An Empirical Analysis of Futures Margin Changes: Determinants and Policy Implications

45 Pages Posted: 8 Nov 2014 Last revised: 30 Sep 2015

See all articles by Nicole Abruzzo

Nicole Abruzzo

Independent

Yang-Ho Park

Board of Governors of the Federal Reserve System

Date Written: December 1, 2014

Abstract

Margin regulation raises two policy concerns. First, an alignment of margins to volatility can amplify procyclicality, leading to a build-up of excess leverage in good times and a forced deleverage in bad times. Second, competition among central counterparties (CCPs) can result in lower margin levels in order to attract more trading volume, which is referred to as a "race to the bottom.'' Motivated by these issues, we empirically analyze the determinants of margin changes by using a data set of various futures margins from Chicago Mercantile Exchange (CME) Group. We first find that CME Group raises margins quickly following volatility spikes but does not immediately lower margins following volatility declines, implying that margin-induced procyclicality is more of a concern in recessions than in expansions. In addition, we find some evidence that the margin difference between CME Group and its competitor, Intercontinental Exchange (ICE), is an important driver of margin changes after changes in other margin determinants are controlled for, implying that competition may be factored into margin setting.

Keywords: Margin, futures, volatility, central counterparties, procyclicality, race to the bottom, Dodd-Frank Act

JEL Classification: G01, G18, G28

Suggested Citation

Abruzzo, Nicole and Park, Yang-Ho, An Empirical Analysis of Futures Margin Changes: Determinants and Policy Implications (December 1, 2014). Journal of Financial Services Research, Forthcoming; FEDS Working Paper No. 2014-86. Available at SSRN: https://ssrn.com/abstract=2520186 or http://dx.doi.org/10.2139/ssrn.2520186

Nicole Abruzzo

Independent ( email )

No Address Available

Yang-Ho Park (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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