The economics of performance margins in futures markets

Abstract

erhaps no other subject area in the futures industry is as misunderstood as P the function of margins. Margins in futures markets perform different economic functions from margins in securities markets. However, people often mistakenly assume the functions are the same because the same terms are used. A margin in the securities market is a down payment for the security and results in an extension of credit. A margin in the futures market is essentially earnest money and represents a good-faith deposit to guarantee that the holder of the futures contract will perform.No extension of credit is made for opening a position in the futures market. To minimize any misunderstanding in this article, the term "credit margin" will be used when referring to margins in securities markets and the term "performance margin" will be used when referring to margins in futures markets.Initial credit margins in securities markets are set by the Federal Reserve Board. Performance margins in futures markets are set by individual exchanges. These regulatory differences in administering credit-margin requirements and performKandice H .

The effects of margin changes on commodity futures markets

“…Traditionally, futures exchanges use margins as a risk management tool; they are a payment that serves as a collateral deposit to eliminate credit risk (e.g., Telser 1981, Figlewski, 1984, Kahl et al, 1985, Gay et al, 1986, Fenn and Kupiec, 1993, Gemmill, 1994. Till recently, futures exchanges had the discretion to set and change margin rules.…”

Price volatility and futures margins

“…Indccd, many earlier academic studies have concluded that historically, margin requirements in futures markets have performed well in preventing contractual defaults and may be, on average, conservatively high. [See Telser (1 98 1); Figlewski (1984); Edwards and Neftci ( 1985); Kahl, Rutz, and Sinquefield (1985); Brennan (1986); Gay, Hunter, and Kolb (1 986); Estrella (1988);and Craine (1992)l. Some also argue that any attempt to force a drastic increase in margin requirements in stock index futures contracts would drive trading volume overseas and hurt the liquidity and viability of U.S. futures markets [Miller (1990)].…”

Price Limits and Margin Requirements in Futures Markets

“…Markham (1987) shows that margin requirements have been an integral part of the modern futures trading from the very beginning. For the purpose of margin, also seeTelser (1981), andKahl, Rutz, and Sinquefeld (1985).…”