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Last year, silver contract margins were subject to aggressive increases. This year, the rates are moving in the opposite direction.
By Michelle Smith — Exclusive to Silver Investing News
Last year CME Group (NASDAQ:CME) drastically raised the margin requirements for silver contracts, but this year the amounts needed to initiate and maintain silver contracts are being whittled back down. On April 16, the initial margin for COMEX 5,000 silver futures for speculators will be lowered from $21,600 to $18,900 and the maintenance margin will be reduced from $16,000 to $14,000. Initial and maintenance margins for hedgers and members will be reduced from $16,000 to $14,000.
These changes follow the reductions implemented on February 13, when initial margins for speculators were cut from $24,975 to $21,600, and maintenance margins were lowered from $18,500 to $16,000. The rate for hedgers and members was reduced from $18,500 to $16,000.
2011 margin increases
Even with the latest reductions, margins are still well above where they were this time last year, when CME Group raised requirements eight times.
Five of those increases were implemented between April 26 and May 9. On one occasion the margin hike was so rapid that CME announced two price changes at once, with one going into effect on a Thursday and the other on the following Monday.
These aggressive changes raised the cost of COMEX silver positions by over 80 percent and were widely blamed for the subsequent decline of silver prices, which fell by over 30 percent.
“Incredibly, many outside observers interpret an increase in margins not as a protective device for all parties involved but rather as a way to force a price reversal by ‘making silver more expensive to trade,’” wrote Howard Simons, President of Rosewood Trading, accurately summarizing the sentiment at the time.
In the midst of widespread frustration and criticism, CME Group has asserted its neutrality and insists its intention is not to move prices or impact trading. Rather, it has said margins are a tool to protect both the market and market participants.
“We’re intently focused on risk management,” wrote Kim Taylor, President of CME Clearing, in a document titled “Understanding Margin Changes.” “[Margins] aren’t a means to move a market one way or another, or to encourage or discourage participation from one kind of market participant or another,” Taylor also wrote.
Margins are basically performance bonds, good faith financial deposits that guarantee the performance of derivatives contracts, CME Group explained in another educational document.
“Though margin changes may coincide with price increases or decreases, margins are not changed as the result of particular market prices,” the document said. “Moreover, margins are not set to dampen or heighten volatility, but rather to provide the clearing house and clearing member firms with additional layers of financial resources to lessen the impact of price swings,” it added.
2012 price decreases
Trading volumes of COMEX silver have been lower in 2012 than they were last year. Through March, a report shows that volumes year to date were down 28.5 percent. Some suggest that recent margin decreases are an attempt to attract liquidity to the market.
As explained by CME Group, falling silver margins indicate that the market and its participants have reduced needs for financial security.
“When daily price moves become less volatile, margins typically go down because the risk of the position also decreases,” explained CME Group.
The latest changes do not take effect until the close of business on April 16. Waiting until the market closes provides the exchange with a full view of the trading day’s market liquidity.
Along with silver, CME Group also announced margin reductions for copper and palladium contracts.
Securities Disclosure: I, Michelle Smith, do not hold any equity interests in the companies mentioned in this article.