Schaeffer's Trading Floor Blog

The New VIX Futures Margin Requirements

Margin requirements have changed for the market's

by 6/28/2013 7:53 AM
Stocks quoted in this article:

It's a summer Friday, so it's not likely we see too much intraday volatility in stocks today. CBOE Market Volatility Index (VIX) futures, though, could see some serious action. Margin requirements have changed significantly since last night. My friend Bill Luby has the details here at VIX and More:

A number of readers have expressed concern to me privately about today's increase in the VIX futures margin requirements. The current margin requirements are detailed at the CFE Margins splash page, while the new margin requirements were outlined in CFE Regulatory Circular RG13-019 on Tuesday and were just updated on the CFE (CBOE Futures Exchange) web site here.

Perhaps the most critical of the changes is the substantial increase in margin requirements for spread positions. The current initial margin requirement for a spread is $625 - $1250, which the variation due to the number of months involved in the spread. The maintenance margin for these positions is $500 - $1000. After today's close, the initial margin requirement jumps to $2860 - $4015, with the maintenance margin rising to $2700 - $3650.

For those VIX futures spread traders out there – and I'd imagine that includes just about all VIX futures traders – this is an increase of 5-6 timesthe current margin requirement and has the potential to trigger some forced liquidations. If you have any concerns about your margin position going into tomorrow's trading day, I urge you to take the balance of today's trading session to make the appropriate adjustments.

As best as I can tell, quite a few VIX spread traders are not aware of these margin requirements changes, which could only add to any potential market dislocation.

That's just a crazy change to spring out this quickly.

As Bill details, the oversight has switched from CFE to the OCC, and the OCC model apparently assesses the risks quite differently. Our friend iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) is, of course, based on VIX futures, though the creators don't necessarily use actual futures, they can use customized swaps as well. Even so, any dislocation in the VIX futures market will still spill over into VXX and the myriad other less liquid and/or leveraged ETNs that proxy VIX futures.

Now, while this figures to impact Chicago "locals" and the whole VIX trading complex, I doubt we get much in the way of a tail-wagging a dog here. There's no locked arb between anything VIX-related and actual index options, so it's unclear how big an effect this has on actual options. And it's worth noting that volume in S&P 500 Index (SPX) and SPDR S&P 500 ETF Trust (NYSEARCA:SPY) options dwarfs the whole VIX complex.

But who really knows? I'm hard pressed to remember any precedent for something like this. Margin requirements get moved all the time, but it's generally in response to market imbalances. This one's just out of nowhere, and relatively huge in size.

Disclaimer: The views represented on this blog are those of the individual author only, and do not necessarily represent the views of Schaeffer's Investment Research.


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