Wednesday, December 7, 2011

CME Group Defends Silver Margin Hikes

An SD reader has tipped us off to a missive the CME Group provided several months ago in an attempt to rationalize its 5 margin hikes of silver during the first week of May as "routine", and "unnecessary" for gold.
Note that the CME states that margins were hiked due to increased volatility, not increased price, and that margins are typically decreased when price volatility declines.  That makes sense-that explains the 8 silver margin declines recently. 
Has anyone seen the CME decrease silver margins even a single time as silver has consolidated around $30 over the past 8 weeks!?!
LOL.  Enjoy the levity.

1. Margin changes are routine in CME Group markets.
Margin levels are set to cover roughly 99 percent of the possible price moves for a position
in a trading day or multiple trading days.
When daily price moves become more volatile, a clearing provider such as CME Clearing typically
raises margins to account for the increased risk. This change could be triggered by such things as:
• Supply/demand shifts;
• Changes in fiscal policy;
• Major geopolitical events; or
• Natural disasters.
When daily price moves become less volatile, margins typically go down because
the risk of the position also decreases. (Except for silver or gold for obvious reasons!)
For example, silver market volatility resulted in 11 margin increases in the last year,
while copper market volatility pushed margins down twice during the same period.

3. Margins are part of CME Clearing’s neutral risk management practices;
they are not intended to move the market one way or another(LOL!)

CME Clearing is a neutral participant in financial markets – it is our goal to protect the market,
whichever way it moves. (Translation- it is our goal to protect the high frequency traders and the powerful interests such as JP Morgan, not individual customers, as we made explicitly clear in the MF Global debacle)
We do not have an interest in moving the market one way or the other. (Unless we are talking about gold or silver of course) However, we do make sure that every market participant contributes enough margin to cover the most likely price moves each day.

For the rest of the CME Group's explanation, including a couple of fancy graphs attempting to explain why 11 margin hikes were necessary for silver, but not for gold, click here: