We have long been befuddled by the trends in commodities where we will see a sudden drop in the prices of Gold and/or Silver right before an announcement is made regarding an increase or decrease in the margin requirement. For a little bit of background, margin requirements are imposed by the various exchanges whether it be the CME Group (CME), the Intercontinental Exchange (ICE), New York Board of Trade and others to limit the amount of counter-party risk in the event of a sudden move in the markets.
Some of you may be aware of the amount of leverage involved in futures/commodities trading, but for those who do not, it can get to be quite lucrative. For example the amount of leverage on the 10-Year Note Futures at the Chicago Board of Trade is approximately 46 to 1. Meaning that you only have to put up $2,160 to trade $100,000 worth of bond futures. To control this amount of money with so little margin can get some people into a lot of trouble. This is why the exchanges impose requirements so that they do not have to pick up the tab if a counter-party were to fail.
With that in mind, we have wondered if there is some level of leakage of when margin requirements will be changed that allows for people to front run this information. As I recently attending the Bloomberg Market’s 50 Summit in New York, I happened to run into the Chairman of the CFTC, Gary Gensler. I asked him about this and have uploaded the audio for you to hear his response.
It is a very interesting point that he makes about Governmental vs. non-governmental data release. Almost as if it’s the wild west when it comes to non-governmental (Price Discovery) information i.e. crop reports, margin requirements, etc….
Is he actually saying: If someone wants to leak that data for price discovery then by all means? I suppose the question really should be: do people who have positions on in whatever particular market they are trading in get notices prior to releasing it to the public? Meaning, that those with positions in the index or commodity have the ability to trade first prior to the public knowing about it.
It seems as if this is the case.