Margin requirements in futures markets: Their relationship to price volatility

✍ Scribed by Raymond P. H. Fishe; Lawrence G. Goldberg; Thomas F. Gosnell; Sujata Sinha

• Publisher: John Wiley and Sons
• Year: 1990
• Tongue: English
• Weight: 902 KB
• Volume: 10
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990100510

✦ Synopsis

rokers and exchanges require customers to provide security deposits called B margins when they trade in futures markets. Minimum margin levels are set by exchanges and brokers must set margin requirements for their customers at least equal to these minimums. This system has come under attack as financial markets have experienced increased instability, and industry regulators have become more concerned about trade practice abuses. A two-year study by the Federal Reserve System (released in 1985) specifically recommends that a new federal agency be created to set margin requirements in both stock and futures markets. Renewed interest in such an agency developed after the October 1987 collapse of the stock market. In November 1987, a bill was introduced in the House of Representatives that "would empower the Federal Reserve Board to require purchasers of 'equitylike derivatives,' including stock index futures and options, to put up as much as 50% in cash.. . . Before the October 1987 collapse, buyers of stock index futures faced margins of 10 cents on the dollar, or even less."' Specific proposals to alter the regulation of futures markets have emanated from the New York Stock Exchange, the Securities and Exchange Commission, the Commodities Futures Trading Commission, and the General Accounting Office. The Brady Commission, appointed by President Reagan, has recommended an overhaul of the regulatory system. The Commission viewed all financial markets as being interconnected and advocated one regulator, the Federal Reserve Board, to oversee all financial regulation. The Commission considered margins in different