members to settle fully in fiat if required (i.e. bring their balances to zero and thus be able to leave the club without imposing costs on the remaining members). This may lead to a situation analogous to a bankrun.

Although it is hoped that the club context and features such as reputation scoring will encourage good behaviour (see the 'Trade credit settled in mutual credit' and 'System payment interval probabilities' sections in [late payment](/iIVkdpz_S76a_6FexHZWAw) for a full range of potential mechanisms), there should be objective criteria for setting and monitoring this limit and the process should be subject to collective determination and oversight by all other members.