Can Commodity Futures Margin Requirements Control Risks Effectively? Evidence from China

Abstract

This paper differentiates two types of margin requirement increase in Chinese futures market: regular margin increase and risk margin increase. We use SVAR model to study the relationship among open interests, price volatility and margin level of six kinds of futures traded on SHFE. The result demonstrates that the volatility and open interests both decline after regular margin increase while they do not decrease as expected after risk margin increase. The result suggests that while the current Chinese margin system can reduce default risk related to deliveries, it has limited effects on controlling the markets risks.