Brokers impose higher margins, restrictions on oil futures trading

Singapore

SEVERAL brokerages have put in speed bumps on oil futures trading by raising margin requirements or imposing restrictions, especially on near-term contracts, in a bid to safeguard clients as oil markets experienced unprecedented volatility.

These restrictions do not, however, seem to have doused trading interest.

Online trading and investments provider IG on April 24 introduced a floor margin of 80 points for its spot contracts and July 2020 contracts, and 500 points for its June 2020 contracts. This compares to the typical margin requirement of 20 per cent, and means some clients may have to stump up more cash.

Phillip Futures has from April 27 banned clients from initiating new positions on June 2020 contracts. Benjamin Yeo, head of dealing at Phillip Futures, said: "While we constantly encourage and remind our clients to maintain sufficient buffer of funds to withstand the big price swings, the margins on energy-related products were raised due to very wild swings in prices. As a broker, we felt the need to safeguard our clients during this period of unprecedented volatility."

June contracts are in the cross-hairs of brokers because these are now the next to expire. Trading of contracts for May delivery or settlement had stopped in late April.

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The May futures contract of West Texas Intermediate crude oil fell below zero last week as traders scrambled to find storage tanks to take delivery.

The ban by Phillip Futures is the latest in a series of progressive measures it has taken since March, when the world's two largest producers, Saudi Arabia and Russia, became embroiled in a duel over output cuts. Brent prices had tumbled to below US$30 a barrel and have continued to trend down since.

On March 12, Phillip Futures had increased margin requirements by 20 per cent on some crude-related products above the exchange-required level. This was extended to other crude-related products on March 24.

Over at OCBC Securities, the margin of expiring spot month contracts has been raised to twice that of the exchange-required margins since April 27.

Keeve Tan, head of futures and leveraged FX at OCBC Securities, said: "We believe the move strikes a balance between allowing our customers undisrupted access to the markets, while managing our risk exposure and maintaining good market order."

Another policy that has been in place since March is to engage clients with low equity on Thursday, so that they can top up their margins and their funds can reach OCBC Securities by Friday. This is to buffer for any economic shocks and news that may occur over the weekend. "As such, when oil prices crashed last week, OSPL (OCBC Securities) remained sheltered," he said.

In spite of the speed bumps placed to tackle volatility, at least one broker has seen greater trading interest. IG's spokesperson Brandon Lee said: "We have actually seen an increase in oil trading interest since the unprecedented crash in May 2020 oil price. Most clients trading with us have opted to use our Guaranteed Stop feature, which offers them the potential benefits of trading on a lower margin requirement."

Joel Ng, KGI Securities' head of Singapore research, told The Business Times that higher margins and other restrictions imposed by brokerages are meant to curb the exposure of speculative traders. Physical traders who use futures to hedge are unlikely to be affected by tighter trading conditions because the brokerages would know which clients are such traders.

KGI has imposed higher margins on a case-by-case basis since March.