Margins and market integrity: Margin setting for stock index futures and options

Abstract

Step hen Figle w s ki n the past two years trading has been introduced in a variety of futures I and option contracts based on stock indexes. In addition to puts and calls on individual stocks, which have traded on organized exchanges since the formation of the Chicago Board Options Exchange in 1973, there are now futures contracts on three broad stock market indexes, options on these futures contracts, and options on several market and industry group indexes. Many more such derivative securities have been proposed or are being planned at this time. (Throughout this article we will refer to futures and options contracts as "derivative securities," for want of a better term. They are derivative, in the sense that their value derives from the value of some underlying asset, such as a portfolio of stocks, but they are not actually securities; they are simply contracts to engage in a specified transaction at a future time.)The creation of these new markets raises a number of important issues for the agencies charged with overseeing the operations of the financial system. Among them are questions of how trading in the new securities affects existing markets, how jurisdiction over different but related instruments will be allocated among the various agencies, and how consistent regulatory policy should be set in the interrelated markets. This article will address the question of margin setting for the different types of stock-related instruments. In the next section we discuss the rationale for margins, beginning with the traditional reasons for government regulation of initial margins on stocks themselves. The following section explores the differences between the "credit" margins used in the stock market to limit lending against stock collateral, and "performance" margins, such as those imposed on futures contracts to limit default risk. Margins on options are a sort of hybrid between the two. We then address issues relating to the effects of differing margin levels among the markets for derivative securities and the stock market itself.

Price limits, overreaction, and price resolution in futures markets

“…As shown in Table II, the number of big bullish days is roughly the same as that of big bearish days, suggesting that there is a symmetry between significant bullish and bearish events in nature. 20 See Figlewski (1984), Gay, Hunter, and Kolb (1986), Estrella (1988), andFenn andKupiec (1993). 21 To account for the changes in price limit levels, subsamples are created and the same procedure outlined is carried out to identify the event date.…”

Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?

“…6 See for example, Moore (1966), Ocer (1973), Largay and West (1972), or Grube, Joy and Panton (1979). 7 See for example, Telser (1981), Figlewski (1984), or Edwards (1983).…”

Regulatory competition and the efficiency of alternative derivative product margining systems

“…'Margin is one of an array of safeguards employed by clearing organizations that include mernbcrship and capital standards, frequent marking of positions to market, and liquidity facilities. See Edwards ( 1 983) or Figlewski (1984) for further discussion. The conclusions herein are those of the authors and do not represent the views of the Federal Reserve Board or any of the Federal Reserve Banks.…”