ndividuals trading in futures markets are required to post security deposits, I called margins, to insure that brokers and exchanges are potected from nonperformance due to unfavorable price movements. Specified in dollar amounts per contract, margins may be posted in either cash or interest-bearing Treasury securities. Currently, exchanges set minimum margin requirements on all contracts, with brokers free to require additional margins from their customers. In recent years margin requirements have fluctuated fairly often. For instance, between 1971 and 1982 margin requirements at the Chicago Board of Trade (CBT) changed an average of 75 times per year.' Because of the increased margin activity and the rapid growth of futures markets, there have been suggestions that the government intervene and establish absolute minimum margin requirements on all futures contracts as is done with stock market purchases.2 The purpose of this article is to determine whether margins have an impact on trading as measured by both open interest and volume and, if so, to determine the size of the effect. If margins have a significant effect on trading, then government intervention may reduce the liquidity and attractiveness of futures markets to traders.
Previous studies of margins have produced both theoretical and empirical results. The theoretical studies mainly address the role of margins as a security deposit (Telser and Yamey, (1965);and Telser, (1981)) or the method of determining margins to minimize the likelihood of default (Kuhn, (1976); and Figlewski (1984)). Technically speaking, default occurs when a trader reneges on the contract obligations, *We wish to thank Lloyd Besant, Mike Connolly, Bob Kolb, Mark Powers, Roger Rutz, Lester Telser, and two 'See Rutz (1983) for an overview of margins and their historical pattern. 'See Edwards (1983), Houthakker (1982), and Burghardt and Kohn (1981) for discussions of the arguments for anonymous referees for comments on an earlier version of this article. All errors remain our responsibility. and against government regulation of margins.