Exchange Minimum Margins
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We are trading contracts that call for taking or making delivery of a physical Commodity at a specified date and predetermined price. These contracts each have their own unique specifications and of course, contract values in dollars.
The dollar values of these contracts are tremendously large in some cases. Table 1 shows a few examples of these contract values. Fortunately, Futures traders are not required to have the full value of the contract to trade them. In some cases, the metals commodity futures trading margin requirements, this number is a little higher due to the extreme volatility.
Margin is sometimes referred to as a Performance Bond. This cash is used to assure the broker, or clearing firm, that the customer is good for any losses they may have while in a particular trade. Table 2 shows the margin required to trade the Gold contract. Margins are just one of the risk management tools that clearing firms such as CME Group and ICE use to protect the individual investor and provide security to commodity futures trading margin requirements markets.
During volatile periods in a market, a clearing member like the CME Group will generally raise the margin to account for the perceived risk. Some of the factors that could contribute to this volatility are:. When the daily volatility decreases, margins typically go down because the perceived risk is lower for traders holding open positions. This raised the volatility levels so severely that the exchanges had to increase the margin levels 11 times over the past year.
During the same time Silver was in a run-away bull market, the Copper market was relatively flat thereby reducing the volatility and risk to open positions. The exchanges actually lowered the margin requirements two times during the same period.
Exchanges review the volatility daily to make adjustments to margins. More volatility leads to higher margins, while lower volatility commodity futures trading margin requirements lead to lower margins. Many times it appears that when an exchange raises margin levels, it is an attempt to control the price action and possibly stop a price trend. But the exchanges are not trying to manipulate prices, they are simply protecting investors and markets when the volatility becomes excessive. Raising margin provides additional layers of financial resources to reduce the impact of these large price moves.
This demonstrates that raising margins does not always deter price action trends. Exchanges are neutral participants in the financial markets — it is their intention to protect the market whichever way it moves.
Also, they want to ensure that each participant has enough capital to protect against price moves each day. There are approximately 50 other global exchanges that use the same system for determining these margins.
This will help keep some consistency around the world. Using SPAN around the world will help ensure that margin rates are relatively the same during trading in different time zones.
Exchanges will look at three different kinds of volatility to make their decision on margin rates:. Exchanges will also review other factors such as liquidity, seasonality, current and anticipated market conditions and any other relevant information they see fit for determining margin levels. However, exchanges have been known to raise margins intraday due to severe volatility crude oil Market participants will usually have 24 hours notice of these margin changes to give market participants time to assess the impact on their positions and add additional funding if needed.
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