Commodity margin refers to the initial amount of money that needs to be deposited to open a commodities futures trading brokerage account. Commodities futures contracts are traded on many exchanges throughout the world. In a futures contract, a buyer and seller agree on the date for delivery of a specified commodity, its price, and the quantity to be delivered. Most commodities futures positions are settled prior to the contractual delivery date. This can be accomplished by taking the opposite side, either buy or sell, from the original transaction prior to the expiration date of the futures contract.
A commodities position is opened when a customer of a commodities brokerage firm either buys or sells a specified commodity futures contract. The exchange on which the futures contract is traded requires the customer to make an initial good faith deposit on the transaction. This amount, called the initial commodity margin, is a specified percentage — usually 2-15% — of the futures contract’s full value.
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 political developments — can have a substantial impact on the price of the futures contract itself. Accordingly, in addition to the initial margin amount, the commodities exchanges require a customer to maintain the equity in his account at a specified percentage of the market value of the commodities 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 commodities brokerage firm will require the customer to deposit sufficient additional funds into his account in order to bring the value up to the specified maintenance margin percentage. A customer can also satisfy a commodity margin call by selling some of the futures contracts in his 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 in commodities trading accounts are established by the various exchanges on which commodities are traded. In addition, commodities brokerage firms may have margin requirements that exceed the minimum established by the commodities exchanges. If the exchange anticipates a period of volatility in the markets, it may increase both the required initial and margin maintenance levels. Information on commodity margin requirements can be obtained by consulting with a commodities brokerage firm.