The CME has set new margin rules for gold and silver. The CME says this is a procedural change with no significant impact on the margin market, but we think it is a much bigger issue and will eventually affect all markets. Traditionally, margins are set as a dollar value tied to the contract's notional value and volatility. It should cover more than the expected most significant one-day move. The link between VaR and margin in this setting is unclear; there is no direct link, and it is determined by a committee. There is a process, but it is not mechanical, and the underlying assumption is that margins will remain relatively stable over time unless market behavior changes significantly.
The new procedure that went into effect for the gold and silver markets is now based on a percentage of notional value. Hence, if the value of the gold or silver contract increases, there will be a corresponding increase in margin. In a rising market, the longs will have to post more margin on their gains instead of being able to take their notional gains out of the market. In practice, most traders will not take excess cash from their margin account until there is a gain in cash balances. In the case of shorts, when there is a gain in the market, there will be a need to post more money. The average cost of shorting will be higher.
Now, at the end of the month, the CME increased the margin percentage for gold and silver, so the margin required for those contracts needed to be posted again.
Gold margins rose to 8% of the value of the underlying contract from the current 6% for a non-heightened risk profile, and the heightened risk profile margins increased to 8.8% from the current 6.6%.
Silver margins climbed to 15% from the current 11% for a non-heightened risk profile, while the heightened risk profile margins moved to 16.5% from the current 12.1%. Platinum and palladium futures' margins were also boosted.
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