On Wednesday, the CME group raised margin requirements on trading soybeans futures contracts, shortly after the Chicago exchange increased margin requirements to curb silver and cotton trading, further boosting the appeal of exchange traded funds (ETFs) which enable investors to gain exposure to these commodities.
Margin requirements are the minimum deposit, or cash, that a trader is required to put with up an exchange to cover inherent risks involved with trading commodities. When compared to stocks, in general, commodities are traded in margin accounts, where traders has the ability to control contracts with values a lot more than what they have in accounts.
The fuss around commodities and margin requirements has escalated due to the recent surge in appeal of commodities. Recently, the appeal of commodities has grown due to supply and demand issues fueled by strength in emerging markets and quantitative easing monetary policies implemented by the US which is devaluing the US dollar, which is the currency that nearly all commodities are traded in.
As a result, many regulators fear that speculative money has flooded the commodities markets pushing prices to near record highs which has amplified volatility and could eventually lead to a bubble or a massive sell off sending prices in a downward spiral. If this phenomenon were to prevail, a shortfall could potentially expose clearinghouses to major losses if traders refuse to pony up payment. To mitigate the downside risks of a shortfall prevailing and default of payment, exchanges have raised margin requirements which makes it more cash-intensive for investors to directly invest in commodities.
From an investor’s perspective, the following ETFs enable one to play soybeans, silver and cotton without having to tie up excessive amounts of cash on margin:
- iPath DJ-UBS Agriculture TR Sub-Idx ETN (JJA), which seeks to replicate a basket of futures contracts of which nearly 24.3% is allocated to soybeans.
- PowerShares DB Silver Fund (DBS), which holds futures contracts of silver
- iPath DJ-UBS Cotton TR Sub-Idx ETN (BAL), which seeks to reflect the returns that are potentially available through an unleveraged investment in the futures contracts of cotton.
Disclosure: No Positions