Filed 18 November 2011, 11:10 IST. Every price, volume and forecast below is reproduced as published on that date and is not a current quotation. For how the benchmarks themselves are set, see how gold is priced.
The Shanghai Gold Exchange indicated it might raise margin requirements on silver trading for the second time within a quarter, after turnover in the contract grew faster than the exchange's risk framework had been built to accommodate. Margin had already been increased once in the period, and volumes had continued to rise.
An exchange raising margin twice in three months is making an admission as much as an intervention: the volume assumptions behind its risk model were wrong. That is the useful information in this dispatch, and it is a better indicator of how fast the Chinese silver market was growing than any volume figure published at the time.
What margin is, and what it is not
Margin is a performance bond, not a fee and not a down payment. It is collateral held against the possibility that a position moves against its holder before it can be closed, and it is sized to the contract's daily volatility. Raising it makes a leveraged position more expensive to carry without changing the contract, the deliverable or the price, which is why it is the standard tool for cooling speculative turnover.
Two things follow. Margin increases hit leveraged short-term participants hardest and long-term physical hedgers least, so they change the composition of the order book as well as its size. And because margin is normally recalculated from realised volatility, a discretionary increase on top of that is a deliberate signal rather than a mechanical adjustment. See contract specifications for how margin sits alongside the other terms of a contract.
The Chinese context
Silver had only recently become accessible to Chinese retail participants in a meaningful way, and it arrived into a market with limited alternative outlets for speculative capital, high household savings and a strong cultural familiarity with precious metals. The result was turnover growth that repeatedly outpaced the infrastructure, and margin increases were the fastest available brake.
The same period saw a parallel set of stories on the gold side, including the attempt to build a retail spot-gold venue in Kunming that ran into the clearing question it had never answered. Read together, they describe market infrastructure being built and adjusted in real time, several years ahead of the regulation that would eventually govern it; see the gold section.
Raising margin twice inside a single quarter is not a view on the price; it is an admission that turnover had outgrown the assumptions the risk framework was written against. The exchange had the blunt instrument and used it, because the alternative, letting position sizes run while settlement obligations grew, is the failure mode every clearing house exists to avoid.
Questions about this dispatch
Why would an exchange raise margin requirements on silver?
To slow speculative turnover without altering the contract. Margin is collateral sized to a contract's volatility, so raising it makes leveraged positions more expensive to carry. It affects short-term leveraged participants far more than physical hedgers, which changes the composition of the order book as well as its size.
What does raising it twice in a quarter tell you?
That the exchange's volume assumptions had been overtaken. Margin is normally recalculated from realised volatility as a matter of routine; a second discretionary increase in three months is a deliberate signal that growth was outrunning the risk framework rather than a mechanical adjustment to it.
Is margin the same as the price of the contract?
No. Margin is a performance bond held against adverse price movement, not a payment toward the metal. A position can be opened with margin worth a small fraction of the contract's notional value, which is exactly why margin levels are the lever an exchange uses to control leverage.
This page restores an item first published on 18 November 2011, 11:10 IST at the address below. Cite the publication date rather than the date you read it: the material is a 2011 to 2016 document, and the date is what makes it meaningful.
https://www.bullionstreet.com/news/chinas-sge-may-raise-silver-trade-margins-again/416