A Not-So-Marginal Risk in Silver

EconMatters's picture

By EconMatters

Our research analyst John Gray was interviewed by Carolyn Cui from Wall Street Journal regarding why we believe CME should have raised margins on silver earlier and had missed the best opportunity to do so.

Below are excerpted from Carolyn's article--Tripped Up by the Margin--dated June 8, 2011 along with some more of our thoughts:

Commodity investors have long been used to wild market swings driven by wars and hurricanes. But recently a new risk has been added to their list: margin requirements.

Investors are still crying foul over CME Group Inc.'s decision to raise margins five times over just eight trading days. Between April 25 and May 5, the exchange operator increased silver margins to as much as 12%, or $21,600 per contract, from 6%. Silver tumbled 25%.?

Chart Source: WSJ.com


The lack of disclosure riles John Gray, a researcher at EconMatters.com, a website dedicated to economic and market analysis. 

"They need to be more transparent," Mr. Gray said, adding that margins should be a consistent percentage of the contract price, and that exchanges should give more warning of any moves. 

Mr. Gray is among market participants who say the CME should have raised silver margins earlier. CME increased once in March, but didn't make any changes until a month later. Silver prices gained about 30% to $47.151 an ounce between those moves. 

"It should have been a red flag to CME when silver crossed the $40 threshold that they needed to raise margins significantly," Mr. Gray said.

EconMatters additional comment:

Compounding the problem is that brokers also raised their in-house margins on top of the ones CME implemented. Carolyn's article noted Interactive Brokers "overstepped the exchange twice" in hiking silver margins, while MF Global is another broker, had also charged more margins on silver than what was required by exchanges at the time.  That set off a mass liquidation spilled over even to the other asset classes as well with investors scrambling to cover the newly raised margin requirements.     

Ideally, margin requirement should be set by the criteria the Exchange deems proper based on experience and historical pattern, and preferably at a fixed percentage at all time, instead of jumping all over the place as illustrated in the chart above.  So as the price of the underlying commodity goes up or down, a consistent percentage of margin requirements is maintained--i.e. more real-time mark-to-market.

This will help reduce market volatility as traders won't get caught off guard and be forced to liquidate large positions in order to meet the sudden raised margin requirements.  A fixed percentage also will increase the transparency while keeping the risk of over-leverage in check.

Note - Carolyn's full article is available here at WSJ.com.

Further Reading:

Silver Market: Why CME Must Raise Margin Requirements By 30%
Physical Silver Investors Are Being Hoodwinked by the Futures Market

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Moe Howard's picture

No margins, physical only and I will buy the dip when there is a dip below at least 30.

Urban Redneck's picture

This notion of fixing margin rates as a percentage of cost is ONLY ADVOCATED BY THE IDIOTS OF THE SPECULATING CLASS.  The point of producer HEDGING is to lock in to a future sales price for production at a fixed cost (and this supposed to 1/2 the market), if the maintenance cost of that hedge fluctuates in direct correlation to the spot price then there is NO POINT in hedging, since SIGNIFICANT capital must be set aside (and NOT deployed in production) to cover margin calls as the price increases.  If there are no producers hedging production, or there are short-contract holders with only cash and not physical product, then THAT IS A DIFFERENT ISSUE. 

Either set the margin rate at a fixed amount, and only change it for new or rolled contracts, or make the margin 100% to drive all the legitimate hedgers out, and admit that the market is nothing more than a TBTF casino and a tool for the central banks to suppress currency devaluation.

The fact that the ass clowns of the WSJ publish material which demonstrates that they lack basic comprehension of the functioning of one of Wall Street's primary products for a legitimate productive enterprise tells you just what rigged pile of bullshit Wall Street and its official rag have become.       

zhandax's picture

Were there any prospects for a dip to buy before this?  Be thankful for the unintended consequences of assholes.  Now, drive it like you stole it.

Dan The Man's picture

...the margins are paper too.  Its irrelevant what the numbers say.  They can't be trusted to be accurate or consistant.   Just BTFD and amuse yourself with the price charts.

They won't matter much longer.

jomama's picture

am i seriously the only one who feels like the little boy who cried wolf?

Piranhanoia's picture

I hear a bit of crying about paper mache, you could have spent your money on a nice biday. You volunteered your heiney but didn't know, you'd be the goat at the ole rodeo.

ebworthen's picture


Doesn't monkey'ing with margin requirements simply offset speculation bets and defeat the purpose of a futures market?

Why adjust margin requirements in a speculative market where margins should be regulated by risk appetite and consequence - rather than an enforced variable set centrally?


alexdg's picture

If they had raised the margins earlier, Silver would now be over $50...

Manthong's picture

I'm not down on physical, but where was this insight several months ago?

Freddie's picture

Where is Feces Ferguson when we need him? 

Looks like the Ob-a-ma Lib Dem a*s boys who post here are also missing.

lawrence1's picture

Physical only, dont need therir fucking margins, futures and especially their rationalizing bullshit trying to exuse blantant manipulation for obvious reasons by sociopaths.

Stuck on Zero's picture

Why should there be margin speculation and why should it be the government's business how you obtain the money to speculate in commodities?  Do the Feds care how you get your money when you go to Vegas?

So Close's picture

Losing or winning money in Vegas doesnt not expose the fiat end game.  Rising PM prices do.  Nuff said?

zorba THE GREEK's picture

 Just use the dips to accumulate physical. No leverage , no risks. Don't play their

 paper games and they can't hurt you.

rocker's picture

You surely have the right idea.

If one studies the chart and like chart patterns, there is a very obvious one exposed. One that I missed and now see.

It says, Buy the Fukn Dip.  Think old school and O'Niel's teachings.

Urban Roman's picture

Next up: frustrated silverbugs throwing their worthless coins into the dumpster.

... if I could just figure out which dumpster ...