Could part of the recent sell off (excluding yesterday) in commodity markets be related to increases in margin requirements?

We have seen a very volatile month of trading across commodity exchanges around the world, and exchanges have responded by aggressively raising margins. Some might say they are trying to curb speculation…. but exchanges like ICE and the CME are likely just reacting to the increased volatility by insuring those who use their products have enough money on hand to absorb some of these wild day to day swings.  The exchanges guarantee the other side of every trade… so it is in their best interest to make sure there is as much money as possible behind every trade. But it is also a delicate balancing act for them, with too much of a requirement potentially dampening interest in a market, while too little opens up the risk for participants to be unable to cover their losses.

Sugar traders have been hit the hardest (see full table below) with the ICE increasing margins 81% in November. Whether Sugar prices declining  (-20%) over the last few days is a result of this (traders needing to liquidate positions to stay off margin call) is up for debate?

Most Multi-market commodity trading advisors (CTAs) we track have positions in at least a couple of the markets seeing the increases, forcing them to keep a close eye on the margin-to-equity (M/E) ratio for their programs.  They typically do not like to see the M/E ratio climb too much higher than 20% although some will tolerate 30%.  Anything higher than 30% can be a red flag that a manager is being too aggressive in his trading.

Recent Margin Changes

 

	%  Increase	11/01	11/19
Sugar	81.40%	3010	5460
Silver	45.01%	6750	9788
Bean Oil	36.36%	1485	2025
Soybeans	30.01%	3375	4388
Platinum	20.00%	4125	4950
Palladium	18.79%	4125	4900
Cotton	14.29%	4900	5600
Soymeal	14.26%	2363	2700
Swiss Franc	11.11%	2430	2700
Aussie $	9.09%	2970	3240
Euro	6.67%	4050	4320
Gold	5.85%	5739	6075