The purpose of increasing the initial margin on sugar is so that you don’t kill yourself. Volatile commodities attract every amateur on the planet. Higher margins are not a sign to “get short” nor are they a way to punish speculators.
By instating a higher initial margin for the futures contract, it forces the would-be speculators to consider whether or not they will be able to perform on the contract. This maintains financial integrity in the marketplace between traders and contra-firms alike.
Such increases normally come from an increase in volatility. Based on the 20-day ATR, volatility for Sugar has increased 25% since October 1 through last week. This week’s price action brings that increase to nearly an 80% increase. If you are going to trade sugar, and you might need to deliver your house if the trade goes against you, wouldn’t you want to know that ahead of time? Me too.
The margin call you want to avoid is the maintenance margin call. That’s the one where you might have to add a few thousand dollars to your account TO BRING THE BALANCE BACK TO ZERO. By increasing margins, the exchange goes a long way to help you avoid that call. By increasing margins the exchange is acting responsibly.
The various exchange’s set the initial and maintenance margin rates and they can change them at any time. Member firm Futures Commission Merchants (FCM) can always make the margin rates more stringent, but they cannot make them more lax. For example, if The Ice mandates $3,550 for initial margin on March sugar SBH1, your FCM can make it $5,000 (“$5k to play”), but not $3,000.
I have personally seen margin for one particular commodity set at 100% of its notional value (price of the commodity futures contract x its standardized size). Message: don’t trade this commodity here. Your money drama is not our business…literally.
If you start seeing $60 – $100 range days (long-ruler days) regularly in gold, for example, you’ll see margins get bumped there also. Hope this helps.
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