July 6, 2022

How the COMEX Crashed the Silver Market

By the close of trading on Wednesday, May 4th, the silver market had experienced significant selling pressure that drove prices down by 17.3% from Thursday, April 28th.  This sell off corresponded exactly to a series of increased margin requirements by the COMEX  for trading silver futures contracts.

Silver traders who may have been apprehensive about additional margin increases did not have long to wait.  After the close on Wednesday, May 4th, the COMEX announced two huge additional hikes in silver margin, effective at the close of business on Thursday and another hike effective at the close of trading on Monday, May 9th. As of Monday, initial contract margin requirements would be increased to $21,600 and to $16,000 for hedgers.  A year ago, when silver was trading in the $18 range, the margin requirement for a speculative contract was only $4,250.

The rapid series of five margin increases by the COMEX resulted in raising initial margin requirements for speculators from $11,745 to $21,600 – an increase of 84%.    The margin requirements for hedgers also increased by 84% from $8,700 to $16,000.   Silver futures traders would now be forced to come up with huge amounts of additional cash or liquidate holdings on price weakness.   The collapse in silver prices on Thursday May 5th, triggered by the COMEX margin increases, indicates that many players were forced to liquidate positions.

The actions taken by the COMEX constitute a perfect text book example on how to crash a market. The non stop increases in margin requirements resulted in a dramatic reduction of liquidity in the silver market by forcing out small speculators who were not prepared to commit additional cash for margin maintenance.  As prices fell in response to the COMEX margin increases, bigger players in the silver market were forced to liquidate positions to avoid margin calls and large losses on leveraged positions.

The last two margin increases by the COMEX, after silver had already declined by over 17%, created the perfect crash scenario.   Silver traders liquidating positions to meet new margin requirements caused a further cascade of forced selling and the silver crash became inevitable. The elimination of liquidity from any market will result in falling prices and the COMEX knew this.

If someone wanted to crash the silver market, the moves taken by the COMEX were perfectly designed to accomplish this by reducing liquidity at a time during which the markets were already stressed from previous margin increases. The result was a collapse in silver prices from $48.70 to the $34 range.

In response to the outrage over the devastating series of margin requirement increases, Kim Taylor, President of CME Clearing, which owns the COMEX, issued a statement explaining CME’s actions. According to Ms. Taylor, margin increases are related to risk management and done to prevent default by clearing member firms.  Margins are adjusted based on market volatility and are not designed to move a market or discourage investor participation.  Among the factors considered in setting margins is a CME calculation of a worst case scenario for possible portfolio losses.

Specifically regarding the margin increases on silver futures, Taylor stated that “we have made several changes in recent weeks to adjust to volatility in the marketplace…Our interest is in providing security for the entire market – no matter which way it moves”.

CME’s statement seems disingenuous at best.  The protection they speak of is not for the benefit of investors, but rather for the benefit of CME and clearing house members.  The actions of the COMEX in implementing a rapid series of margin increases, even after silver had already steeply sold off, resulted in large profits to short sellers and reduced risk for CME at the expense of huge losses for silver investors both large and small.

A slower series of margin increases would have seemed more appropriate to address price volatility.  The CME knew or should have known that its actions would severely limit liquidity in the silver market.   The decrease in liquidity caused further market volatility, requiring more margin increases, which in turn crashed the price of silver. Anyone looking into the great silver crash of 2011, can start by looking at the COMEX.

COMEX Increases Silver Margin Requirements for Third Time in Past Week

On Tuesday, May 3rd, the COMEX raised margin requirements for trading silver futures contracts. This was the third increase in the past week.

The new margin requirement per contract was increased from $14,513 to $16,200 for initial margin and from $10,750 to $12,000 for maintenance margin.  Hedgers in silver futures pay maintenance margin as initial margin while traders are required to post the higher initial margin amounts.

Effective last Friday, the COMEX had also increased initial margin from $12,825 to $14,513 and from $9,500 to $10,750 for maintenance deposits.

Two days prior to this, the COMEX had also raised margin requirements. On April 27th, margin for initial contracts were increased from $11,745 to $12,825 and margin for maintenance contracts was increased from $8,700 to $9,500.

The CME Group, which owns the COMEX, has been raising margin requirements in an attempt to reduce volatility and protect itself from potential losses generated by large price moves.  As recently as early February the initial margin requirement per silver contract was only $6,075.

Although margin requirements have been raised significantly, the margin required as a percentage of total contract value has remained within a relatively narrow range of between 6 and 8 percent.   The increase in COMEX margin requirements have merely tracked the increase in the price of silver.

Under current margin requirements, a price decline of 8% could wipe out the margin of a silver trader leaving the COMEX exposed to potential losses if the trader does not come up with additional cash.  As silver prices have climbed almost nonstop, the COMEX has raised margin requirements ten times over the past year in order to maintain the same percentage of margin to the silver value represented by one contract.

Even with the higher margin requirements, silver futures contracts allow a trader to make a highly leveraged investment.  One silver futures contract is for 5,000 ounces worth $218,050 at yesterday’s closing London Fix Price.  The new higher margin requirement of $16,200 represents only 7.43% of the value of  one silver futures contract.

After trading close to the $50 per ounce level late last week, silver closed Tuesday at $41.72 in New York trading for a loss of over $8 or 16% over the past two days.