[T.S.R:17343] Have Margins Destroyed The Silver Market?

Margin requirements in the spotlight this week again after the CME Group, owner of futures exchange NYMEX, announced a 25% hike in collateral requirements for crude oil futures, putting initial, and short-lived, pressure on WTI and Brent prices.  After market volatility spiked last Thursday with a general sell-off in the commodities complex, crude oil's reaction to a margin hike contrasts drastically from silver's which tanked heavily in a few days, while oil is holding off quite well.

Initial margins on crude oil, or the amount market participants must pay when opening a position with a broker, were hiked 25% to $8,438 starting after the close of the May 10 business day.  Maintenance requirements, or the amount of collateral market participants must post to keep their positions, were hiked by the same amount to $6,250.

Announced late on Monday, this was the latest in a series of four consecutive margin hikes since February, as volatility has spiked in the markets, especially in the commodities complex.  Last Thursday, major commodities had one of their worst days, with crude oil futures plunging more than 15% and oil volatility, as measured by the OVX index, soaring to 48.64, its highest value in almost a year.  WTI crude traded below $100 for the first time since civil strife in the Middle East and North Africa led to an exponential jump in the value of so-called black gold. (Read After Oil Drops $10, NYMEX Extends Trading Limit To $20).

While front month WTI futures were pushed down to $100.25 by 1:53 AM through the late night/early morning New York session on Tuesday, prices recovered and were trading up to $103.08 by 11.38 AM in New York.  Brent crude for June delivery, which traced a similar pattern to its North American counterpart, was trading up $1.44 to $117.34. (ReadHere's What The GPS Devices Used By The FBI To Track Your Car Look Like).

Market chatter has centered on the CME decision as an attempt to force speculators out of the market in an attempt to quell market volatility.  While CME admits that margin movements are in response to market volatility, Kim Taylor, president of the clearing unit responsible for setting margins, noted that "[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 explains that "as part of the neutral risk management services [CME] provides," margins are set to reflect "the worst possible loss a portfolio might reasonably incur in a set time," which for futures is generally one trading day.

Jeff Kleintop, chief market strategist for LPL financials, agrees with Taylor, noting that margins should keep a "good proportion" with futures prices.  "Oil prices are very high, trading above $100 and beginning to hit the consumer, regardless, it's logical for exchanges to try to keep a good proportion between the price of oil" and the collateral needed to trade on margin.

Silver, which had been flirting with all-time high valuations of $50 an ounce last week, fell drastically after CME owned COMEX raised margin requirements by 84% in two weeks.  This forced many investors out of the market as they couldn't or wouldn't afford the $21,600 margin required to trade silver.  Silver, which had been considered in an exuberant bubble stage by various experts, was said to have been taken there by speculation.  A common conclusion after the precipitous drop from nearly to $50 to almost $33 was that speculators had been shoved out of the market.  Silver futures for June were trading up 3.2% or $1.20 to $38.31 by 11:38 AM in New York. (Read 'Gravity Defying' Silver Will Fall Back To $34/oz).

Kleintop, though, drove a subtler point, explaining that if margins were indexed to the price of the contract, they would have surged through the year.  "Raising margins on silver 84% seems huge but before that they didn't have much to do with reality," noted the strategist, adding that "the timing was probably targeted," but this isn't an issue of speculators.

"Oil and silver are very different markets," continued Kleintop, noting that reactions to margin hikes evidenced major trends.  "As is known, oil is a very liquid and much deeper market, it's a market of hedgers and large corporations," said the strategist.  "Silver was much more financially driven," explained Kleintop, noting that magnitude of the hike, with oil going through a much more gradual hike compared to silver's 84% hike in two weeks. 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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