Commodity margin is the initial deposit required to open a commodity futures trading account. It is a percentage of the total value of the futures contract and is required to maintain equity in the account. Margin requirements are set by exchanges and brokerage firms.
Commodity margin refers to the initial amount of money that must be deposited to open a commodity futures trading brokerage account. Commodity futures contracts are traded on many exchanges around the world. In a futures contract, a buyer and a seller agree on the delivery date of a specific commodity, its price, and the quantity to be delivered. Most commodity futures positions are liquidated before the contractual delivery date. This can be accomplished by taking the opposite side, either buy or sell, of the original transaction prior to the expiration date of the futures contract.
A commodity position is opened when a client of a commodity brokerage buys or sells a specific commodity futures contract. The exchange on which the futures contract is traded requires the customer to make a good faith initial deposit into the transaction. This amount, called the initial commodity margin, is a specified percentage, usually 2 to 15%, of the total value of the futures contract.
Since futures contracts are transactions for the purchase or sale of specific commodities, any changes in the market price of those commodities that occur between the transaction and the settlement date, caused by supply and demand factors, catastrophic weather, or developments political, can have a substantial impact on the price of the futures contract itself. Accordingly, in addition to the amount of initial margin, commodity exchanges require a client to maintain equity in his account at a specified percentage of the market value of commodity positions held in the account.
If the price of the underlying commodity declines to the point where the equity in a trader’s account is below the required margin maintenance level, the commodity brokerage firm will require the client to deposit sufficient additional funds into their account to raise the value to the specified maintenance margin percentage. A client may also satisfy a commodity margin call by selling some of the futures contracts in their account to raise cash. He can also accomplish this by depositing sufficient acceptable collateral, such as United States Treasury Bonds, into the account.
Margin requirements on commodity trading accounts are set by the various exchanges on which commodities are traded. Additionally, commodity brokerage firms may have margin requirements that exceed the minimum set by commodity exchanges. If the exchange anticipates a period of volatility in the markets, it may increase the required margin and initial maintenance levels. Information on commodity margin requirements can be obtained by consulting with a commodity brokerage firm.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
