Friday, March 25, 2011

CME Hikes Silver Margin Requirements‏ (Again!)

Disclosure: I would like to point out to readers that I have never traded on the COMEX. This is more so a  generic discussion on how leveraged accounts work.  If I have anything wrong feel free to leave a comment (preferably with a link).

In what has become somewhat a regular occurrence CME once again stepped in last night (on Thursday in the US) to increase the Silver margin requirements

The initial margin requirement is a set number of dollars that a trader needs to put down to take control of 1 COMEX Silver contract. A COMEX Silver contract is 5000 ounces, so at current Silver pricing a single contract is worth approximately $185,000 (5000 ounces x $37 spot price). 

Based on the latest initial margin requirement if a trader had $50,000 capital then they could take control of 4 contracts (4 x $11,745 = $46,980) with some capital left spare ($3,020). With the 4 contracts they would have control of 20,000 ounces of Silver (4 x 5,000 ounce contracts) or around $740,000 worth total (20,000 x $37). If the margin requirement were to rise again to $12,000 the trader in this example would still be covered by his spare capital (4 x $12,000 = $48,000 required, so he can dip into his spare capital to 'top up'), but if the margin requirement were to rise to $13,000 (totaling $52,000) then he would either have to come up with $2000 more capital or sell one of the contracts to cover the difference. This is why the margin increases can cause some selling pressure; some traders may be forced to sell some of their positions if they are too highly leveraged to afford the extra needed.

If the CME did not increase margin requirements and the initial margin requirement was still $8,775 (as it was in November last year), then a trader with the same amount of capital ($50,000) could take control of 5 contracts instead of 4 (that may not sound like a big increase but remember every contract is 5000 ounces of Silver so the extra contract adds another $185,000 of exposure). The higher a traders leverages the larger effect swings in the price of Silver has on their account. This can be great if the trader is long and the price is rising, but can be devastating if they were long and Silver had one of it's typical sharp corrections. Allowing such highly leveraged positions is not responsible so it’s a good thing (in my opinion) that the CME raises margin requirements. 

These actions from CME are not a conspiracy as some would have you believe. It’s their way of reducing risk and volatility. It appears on some occasions they are introducing the increased margin requirements with a very short amount of time for traders to deliver the extra capital, this could be seen as irresponsible, but with Silver tearing higher by 3-5% during some sessions it’s no wonder they have to move quick!

Every time we see this margin raised I see precious metals enthusiasts across the blogosphere rage that CME is trying to manipulate the market. I decided to sit down and collate the examples I could find (they are being reported regularly on Zero Hedge) and try to workout what the effect of the margin hikes might be given the rising price of Silver.

Here are examples from Zero Hedge where the margins have been increased on Silver contracts (in some cases along with Gold and other commodities):

March 24th, 2011
In tried and true fashion, just as Silver was about to viciously destabilize the global capital markets as it surged to new 31 year highs, the CME stepped in and did its usual 3-6 half life intervention by hiking initial and maintenance margins on silver futures from $11,138 and $8,250 to $11,745 and $8,700 respectively. ZH

February 18th, 2011
Now that JPM is out of the picture, the last recourse of gold and silver price suppression is exchange margin hikes. Or was. The CME has announced, that as of close today, it will hike various gold and silver (and other metal) contract initial and maintenance margins by 50%.... And nobody cared. ZH

February 11th, 2011 (for February 12th increase)
The CME group announced that margins for metals futures contracts on the NYMEX and COMEX will rise beginning February 12 by approximately 25% across various classes.  The initial margin for 100-ounce COMEX gold futures will increase to $6,747 from $5,403, while the maintenance margin will rise to $4,998 from $4,002. For 5000-ounce COMEX silver futures, initial margins will increase slightly less: from $6,075 to $6,750 while the maintenance margin increases by $500 from $4,500 to $5,000. ZH

December 17th, 2010
CME Hikes Margins Across The Board: Copper, Palladium, Silver, And, Oddly, IR Swaps, Treasuries And Fed Funds. ZH

November 16th, 2010
If at first you don't succeed at killing the higher beta stock short hedge, try again. The CME has just raised its margin requirement on silver again, bringing maintenance margins up from $6,500 to $7,250, after hiking it less than a week ago for the first time and preventing silver from surpassing $30. ZH

November 9th, 2010 (for November 10th increase)
"CME confirmed silver margins raised from $5000 to $6500 (30%) effective 11/10 settl - no other metals affected." ZH

Here is a quick look at the initial margin requirement for spec traders (legitimate hedgers/members have a lower requirement) over several dates they were increased:

Date: November 10th, 2010
Spot Price: $27.18
Contract Value: $135,900 (5000 x $27.18)
Margin Requirement: $8,775
(6.5% of full contract value)
Resulting Leverage: 15:1

Date: November 16th, 2010
Spot Price: $25.40
Contract Value: $127,000
(5000 x $25.40)
Margin Requirement: $9,788 (7.7% of full contract value)
Resulting Leverage: 13:1

Date: December 17th, 2010
Spot Price: $29.15
Contract Value: $145,750
(5000 x $29.15)
Margin Requirement: $10,463 (7.2% of full contract value)
Resulting Leverage: 14:1

Date: January 21st, 2011
Spot Price: $27.45
Contract Value: $137,250
(5000 x $27.45)
Margin Requirement: $11,138 (8.1% of full contract value)
Resulting Leverage: 12:1

Date: March 24th, 2011
Spot Price: $37.26
Contract Value: $186,300
(5000 x $37.26)
Margin Requirement: $11,745 (6.3% of full contract value)
Resulting Leverage: 16:1

Note: These figures differ somewhat from the Zero Hedge article figures, it appears ZH was a little careless with the figures they used. They chopped and changed between initial margin requirement and account maintenance figures, I have taken my figures directly from CME so believe they are correct.

Notice how the leverage remains within a fairly small range?
As you can see while the margin requirements have increased quite significantly over the last 6 months the amount of leverage available is still relatively similar, it is only due to the rising cost of Silver that CME must continue raising these margins. 

The rising margins may be reducing the number of ounces a leveraged trader can take control of, but it would be exactly the same if buying physical. If you had $50,000 to buy in September you could have bought 2500 ounces ($50,000 / $20) where as today that same amount of capital will only buy around 1350 ounces ($50,000 / $37).

Here is a chart showing the point at which the above 5 margin increases occurred:

Does it look like the change in margin requirements is having a long term effect on the price of Silver? On the day of announcement most days closed in the red, but were often followed in the short term by another surge higher. As long as the fundamental drivers are in place Silver will continue to climb in price.

There is a lot of conspiracy talk around Silver and how it is manipulated. In my opinion there is no conspiracy to be found here.


For a brief run down on how the COMEX works I would recommend a visit to About.AG -> LINK

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.


  1. Watch out, you might get yourself banned by Zero Hedge :)

    On one hand people complain that COMEX is a fake "paper" market that can be manipulated but then complain when margin is raised, which makes it more difficult to manipulate.

    Very few in this game are really interested in the truth, instead seeing what they want to see.

  2. Would not be surprised to get banned from there one day Bron. A couple of weeks ago there was an article on ZH proposing that there was a link between the US Mint calling for suggestions on metals to use in their circulating currency and the lack of American Silver Eagle sales for the month. I suggested this was rubbish and they were not connected and that the US Mint only updates ASE sales intermittently (by chance their ASE sales were updated later that day) and had my post flagged quite a few times as junk.

    I can't believe how much rubbish already gets pedaled around, let alone how bad it might get as the metals continue higher. You are very right that people see what they want to!

  3. Seems sensible. I've been looking for information to counterbalance the claims I've read on Zerohedge and this seems reasonable. Still learning...

  4. Thanks Anon. I think ZH is a great resource, however I do believe some of their articles are sensationalised/blown out of proportion.

    I think it's important to keep a critical thinking cap on when reading from MSM sources, ZH or anywhere else (including here!).

  5. Thanks BB.

    Excellent article complete with examples outlining what appears to be a common sense approach, by the CFTC, to increasing margin requirements in line with increasing silver prices.

    "no conspiracy to be found here" +1


  6. Update as of 5th May, 2011

  7. The long term affect doesn't matter. Increased Margin requirements have a drastic short term affect to the downside. Although the increased requirements don't affect price action (the direction of the stock) in the long term, it's manipulating the true market value of Silver because the new margin requirements lower the price of Silver and prevent the true equilibrium price from being reached (ceteris paribus)..