Trading Guide

09/12/2022

In trading commodity derivativesmargin ratio is one of the important information that investors need to understand. Each commodity derivative product has a different margin ratio, and the formula for calculating the margin ratio is different.

*I. What is Margin?*

Margin in commodity derivative trading is the amount that an investor must pay and maintain on his/her account to fulfill payment obligations from commodity derivatives trading. This is not a prepayment portion of the entire contract, but a guarantee that the obligation will be fulfilled at maturity.

The level of trading margin will depend on the specific contract, with each different commodity derivative product according to MVX’s regulations.

Investors need to make a deposit when commodity derivatives trading to ensure enough money to fulfill their obligations to pay for commodity derivatives contracts. Each underlying commodity will have a different margin.

For example:

– Corn (commodity code ZCE) has a margin of 54 million VND.

– Soybean oil (commodity code ZLE) has a margin of 58 million dong.

– Arabica coffee (commodity code KCE) has a margin of 103 million VND.

**II. Margin classification:**

Initial Margin (IM): This is the smallest amount that an investor must put into an account in order to hold a contract volume (Eligible to place new orders).

Maintenance Margin (MM): This is the additional amount to be paid when the margin is below the required level.

Variable Margin (VM): This is an additional amount to be paid when the margin is below the required level.

Delivery Margin (DM): Applied after the date of the first notice when intending to participate in the delivery of goods.

a) Initial margin, required margin

Each type of margin in commodity derivatives has a different calculation. Derivatives margin initial rate will be determined for each different commodity. For example, the initial margin levels of some commodities in commodity derivatives are as follows:

Commodity name |
Transaction code |
Interoperable foreign exchange |
Initial deposit/contract (VND) |

Corn | ZCE | CBOT | 67,394,800 |

Silver | SIE | COMEX | 216,172,000 |

Cotton | CTE | ICE US | 114,444,000 |

Investors can refer to the initial margin for each item here: MXV | Mercantile Exchange Of Vietnam

The formula for calculating the required margin is calculated as follows:

Margin required = initial margin x margin factor

In there,

– Margin coefficient: is the multiplier on the initial margin, applied by MXV to different customers, if there is an increase/decrease, MXV will notify you in advance.

Currently, the margin coefficient applicable to corporate clients is 1.0 and individual clients is 1.2.

Example: Individual investor buys 50 KHTC at MXV, each contract has an initial margin of $2,338. The margin account has a balance equal to the amount of margin required for trading. During the session, the market fluctuated adversely, causing the account to lose and $27,000 left. The margin individual investors need to add to the account is 2,338 x 1.2 x 50 – 27,000 = 113,280$.

b) What is maintenance margin?

Maintenance Margin is the minimum margin a client must have in a commodity trading account to maintain an open position. If the net worth in margin falls below this maintenance fund level, the investor will receive a notice to replenish. Currently, the maintenance margin level is being applied by MXV at 100% of the required margin.

For example: Investor A opens 100 financial contracts, each contract has a required margin of $1000 and a maintenance margin of $1000. Investor A’s opening account balance is $130,000.

If the market moves adversely, the account will lose an expected $20,000.

After closing the session, the remaining margin of investors is 130,000 – 20,000 = 110,000$.

This balance is still larger than the maintenance margin, so investors do not need to close additional funds.

c) Margin and Spread trading contract on CQG

Spread Contract is a trading strategy based on arbitrage trading using various account types. This type of trading helps investors or traders to make quick profits on price spreads.

Applying cross-margin, customers will get Spread transactions on CQG. At the same time, investors need to place buy and sell orders in accordance with the ratio of the spread pair. The specific spread code structure is as follows:

Spread code structure = Commodity ticker + S + Gap between two terms + base term month + base year.

In there:

– S stands for spread transactions.

For example: ZCE 1H22 is the spread code structure of corn with a 1-month gap between the two terms. The original maturity month is March, the base tenor year is 2022.

*III. Margin handling levels*

Escrow handling:

Margin required = 100%: this is the initial margin for businesses and 120% for individuals. Investors must comply with this margin when participating in commodity trading to be eligible to place orders.

Maintenance Margin = 100% of Initial Margin.

Investors will receive notifications on trading platforms and via Email about margin warnings. Investors need to make additional margin to the initial margin level. If the account violates this margin for 3 consecutive days (According to the end of day statement), part or all of the open positions (Open positions) of this trading account will be liquidated ( mandatory order closing) on the next trading day to ensure margin safety.

Cancellation of pending orders = 70% of the initial margin.

Investors will receive notifications on the trading software. Violation of this margin level, all flag orders of this trading account will be cancelled.

Required position settlement = 40% of the initial margin.

Investors will receive a notification via text message about the phone number registered to open an account. Violation of this margin level, all open positions of this trading account will be forfeited (Mandatory Close).

Margin rate guarantee customer payment obligation. Therefore, when a customer violates the margin ratio when trading goods, the transaction will no longer be valid.

The most common violation of the margin ratio when trading commodities is that the initial margin ratio is lower than the maintenance margin ratio. That is, the ratio of using margin assets of investors (AR) has been higher than the allowed level.

The clearinghouse has the authority to determine and monitor the margin ratio in real time. Warn the clearing member and apply one of the investment account handling measures such as:

– Request the Commodity Exchange to suspend the operation of related trading accounts, except for reciprocal transactions.

– Request clearing members or through clearing members to request investors to perform reciprocal transactions.

=> Thus, it is possible to reduce the position and add margin

*IV. What should investors do when violating the derivative margin ratio?*

When an investment account has violated the derivative margin ratio, what should investors do? In this case, the investor should ensure the safe status of the account by the following steps:

Step 1: Close down the open position thereby reducing the margin requirement.

Step 2: Increase margin assets by supplementing assets so that the margin ratio remains at an appropriate level. To ensure the safety of the account, investors must make an additional deposit before 8:00 am on the trading day.

Step 3: Check the trading account to see if the AR has returned to a safe level.

Note: If AR has exceeded 100%, investors are required to add money before 15:30 on the same day. In case the investor does not pay enough on the prescribed time, the investment registration units can support. Specifically, cash will be paid to bring the account to an AR level of less than 90%.

09/12/2022

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09/12/2022