Email of the day (1)
Comment of the Day

June 10 2011

Commentary by Eoin Treacy

Email of the day (1)

on margin requirements:
"May 25th I asked a question…when margin requirements are increased when are they reduced again is it when price reverts to the mean etc'

"Please see CME reply below. To be fair, I only got around to asking CME the question today and they replied within three hours, which was nice.

Here is the attached email:

"The key is that margins are adjusted to cover the largest potential one day loss on a product within confidence of 95-99% considering market volatility with look-backs of 6 months, 1 year and 18 months.

"Margins are raised and lowered using the same methodology which looks at price volatility and implied volatility. Depending on the product, CME holds margin at a 95-99% coverage level of a one day move. This would mean that the margin level would be held at the largest potential one-day loss within a 95-99% confidence interval. The distribution of prices within this confidence interval uses a 6 month, 1 year and 18 month look-back period and also incorporates other factors depending on the product, seasonality for example.

"So, margins would likely be raised as volatility increased such that it would cover the new larger potential loss considering increases in volatility over these look-back periods. Likewise, if there were a sustained decrease in volatility and our margins were consistently higher than the 95-99% coverage standard of potential one-day loss, they would likely be lowered to keep in line with this standard.

"I hope this is helpful."

Eoin Treacy's view Thank you for sharing this additional information which I'm sure will be of interest to subscribers.

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