By Greg Peel

At the close of trade last Friday, the CME Group announced it was raising the margins required for trading in gold, silver and copper futures contracts on Comex. This effectively means that players in the market must now put a greater amount in the kitty per contract before being allowed to play, and existing position holders must also up their antes. The increases were not unsubstantial, with margins for gold increased 21%, silver 16% and copper 18%.

Increases in CME margin requirements are nothing new and occur regularly. Basically it's the exchange's way of saying can we all just settle down a bit please. Futures are leveraged contracts on initiation which then attract margin calls as often as daily if positions are running against traders. If a trader is unable to meet a margin call, the exchange must make good on that trade anyway, making the exchange every position-holder's counterparty. Whenever there is a surge in futures price volatility, by default there is an increase in the risk of unpaid margins.

In order to hedge this increased risk, the exchange requires increased collateral, just as a bank might require a greater deposit on a mortgage in volatile economic times. It is no surprise that increased margins are usually a source of immediate price weakness as some speculators are forced to reduce positions to be able to comply. However, given exchanges increase margins in times of volatility, the impact of margin increases can still be lost in the wash.

The prices of all of gold, silver and more recently copper have plunged rather spectacularly in recent sessions, prompting the margin increase. It is worth noting, however, that exchanges will reduce margin requirements just as regularly as they increase them if volatility dries up.

The Comex futures exchange in New York and the London Metals Exchange see the bulk of the world's physical and paper metals trades. A single day's trading in Comex gold, for example, can exceed the volume of all the gold in known physical existence. Speculation rules these metals, and therefore it is incumbent upon market regulators to ensure the system does not break down. Were the counterparty to these trades, being the exchange, unable to make good on speculative positions then the global financial system would collapse.