Margin Hikes' Interesting Track Record

Todd Shriber
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Keeping with the theme of margin increases, oil is getting its turn in the spotlight. Crude is by no means a ''new'' victim to the margin raising shenanigans of the CME Group, but the new margin increases on oil futures that went into effect at the close of trading today were the first on oil since March. Traders now have to deal with a margin requirement of $6,250, up from $5,000 for existing futures position on West Texas Intermediate and $8,438 up from $6,750 on new futures positions.

So what's behind all this margin raising by CME? Is it a move to actually impact the market by lowering prices for select commodities? The exchange operator certainly does not confess as much in the PDF file highlighting the new margin requirements, which you can view (HERE).

At the very least CME is perhaps trying to remove some of the volatility from various futures markets and the firm's weapon of choice is obviously margin increases. Perhaps the better question is not what prompts CME or any of the comparable firms to raise margins, but do these margin hikes have the desired impact of lowering prices? After five margin increases on silver in the past two weeks (the initial margin requirement for silver is now $21,600 compared with $11,745 in late April), the white metal is trading lower than it was when the recent round of margin increases started.

However, silver margin increases have a spotty track record of actually lowering prices. Just look at this chart from Attain Capital that highlights silver's performance following a November 2010 margin hike.

How about some other margin increases? In November, IntercontinentalExchange boosted cotton margins and the cotton ETN took a mighty tumble from around $80 to around $60. By mid-December, the fund had taken out its November high. ICE tried the cotton margin hike trick again in February only to see prices race to a record.

There is more. As Attain Capital notes, margins on corn were raised earlier this year. July corn futures are currently flirting with $7 per bushel and some analysts have said $12 a bushel could be seen in the next year. If corn prices really start to take off again, it would not be surprising to see some more margin hikes for this commodity as it is one of the most volatile out there, but are all those margin hikes going to make a difference in the end? Count me among the skeptics.

Getting back to oil, CME last raised margins on WTI futures on March 4. A sharp decline followed, but prior to last week's epic slide, WTI futures had tacked on almost $10 a barrel following the March 4 margin hike.

Obviously this is one of those situations where the disclaimer ''past performance is no indicator of future returns'' needs to be applied, but if recent history is any guide, margin hikes may not be the worst news for commodities bulls.

Todd Shriber