MARGIN REQUIREMENTS

Futures margin is a good faith deposit – a kind of surety bond, posted to ensure the performance of any trader entering into a contract. Margin is risk insurance for the trading markets. Margins are set by the exchanges and their clearinghouses, and margin levels vary over time, depending upon the risk inherent in committing to a particular kind of contract at a particular time.  

A number of factors are taken into account by an exchange in establishing customer margin rates. But it is important to keep in mind that the basic goal in requiring margins is to protect all those exposed to financial risk, including the exchange and exchange members, the clearinghouse, the commission house and, ultimately, customers and traders who use the markets.

1. A first consideration is the amount of margin per contract that the carrying clearing member must deposit with the clearinghouse to safeguard the open contracts of its customers. Generally speaking, the amount specified by an exchange as initial margin to be asked of customers will be larger than the prevailing clearinghouse original margin required of its members.
    

2. A second consideration is the current price volatility (degree of fluctuation in prices over a period of time) of the contract being margined. The range of prices for a commodity or financial instrument over a given period of time is a good indicator of the risk one assumes in holding the contract over such a period. It is also a good measure of the risk other assume in standing behind a customer with an open contract. If prices fluctuate over a fairly wide range each day, then it is customary to set initial margin rates for such a contract higher than for a contract whose price volatility is low.
    

3. A third consideration is the type of customer position involved. The initial margin required for a spread position, for example, is usually less than that for an outright long or short position. The reason is the generally lower per-contract risk involved when the customer holds both long and short positions in the same or related instruments. So long as price movements generally affect the two contracts in opposite ways, either because the instruments are the same or because their prices move together, then exposure is decreased.