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CME says it is willing to trim margins when volatility eases
SINGAPORE (Reuters) - The CME Group (CME.O), which this month raised the amount of money required to trade silver and oil in response to wild price swings, may bring down margins over time once the market volatility eases, a senior official said on Thursday.
CME, operator of the world's leading energy, grain and precious metal markets, hiked trading margins for silver five times over a two-week period up to May 9 by a total of about 84 percent.
The successive margin increases, cited as one of the triggers for the big commodities rout on May 5, contributed to a slide in silver prices since touching a record high of $49.51 an ounce on April 28.
CME also raised margins for crude futures this month, the fourth time since February.
"The price volatility and the expectation in the market for further volatility was a key determinant in our having to raise margins in silver as well as in other asset classes from time to time," Harriet Hunnable, CME managing director for metals products, told Reuters in a phone interview.
"When the marketplace is less volatile then we'll review that and over time bring it down."
Commodities suffered their biggest one-day loss in more than two years on May 5 as a slump in silver prices -- down almost 30 percent from the record high hit on April 28 -- forced investors to take money off other markets including oil.
The 19-commodity benchmark Reuters-Jefferies CRB index .CRB is down around 7 percent this month, its biggest in a year and its first monthly drop since last August.
Hunnable said the CME assesses all its financial and commodity products daily "and we go through a very rigorous system of assessing what our margins should be."
Margins are deposits paid by investors in futures markets, where full payment is made when contracts mature, to an exchange or clearing house to cover the risk of default by that investor and typically are based on the largest most-likely daily market move.
Exchanges raise margins to mitigate risks as price volatility in the market increases.
However, margins can also be used as a tool to curb speculative trading activity, particularly "hot money," by reducing the number of positions a party can hold by leveraging a particular amount of money.
"If one asset becomes highly volatile, then we need to increase the margin and the participant should take comfort from that because if they want to trade in a very active, volatile market they want to know they have no risk and that's exactly what we do," said Hunnable.
(Editing by Himani Sarkar)
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