"against striking out with hastily conceived restrictive legislation with respect to organized futures markets." The ques tion in his mind is how to minimize the dangers Although he offered no specific recommendations except the commencement of an inter-agency study, he offered the following warning regarding rigid regulation: "[The] markets already have some considerable financial safeguards embedded in their structure. One danger from excessive regulation or the imposition of heavy costs is that activity will shift to unregulated channels here or abroad, potentially leaving the markets more vulnerable than before to manipulation or credit weakness." In 1973, Alex Caldwell, Administrator of the Commodity Exchange Authority echoed these same concerns in his testimony during hearings which ended with the passage of the CFTC Act. Experience has shown that increasing margin 7/ Hearings Before The House Committee On Agriculture, 93d In 1974, during debates on the CFTC Act (H.R. 13113) an amendment was offered to confer margin authority on the Representative Poage spoke against the measure in the CFTC. most convincing terms: But as one begins to study it one finds that For that reason, Mr. Chairman, the Committee felt that it was unwise, although on its face, it is one of the fairest things that one could suggest.8/ In 1966, Robert Martin, now a Commissioner of the CFTC, and then Chairman of the Chicago Board of Trade, spoke forcefully against granting margin authority to the Secretary of Agriculture. Mr. Martin noted the absence of any conditions justifying such power, the adequacy of self-regulation by exchanges with regard to margins, and the effect of price fluctuation limits in controlling price volatility.2/ During hearings held this month, Commissioner Martin, as well as two of his fellow Commissioners, reiterated this view. Thus, three of the four sitting Commissioners (the CFTC 8/ 9/ Congressional Record, April 11, 1974 at 10766 (emphasis added). Hearings Before the Sub-Committee on Domestic Marketing and Consumer Relations of the Committee on Agriculture, April 4, 5, and 6, 1966 (89th Cong., 2d Sess.). having a vacancy) are in agreement that margin authority is The issue before this Committee is one which has been presented to Congress on numerous occasions. Various provisions have been offered to transfer margin authority from the exchanges to the federal government. Most of these provisions can be attributed to confusion over the nature and role of futures margins. The current proposal, S.2704, apparently does not suffer from this semantic deficiency, but the arguments against government control of margins, made so often before, are fully applicable nonetheless. In summary, the automatic imposition of margin requirements on commodity futures transactions or the grant of authority to any governmental agency to establish such requirements would be not only an ineffective attempt to control price fluctuations and speculation, but would cause harm and disruption to the markets, the industry, and the self-corrective capabilities of the markets themselves. Margins are not an effective means to control market volatility or speculation, or to prevent market manipulation. A centralized governmental agency could not possibly set margins effectively and efficiently on the diverse number 10/ The CFTC has taken the position that it may impose margin in the exercise of its emergency powers conferred by Section 8a(9) of the Act. See the Detailed Statement of Robert K. Wilmouth to the House Agriculture Committee, May 22, 1980, pp. 3A-13 through 3A-14. and types of commodities in which futures contracts are traded. Only the exchanges' margin committees and governing boards, with their intimate working knowledge of the industry and the 'flexibility to take actions with the necessary speed (often a matter of hours), can properly and accurately employ this tool in a constructive and efficient manner. Chapter 5 MARGINS AT THE BOARD OF TRADE The nature of futures margins and the policy goals they serve are detailed in Chapters 3 and 4. This chapter will describe in detail how margins are determined and enforced at the Chicago Board of Trade. (This process is necessarily similar at other domestic futures exchanges.) Two case studies are also provided which demonstrate that margin levels are a function of the financial risk to the system posed by the price volatility existing in the markets. Introduction The margins, or performance bonds, are set, paid and enforced at several levels throughout the futures industry. The Board of Trade sets a minimum level for margins that every member futures commission merchant (FCM) must receive from its customer for all futures transactions executed on the Board of Trade. Once a trade is executed for that customer, the position is marked to the market (based on the daily settlement price) as long as it remains open. Customers whose positions increase in value receive a credit to their account. Accounts for customer positions that lose value are debited in the amount of the loss. For example, if the minimum "initial" margin is $4,500 for the Board of Trade gold contract (100 oz.), the customer must deposit at least that amount with his FCM for each contract he buys or sells. If the price of gold then 5-1 |