Bloomberg News

Higher Oil Futures Margins May Boost Volatility, IEA Says

May 11, 2012

Rising margin requirements in oil futures trading may increase volatility and concentrate market share in the hands of large speculators, the International Energy Agency said.

The Obama administration proposed rules on April 17 to strengthen the oversight of the U.S. Commodity Futures Trading Commission to give it authority to raise margin requirements in oil futures trading.

“If we consider raising margin requirements to a very high level through regulations to combat speculation, then we might find that certain trader groups, especially the hedgers and cash-constrained small speculators, will be driven out of the market,” the Paris-based adviser to oil-consuming nations said today in its monthly Oil Market Report.

This would increase “concentration share where few traders, especially large traders, participate in the price discovery” and lead to “more volatile, rather than more stable, oil markets.”

The IEA report also said that while higher margins may increase oil price volatility they may have “no effect on price levels,” a reference to the overall price direction trend, which depends on physical supply and demand.

Separately, CME Group Inc. (CME:US), the world’s largest futures exchange, said on May 2 it would raise margins for non-hedged accounts from May 7 to comply with new regulations. On May 4, the CME received from U.S. regulators a 90-day extension for implementing those changes, under which members would have been treated as speculators for outright positions, paying a higher margin.

To contact the reporter on this story: Sherry Su in London at lsu23@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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