Shanghai Gold Exchange Hikes Silver Margin By 20%

Tyler Durden's picture

Wondering what caused the dramatic plunge in gold and silver earlier? Wonder no more: the CME's counterpart in China, the Shanghai Gold Exchange, decided to follow through with an identical, if more substantial, action to that undertaken by the CME on Friday, and announced an increase in the Silver T+D contract margin from 15% to 18%, a 20% bump; the SGE also noted an increase in the price range limit from 12% to 15%, which will be promptly fulfilled, as margin hikes traditionally tend to lead to a sudden spike in vol, contrary to well-meaning expectations. There was a second announcement, slightly more cryptic one, noting that if volatility were to persist, the SGE would outright halt silver trading (although the Google Translation of this previously unseen form announcement is a little sketchy). Expect to see more exchange intervention in precious metals today. Regardless, those who bought silver 15% lower a whopping, oh, two hours ago, courtesy of the out and out sheer panic, are quite grateful to the Chinese.

The Margin hike announcement - link:

Member Unit:     silver Ag (T + D) contract Sept 23 close to seal the lower limit. According to "Shanghai Gold Exchange Risk Control Measures" of the relevant provisions, such as Ag (T + D) contract on Sept 26 (Monday) close to limit the same direction (ie, a second consecutive unilateral City), end of the day from the date of liquidation from the Ag ( T + D ) contract margin increased from 15% adjusted to 18% , the next trading day Ag ( T + D ) contract price limits range limit from 12% adjusted to 15% .

And the more cryptic one - link:

Silver Ag (T + D) contract Sept 23 close to seal the lower limit. If Sept 26, Sept 27 days Baiyin Yan swap transactions to limit the same direction, namely to reach the daily limit for three consecutive days, there will be the third consecutive unilateral City. According to "Shanghai Gold Exchange Risk Control Measures," the relevant provisions of Chapter II, once the third consecutive unilateral City, Spet 28 Exchange will suspension of silver Ag ( T + D ) the contract day, and the implementation of the following two measures to resolve any of the market risk.

    Measures one: 9 months 28 days to decide whether to take unilateral exchange or bilateral, in the same proportion or in different proportions, some members or all members to improve trading margins, some members or all members suspended new positions, adjust the up (down) circuit breakers rate to restrict some or all members of the withdrawal of funds, the deadline open, forced open, suspension and other measures to resolve in one or more of the market risk. Exchange of relevant measures will be Sept 28 12 -point first through the exchange website, Spet 28 at end of day settlement will go into effect.

    Measures II: Setp 28, the Exchange's trading positions held by members of Baiyin Yan period open for an agreement. Specific methods are: Exchange of the Sept 27 (third unilateral City) daily limit price at closing time to declare the transaction Baiyin Yan swap transactions did not open declaration to Sept 26 (second unilateral City) settlement The contract price and the net profit of customers by profitability position to match the size of the transaction, not in Sept 27 to declare open daily limit price does not enter the agreement positions open range. Recommended to prepare closing out of long positions will, in Sept 27 prior to the closing price to sell positions to declare the daily limit, once the exchange using measures two positions will serve as a basis for agreement. Positions held by the same customer-way, the first level their positions, then the method open.

    City in the event of three consecutive cases of unilateral, which measures the specific use, the exchange will be based on market conditions, in the Sept 28 12 -point first through the exchange website, please access the Member in a timely manner, and to prepare preparations.

    Such as Sept 27 closed, the Bai Yinyan swap transactions did not appear for three consecutive unilateral City, Sept 28 normally open for trading, and maintenance margin ratio 18% , Change stop range limit of 15% unchanged.

Exchange Special Note: As the silver market price volatility and uncertainty of exchange to take measures, in order to safeguard the interests of investors in their own, reminding investors carefully about the risks of exchange control measures, prudent market.

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gorillaonyourback's picture

not gonna help the cartel,,,, its game over for the fiat.  they can't print mo money and they can't afford not to print mo money.

ManufacturedOpinion's picture

Damn - now THERE'S a scary thought:  Closing the gold/silver market.

How am I gonna buy more ???

eisley79's picture

Thank you for posting absolute margins Tyler, we always want absolute as well as % change.

 

Keep up the good work

Sudden Debt's picture

If they close it and prices for the real stuff go to 500$ per ounce I'm selling :)

 

Banjo's picture

As long as I can get FIAT I'm holding my silver. In Yugoslavia, Hungary, Germany and Zimbabwe among others once the FIAT printing got HOT it wasn't worth converting over :)

 

I would suggest hang on to the silver till you are ready to buy someting in the physical world.

unky's picture

When he says $500/oz he means he will sell silver for things which cost $500 today. So he means he would use 32 oz of silver to buy a car for example. The $500 is just a figure to compare. Its quite hard to say 1oz for a computer, 1/100oz for a loaf of bread. Nobody would speak like that.

strannick's picture

LIke Feteke said, the price of gold/silver is on it's way to zero, as in, they will be unpurchasable with govt paper.

Sathington Willougby's picture

"1oz gold will always buy a nice men's suit."

I contend that

"1oz silver will always buy a cheap suit."  What you do w/ it is up to you.  I suggest securing your medicine based business plan or maybe one based on foreign militarism with your new found cheap suit.  Dress him up like a cheerleader and pose him in a large state governor's office if you dare.  Hell, prop him up for the big office on the hill, you can destroy millions of lives there.

zhandax's picture

That's the point...they can't close the gold/silver markets; they can only intimidate the futures traders.

Ahmeexnal's picture

completely predictable.

ffart's picture

Isn't it funny how the more these exchanges act to drive speculators out of the markets in the name of "price stability" the more volatile the markets get.

macholatte's picture

5 minutes after Europe opened everything reversed. What a surprise. What's gonna happen when NY opens?

Tyler Durden's picture

Talk of emergency 50 bps ECB rate cut. ECB denied it meaning it is probably imminent.

buzzsaw99's picture

you are obviously mistaken. china is the only country which can move commodities. [/sarc for emerging mkt copper-tards]

Edward Fiatski's picture

"When China does business, why your pussy hurt?"

buzzsaw99's picture

you likey sweatshop, me likey sweatshop. why you so sore?

Ahmeexnal's picture

roundeye want flied lice withs a stlaw?

LookingWithAmazement's picture

The Shanghai Gold Exchange is as corrupt as the Crimex and drives up prices. Now finally a shake-out.

thefedisscam's picture

Shanghai Gold Exchange is NOT AT ALL more corrupted than the U.S. one!! as a matter of fact, they are LESS likely corrupted, because China still has NO power to mantipulate the global gold/silver market!!  whatever they do, is to follow what the CORRUPTED U.S. and EU have done! Period!

RagnarDanneskjold's picture

Liu Jun Luo (???) predicted the crash in gold, he was just early by 10 months. Chinese buying has been bubblicious. Fitting that today was the day they launched the gold ATM at Wangfujing in Beijing! 

Going Loco's picture

10 months out in timing = WRONG

OldPhart's picture

I'll bet that translation sounded like beautiful bullshit in chinese, too.

City in the event of three consecutive cases of unilateral, which measures the specific use, the exchange will be based on market conditions, in the Sept 28 12 -point first through the exchange website, please access the Member in a timely manner, and to prepare preparations.

 While I get the general gist of the article I can sympathize with the ESL crowd. 

"Accessing" my "Member in a timely manner" and "prepared preparations"....hmm, chinese porno?

eigenvalue's picture

I can give you a better translation. 

In the case of three consecutive days of limt down, the Exchange will decide which measure to take according to market conditions. The specific measure will be released at 12 PM Sept 28 (Beijing time). All exchange members are required to get informed on a timely basis and make preparations accordingly.

OldPhart's picture

Thanks, BUT

while your translation is much clearer, the original seemed so much more, um, 'whimsical'.

eigenvalue's picture

 

I think this will be a better translation than the Google Rubbish :) I guess Tyler may use it to replace the lousy google version

All Exchange Members:

The silver AG(T+D) contract closed limit down on Sept 23 (AG (T+D) contract is similar to LBMA deferred accounts but it is an exchange traded product instead an OTC one). According Shanghai Gold Exchange Risk Control Rules, if AG(T+D) closes limit down again (two consecutive days of closing limit down), the margin level of AG (T+D) contract will be adjusted from 15% to 18% at the end of day and the price limit will be raised from 12% to 15% on the next trading day.

 

All Exchange Members

Silver AG(T+D) contract closed limit down on Sept 23. If the silver contract closes limit on Sept 26 and 27, i.e three consecutive days of being limit down, that will mean the third consecutive day of single directional market movement. According to relevant regulations in Shanghai Gold Exchange Risk Control Rules Chapter II, in the case of the third consecutive day of single directional market movement, on the trading day Sept 28 (21:00 Sept 27-15:30 Sept 28 Beijing time), the Exchange will suspend the trading of silver AG(T+D) contract for one trading day and adopt either of the following measures to deal with risks.

Measure 1: On Sept 28, the Exchange may raise the margin levels of some/all exchange member. The margin level may be raised on one party or both parties of the trading. The margin levels may be raised by the same percentage or different percentage for the two parties of the trading. The Exchange may restrain some/all exchange members from opening new positions. The exchange may adjust price limits. The exchange may restrain some/all exchange members from withdrawing money. The exchange may force exchange members to close positions before a certain deadline or close members’ positions on its own. The exchange may also stop the trading of silver AG (T+D) contract. The specific measure to be adopted will be released by 12PM Sept 28 Beijing time on the Exchange’s website and implemented in the end of day clearing process of Sept 28

 

Measure 2: On Sept 28, the Exchange will apple contractual position closing for all silver AG(T+D) parties, The process works this way:  when the market closes on Sept 27, the exchange will match all the unfilled orders to close long positions at the lower price limit with short positions based on the profit size of all the short positions. The settlement price will be the settlement price of Sept 26. The unfilled orders to close long position at prices other than the lower price limit will not be included in the contractual position closing process. The exchange suggest all the long position holders who are willing to close place their orders at the lower price limit before the closing on Sept 27. Once the exchange adopts measure 2, the orders will be used in the position closing process. If a position holder holds positions on both the long and the sides, all of his short position will be closed before the contractual position closing process.

In the case of three consecutive days of single directional market movement, the Exchange will decide which measure to take according to market conditions. The specific measure will be released at 12 PM Sept 28 (Beijing time). All exchange members are required to get informed on a timely basis and make preparations accordingly.

If on Sept 27, the silver AG(T+D) contract does not experience three consecutive days of single directional market movement when the market closes. On Sept 28, the trading will resume as usual, the margin level will be 18% and price limit will be 15%.

Special Note: Because of the volatility of the silver market and uncertainty of the specific measure that will be adopted by the exchange, for investors’ own good, the exchange suggest investors should carefully study the risk management measures that may be adopted and NEVER ACT ON AN IMPULSE.

 

eigenvalue's picture

This is completely predictable. If you read Shanghai Gold Exchange Rick Control Rule, you will find that SGE just played according to the Rules. When gold/silver closes limit up/down, the margin and price limit will definitely be raised the next day. Shanghai Futures Exchange, Dalian Commodity Exchange and Zhenzhou Commodity Exchange have similar rules. 

honestann's picture

Please EXPLAIN to me and everyone why margin is INCREASED when prices FALL dramatically.  Please tell us how that makes ANY sense what-so-freaking-ever.

To increase margin when prices rise is rational, because it keeps the margin PERCENTAGE more-or-less constant.  The decrease margin when prices fall is rational, because it keeps the margin PERCENTAGE more-or-less constant.

So do please explain the logic of your claim.

buzzsaw99's picture

Please EXPLAIN to me and everyone why margin is INCREASED when prices FALL dramatically. Please tell us how that makes ANY sense what-so-freaking-ever...

 

Please tell me you're kidding.

Thomas's picture

Why does a dog lick his balls?

buzzsaw99's picture

:dog licks balls:

 

Thomas: I wish I could do that.

 

buzzsaw99: Go over there and be nice to him, maybe he'll let you.

honestann's picture

No, I am not kidding.  Are you?

The point of changing margin AT ALL on leveraged instruments is to prevent the leverage from getting excessive.  Got that?

Let's say you put up $1000 to control $10,000 for example, the $1000 being margin (to keep this simple, we'll say this is initial and maintanence).  This is 10:1 leverage.

If the price of the asset falls to the point where on contract only controls $9,000 then they should require $900 deposit so people STILL have 10:1 leverage.  There is no reason when the asset price drops to require $1,200 to control $9,000 when just before you only needed $1,000 to control $10,000.  That is fundamentally arbitrary and counterproductive.  As I showed, the required deposit should have dropped from $1000 to $900 to stay at 10:1 leverage.

Note:  Nobody is saying that people don't need to add money to their account to cover drops in the value of the assets they control on margin.  Of course they do!  We are saying there is zero justification to require $1200 to control $9,000 when last week $1000 was sufficient to control $10,000.  That is blatant manipulation designed to FORCE the price down further.

chindit13's picture

Wow. The explanation should be patently obvious (as I suspect the other poster meant to imply), but apparently it is not.

The word you are looking for is:  volatility.

Exchanges and their members are on the hook for positions that go bad if the position holder doesn't pony up.  Margin levels are the means they use to protect themselves.  They have formulas---unpublished---on which they rely and that are based on a combination of price and volatility.  If the formula was based on price alone, you might have a point.  What you have failed to consider is that when a market begins to experience sharp moves, it is possible that a single day's move alone might wipe out the entire margin.  Margins tend to be around 3-5%.  Any market experiencing a 5% move in a day or over a few days, wipes out the margin of anyone who has been on the wrong side of the trade.  In order to protect themselves, the exchanges understandably raise margin levels. 

The exchanges also know the net position of the market, because every new position has to be declared as a commercial hedge or an outright speculation.  If the exchange knows the spec position to be heavily skewed one way or the other, then they know that a move contra to the net spec position is going to cause a lot of pain and a potential capitulation.  Thus in a market that is moving against the net spec position, the exchanges might be prudent if they consider a margin increase.

The reason that they tend not to publish the formulas is because the pit could run the market one way or the other in order to set off the margin hike and squeeze those on the wrong side.

 

 

honestann's picture

No, the reason they don't publish the formulas is because the formula does not exist as a formula.  The "formula" is simply a name given to the arbitrary manipulations ordered by JPM and executed by JPM agents at the exchanges.  This is so obvious to anyone who looks, it is laughable to claim otherwise.

They just saved JPM about $20 billion dollars.  Maybe more.

chindit13's picture

I was not aware JPM controlled every single commodity, and every single exchange in the world.  Forgive me for being naive, but I thought 1.35 billion Chinese might be willing to stand up to Jamie Dimon, maybe even laugh at him the same way that laughed at Timmy Geithner.  Apparently I do not have access to the information you have, which would make what you say "obvious".  I also can't figure out why Jamie Dimon---who I suspect is kind of a greedy control freak with little or no conscience (only an opinion)---would keep Blythe Masters on the payroll if she indeed was up against it to the extent Max Keiser claims.  Certainly he could have replaced her with Jerome Kerviel and been better off, if the Keiser theory is correct.

Back to your original post, the dependence you cite on price and leverage alone is simply wrong.  Vol and net spec profile are considered as well, in everything from silver to frozen orange juice.

eigenvalue's picture

In China, unlike in the US, margins are set as a percentage of the notional amount of the contract. For example, if the silver price is $30 per ounce, contract size is 5000 ounces and margin level is 18%, then margin you must place in your account will be $30x5000x0.18=$27000. If the price goes to $40, then the margin you must place in your account will be $40x5000x0.18=$36000.

But when market closes limt up/down, the margin level (as a percentage) will be raised AND/OR the price limit will be expanded at the end of the day. 

On Sept 23, the silver contract in China closed limit down, at the end of day, the silver margin (as a percentage of the notional) was not raised but the price limit was expanded for 10% to 12%.

Today, the silver contract closed limit down again. This time the margin level is raised for 15% to 18% and the price limit is expanded to 15%

honestann's picture

You did not explain why margin should be increased when the price FALLS, whether the fall is "limit down", or just "down".  You did not explain what I asked you to explain.

user2011's picture

Gainesville coins site was down for "maintainence" until 9:00am EST monday.   What a convinent arrangement when Silver was down to 26.xx.     I wonder if someone in Gainesville knew about the dip ahead of the time.   They just don't want to sell their inventory at the discount. 

OldPhart's picture

Silver may still go down more when NY opens.  Gotta keep real money disagreeable to the masses.

eigenvalue's picture

Tomorrow will be the option expiry day. $20 silver tomorrow? Hopefully not.

Snidley Whipsnae's picture

"Gotta keep real money disagreeable to the masses"

How does this effect real money? It appears to me that China is helping it's citizens purchase real physical bullion while at the same time discouraging citizen speculation in PAPER PMs.

It wouldn't hurt my feelings if all the crooked speculative metals exchanges jacked their margins to 100% and demanded physical delivery for anyone taking a position as a 'market maker'...

As long as paper PMs are allowed to set the price for physical PMs we will have no idea what the real price of physical is... and central banks thru bullion banks can continue to sell forward 'leased paper gold' to control the price of physical.

With a little luck the paper players will be whipsawed to oblivion... and a real physical market will arise.

 

Mr.Sono's picture

and when it does, there won't be physical in the market. hmm just wonder how long it will take before this happens.

Snidley Whipsnae's picture

"and when it does, there won't be physical in the market."

Yes, there will be physical for sale in the market. At what price?... Now, that is the question you should have asked.

Another question you should be asking is: Will fiat currencies continue to be accepted for physical gold... and, if so, for how long.

Mr.Sono's picture

well thats the thing, who would accepted fiat currencies for gold? if people who buy gold know that fiat won't last, why would some one sell it. only time to sell is when you get new money system so that you would be ahead of the pack to invest what the future holds.

Mr.Sono's picture

yeah that pretty odd. i was about to load up.

Smithovsky's picture

futures markets open at 6pm EST on sunday - i doubt they're stupid enough to not hedge so that just leaves too lazy to start working on a sunday when demand is skyrocketing.  not the brightest bulbs there.  they get the coins from the mint at spot+$2; they could charge a huge premium over the spot and people would still buy because it's down so much.  move on to the next dealer, this one is obviously run by a bunch of clowns

Mariposa de Oro's picture

Funny you mention a huge premium. I noticed the premium for a Mexican Onza at Apmex is now $74.99. I'm pretty sure it was $64.99 a few days ago.......

Smithovsky's picture

of course - gold was $1900 a few weeks ago and is $1600 now, so they figure their customer won't care about another $10.  to them, however, it's an extra 100-150% profit (assuming they pay a 3% gold coin premium to the mint like in US).

DosZap's picture

Mariposa,

ApM&%,has turned into the biggest whores in the market.

I used to use them exclusively,until I found out that JPM is their bank,then it was a no brainer.