CORRECT: Margin Increases Didn't Cause Silver Slide

Changes to trading deposits are a routine part of market surveillance and did not trigger silver price declines, Kim Taylor, president of CME Clearing, told Dow Jones Newswires.

Silver futures have captivated market attention this week as a five-day cascade wiped away 27% of contract values from last Friday. Several market commentators have pointed to the series of trading deposit increases, known as margins, as the reason behind the declines as less-well-funded traders were forced out of the market on short notice.

Changes to margin requirements are a routine part of market surveillance at CME Clearing, the risk management and compliance unit at CME Group Inc. (CME), which owns Nymex. So far this year, CME has issued over 57 margin change notices.

"I don't agree that the margin change was a trigger for changes in the market," said Kim Taylor, president of CME Clearing. Taylor leads a team of sever hundred risk management and compliance professionals who monitor CME's markets around the clock.

"The market is well tuned so that if there's a market move that approaches or exceeds our volatility limits" participants know to expect an increase in margin requirements, she said.

The decision to alter trading margins on a contract typically involves risk management professionals involved in day-to-day monitoring of the specific market as well as senior management of the clearing house. The team looks at a variety of quantitative factors like rising volatility and qualitative factors like seasonality and relevant news events in making margin decisions.

"We try to make changes in a way that we can telegraph to the market, so that participants have notice. We try to be routine and predictable and provide no surprises," Taylor said.

The trading margins are designed to cover around 95% of expected losses, and act as a pre-payment on the coming day's market move.

"When market conditions become more volatile we would increase margins in anticipation of that, and when volatility decreases we don't want to create unnecessary capital costs," Taylor said.

In past instances, CME Clearing has often raised trading margins ahead of certain events in an attempt to damp their impact on trading. For example, the exchange-operator increased trading margins on several products, including crude oil, ahead of Hurricane Katrina to ensure traders were prepared for higher volatility, .

"We try to be proactive with either something we can measure or something we can judge to likely effect our markets,"

At times, margin increases are broken up into two steps "so that participants can prepare for it with their funding" she said.

The decision to alter margins most often happens after markets close "because we need to complete statistical analysis,"

In the case of silver prices, CME announced a margin increase of around 13% on Thursday, April 28 that would be enforced after business close Friday, April 29.

The 24 hour notice period gave traders in Asia little time to prepare for higher funding requirements, sparking a sell-off in early Monday trade. At the time, thin trading volumes amplified the impact of the decline, with prices diving 12% in 11 minutes as just 6,000 silver futures changed hands.

Monday's losses have sparked aggressive action from CME Clearing, which has since raised margins twice more, and announced a third increase for May 9 as part of the exchange's efforts to give traders warning. Over this period, silver prices have continued to post sharp declines, locking in a cumulative 27% loss since last Friday to settle at $35.283 per troy ounce.

-By Tatyana Shumsky, Dow Jones Newswires; 212-416-3095; tatyana.shumsky@dowjones.com

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