Series 3 - National Commodities Futures

Market Operations - Margin Calculations

Margin Calculations
The exchanges may adjust both initial and maintenance margins in real time, so that they tend to fluctuate along with the values of the contracts, or they can set them to a round number and adjust them periodically. Exchanges may also require different margins for speculative and hedge positions. At the CBOT, for example, initial margins are typically 35% higher than maintenance margins for speculators, but not for hedgers.

The speculative margins for agricultural commodities trading recently on the CBOT were as follows:

Maintenance Margin
(per contract)

Initial Margin
Mark Up %

Initial Margin
(per contract)

Corn
$400
135%
$540
Oats
$400
135%
$540
Rough Rice
$500
135%
$675
Soybeans
$750
135%
$1,013
Soybean Meal
$600
135%
$810
Soybean Oil
$400
135%
$540
Wheat
$700
135%
$945
Ethanol
$4,500
135%
$6,075
South American Soybeans
$900
135%
$1,215
The hedgers' margins for the same commodities were identical in terms of maintenance, but had no mark-up for initial margin:


Maintenance Margin (per contract)
Initial Mark Up Percentage
Initial Margin (per contract)
Corn
$400
100%
$400
Oats
$400
100%
$400
Rough Rice
$500
100%
$500
Soybean
$750
100%
$750
Soybean Meal
$600
100%
$600
Soybean Oil
$400
100%
$400
Wheat
$700
100%
$700
Ethanol
$4,500
100%
$4,500
South American Soybeans
$900
100%
$900
Substantial price movements of the underlying assets can have dramatic effects on an investor's margin requirements. For example, CBOT's July 2006 maintenance requirement for a 29,000-gallon (that is, one railcar) ethanol contract was set at $4,500 for a speculative position. Let's say that a contract once traded at $20/gallon, so a full contract would be valued at $580,000. The speculator in this example, though, has only $4,500 of capital dedicated to it. If the price of ethanol should drop 10% in a day, that would reduce the value of the contract by $5,800. It would thus reduce the speculator's capital by $5,800. That is, his margin would now stand at -$1,300, meaning that he can expect a margin call from his broker after the close and would have to promptly add $1,300 to the account or risk losing his positions in other transactions, or even the privilege of having an account with that broker.

There is a similar effect when the exchange changes its margin requirements, which it can do quickly, frequently and unexpectedly.

CBOT's maintenance requirement for that ethanol contract in June 2006 was $3,500. When it was reset to $4,500, all speculators who had ethanol positions through the exchange had to ensure that there was an additional $1,000 per contract in their accounts. Exchanges are entitled to change initial margin requirements as well as maintenance requirements, so these twists can have an impact on new positions as well as existing ones. If a speculator trading on his own account has only $14,000 to invest, this change in requirements would then limit him to buying three contracts instead of four.

Once margin requirements are covered, though, an investor in the futures market is free to withdraw excess equity. The funds needed to meet initial margin requirements in an individual account can only be withdrawn after trades are settled and, in some cases, after all open positions are closed. Still, funds held in an individual account above and beyond the required margin or account-opening requirements can be withdrawn.

The exception to this rule involves those who subscribe to a "commodity pool," a trust operated for the purpose of trading commodity futures or option contracts for the benefit of multiple participants. Some pools have limitations that funds can only be withdrawn on a monthly, quarterly or even annual basis.




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