The effects of margin changes on commodity futures markets

• We assess the effect of margin changes on 20 commodity futures markets.
• Margin changes are positively (negatively) correlated with changes in prices (returns).
• Margin increases make hedgers exit from grain and metal markets.
• Large margin increases decrease market liquidity in grains, soft, and energy markets.
• Margin changes may have irreversible consequences which will also diffuse across commodity markets.
• The effect of margin changes is more pronounced in commodity than in equity and interest rate futures markets.

In light of the recently passed 2010 Dodd–Frank Act, we assess the effect of margin changes on prices, the risk-sharing between speculators and hedgers, and the price stability of 20 commodity futures markets. We find that margin increases decrease the rate at which prices change, yet they impair the risk sharing function and they decrease market liquidity in certain markets. The regulator should set margins by taking the heterogeneity of commodity futures markets into account. Certain effects of margin changes diffuse across related markets though. Our results are robust to endogenously set margins by the exchanges and to alternative ways of measuring market liquidity. Interestingly, the effect of margin changes is more pronounced in commodity futures markets than in major equity and interest rate futures markets.