Traders registered at the Dubai Mercantile Exchange (DME) that trade in the physical market will be charged 35 per cent lesser than what they earlier paid to trade the contract (initial margin), according to a DMEcommuniqué.
This comes as a result of the Chicago Mercantile Exchange (CME) onto which the DME contracts migrated in February this year, deciding to reduce initial margins on NYMEX/DME energy products for hedgers.
The step comes at a time when the Commodities Futures Trading Commission (CFTC) in the US is trying to regulate commodities exchanges across its jurisdiction. The CFTC, which has already come down strongly on speculators is expected to hold hearings this month and in August.
Though the DME declined to comment further on the announcement, this in practical terms means lowering the barrier-to-entry for people using the contracts to manage their risk. Traders at any exchange have to post margin (put up cash) to trade the contract (as a kind of guarantee that they can afford to trade), but if they can prove they are using the contract to trade in the physical market and manage risk, then this margin will be lowered by 35 per cent. The CME Group will require a letter to be filed with the trader's clearing member to show they are using the contract for a physical delivery.
At commodities exchange worldwide, the number of contracts traded that are accompanied by a physical delivery are a 100 times lower than total number. This step means CME and DME want to reward those traders who want a physical delivery.
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