Weekend exclusive: Ukraine war puts major dent in derivative margin costs

The war in Ukraine has caused huge increases in margin across derivatives markets, with firms having to find new sources of financing or reducing their positions in order to meet the collateral requirements from brokers,

The margin rate for Brent Crude futures on Intercontinental Exchange (ICE) now stands at over $10,00 per lot.

With the Brent Crude price hovering around $100, this means the margin is now around 10 per cent. Similar sharp rises in margin have been observed in the natural gas markets, according to new analysis from OpenGamma, shared exclusively with City A.M. today.

Margin on Dutch Gas futures rose by 38 per cent on March 9 on the exchange, which followed a 36 per cent rise on March 4 – a doubling of margin in less than a week.

“The Russian invasion of Ukraine has had a significant impact on derivatives across all markets, but it is the energy market that has been affected the most because of the dependence on Russian oil and gas,” Joe Midmore, chief commercial officer at OpenGamma, told City A.M. this morning.

“Margins are now higher as a percentage of contract value, and with prices still being at record levels this is leading to a significant increase in margin requirements.”

Joe Midmore

Midmore added that “some firms are finding it difficult to fund this and are looking for assistance from central banks. The worry is there could be a default that would disrupt the market even further.”

In agriculture, a sector particularly sensitive due to Russia and Ukraine’s influence in the market, there have been increases in margin for all sources of wheat.

Surprisingly the largest has been on UK wheat, with ICE increasing their margin by half.

Meanwhile in metals, this time last year the margin rate for nickel was $1,270 per tonne, but now it has been raised again to $4,808. That’s a 4-fold increase over the year. 

In bond markets, ongoing uncertainty over how bad inflation will get and the knock-on-effect on interest rates following the Bank of England’s latest rate rise means that clearing houses have been forced to increase their margin rates. Margin on a three-month Euro contract has increased in Q1 from €455 to €660 – a 45 per cent increase.