Commodity Exchanges Increase Margin Requirements as Prices Surge

Nov. 11 (Bloomberg) -- Commodity exchanges in the U.S. and Europe are increasing the cost of trading some raw materials in response to a jump in volatility as prices surge.

CME Group Inc., the largest futures market, increased margin requirements, or the amount of money traders must keep on deposit, for soybean futures by as much as 10 percent as prices jumped to a 26-month high. The CME’s Comex unit raised the requirement for trading silver to $6,500 a contract from $5,000 as the metal reached a 30-year high. ICE Futures U.S. increased margins for cotton as the commodity rose to a record and LCH.Clearnet is raising them for robusta coffee, cocoa and white sugar next week.

“They’re just trying to limit risk by making you pay more to play,” said Michael K. Smith, the president of T&K Futures & Options in Port St. Lucie, Florida. “We’ve just been getting so much volatility,” Smith said. That’s the time when the requirements are raised, he said.

Soybean futures are up 27 percent this year and silver has rallied 62 percent. Cotton has doubled in the past 12 months, the most among the 19 raw materials tracked by the Thomson Reuters/Jefferies CRB Index, which is up 16 percent. White sugar prices have jumped to the highest level since at least 1989.

“We frequently adjust our margins across all of our products, and it’s based on market volatility,” Michael Shore, a spokesman for the CME Group, said in a phone interview yesterday. The last time the exchange raised the silver margin requirement was June 7, 2010, Shore said.

‘Volatile Markets’

Silver yesterday plunged $2.041, or 7.1 percent, to $26.865 an ounce on the Comex. Cotton prices dropped the most allowed by the exchange yesterday as trading surged to an all-time high. Earlier yesterday, the price rose to $1.5195 a pound, the highest level in 140 years of trading. Soybeans fell 9.5 cents, or 0.7 percent, to $13.195 a bushel in Chicago.

The rise in margin requirements “was certainly one of the several factors” that led to cotton’s decline, said Mike Stevens, an independent trader in Mandeville, Louisiana.

It’s not a coincidence that the margin requirements have been raised on silver, soybeans and cotton, Smith said. Those have been “the most volatile markets,” and higher margin requirements slow down speculation, he said.