the market value above said price. Sellers shall have the right to require as security from buyers a deposit of 10 per cent on the contract price of the property sold, and, in addition, any difference that may exist or occur between the estimated legitimate value of any such property and the price of sale. All securities shall be deposited, either with the treasurer of the association or with some bank duly authoried by the board of directors to receive such deposits.1

It will be noted that both buyer and seller deposit margins, each to secure the other. The limitation to 10 per cent is theoretically a safeguard for the small concerns with limited capital, but it is seldom if ever operative. Adjustments of the margins to changes in the market are provided for. It is of interest to observe that the avoidance of the familiar term "margin" in the above stated rule is not accidental. In the rule, as it appears in 1869, 1877, and 1881—that is, in all the earlier rules available as printed in the annual reports of the Chicago Board-the word "margins" is freely used.

A memorandum of deposits so made must be immediately filed at the office of the Board of Trade clearing house. A bank objected to by the party calling at the time of making the call may not be used. Margin deposits must be in the form of cash, although the depositor may make such arrangements with the bank for loans upon the basis of stock or bond collateral as may seem to him desirable.

THE MARGIN DEPOSIT CERTIFICATE.-The depository bank issues certificates in duplicate to the two parties interested in the deposit, the original going to the depositor and the duplicate to the margin caller. For this certificate the following form is presented by the rules: " Not negotiable or transferable.

has deposited with this bank

CHICAGO

2

19-.

dollars as security on a which amount

contract or contracts between the depositor and is payable on the return of this certificate or its duplicate, duly indorsed by both of the above-named parties, or on the order of the president of the Board of Trade of the City of Chicago, indorsed on either the original or duplicate hereof, as provided by the rules of said Board of Trade, under which the abovenamed deposit has been made.

Cashier.

As appears from the form, the deposit can not be withdrawn except by the written consent conveyed by indorsement, on either the original or duplicate, of both parties, except on order from the president of the Board. In case of failure, the depositor indorses over to the margin-calling house the original certificate. The method used makes the margin certificate in effect a certified check and not merely a creditor's claim upon assets. The deposit may remain until the

1 Rule XX, sec. 1.

2 The same form appears in the 1887 rules.

close of the option to which it relates, or until delivery, but, owing to the brief life of most future contracts, this is not likely to happen except where a terminal elevator is at one end. Deposits are available to protect all open contracts between the houses concerned, except that either party may demand that the certificate specify a particular contract, in which case the deposit is applicable only to the settlement of that contract.

ONE HOUR ALLOWED FOR MEETING A CALL.-The rules allow one hour from the time of receiving a margin call for completing the process of putting it up and leaving the duplicate slip with the calling commission house or with the clearing house. In case of delinquency the other party has the right to resell or repurchase the future, as the case may require, immediately notifying the delinquent party of such action and collecting all losses through the clearing house. The calling house, however, may permit the contract to stand.

This stringency of the rules with regard to time allowed for putting up margins may sometimes cause embarrassment to members who are entirely solvent. The margin calling may result from contracts open for country customers who are perfectly sound financially and whose futures may be hedges, but who can not be reached, even by telegraph, and get funds to Chicago within a day, or even two, much less within one hour. The commission house may therefore, as the man "standing in the gap," find itself in rather a tight place. In a wild market, with perhaps more than a 10-cent change in the course of the day, a situation requiring large deposits may develop very quickly. Throughout the period of the recent war, however, there were no important failures on the Chicago Board.

RELEASE OF MARGINS.-Release of margins, in whole or in part, may be effected with reference to changes in prices that make the deposits no longer requisite for protection, as well as because of the closing of open contracts so protected. Under section 1 of Rule XX, however, a depositor can not claim such release merely because the market price has gone in his favor, since the rule provides only for further deposits on account of a difference between the "estimated legitimate value * and the price of sale." However, margins deposited are not likely to continue to relate to the same original contract, hence the question of revision on the basis of more recent contract prices may arise. Rule XX, section 6, provides for a decision by the president of the Board or by an arbitration committee as to whether a release is warranted under section 1 "by reason of

1 Rule XX, sec. 4.

* *

2 The 1869 rules allow three "banking hours;" those for 1887, one hour.

1

changes in the market, or of delivery upon or the settlement of a portion of the contracts upon which security has been deposited.” 1 In case there is a wild market establishing fictitious prices, if there is a dispute because of the desire of those houses that have large paper profits to draw down their margins, it is within the power of the directorate of the Chicago Board to fix the price from which the buyer must margin at the normal instead of at the temporary market price.2

THE MARGIN RULE PERMISSIVE ONLY.-As appears upon its face, the rule relating to margin deposits between members of the clearing house-all other trading members and commission houses are customers of clearing members, as will appear later--is merely permissive as to the requirement of a deposit, and restrictive as to how large a deposit may be required. Only in a wild market will as much as 8 or 10 cents per bushel margin be required. In a quiet market, 2 or 3 cents will be regarded as sufficient. But the proportion of the 10 per cent callable under the rules that is actually called depends upon the standing of the firms as well as upon the steadiness of the market. In some cases some concerns do not call any margin, perhaps upon the basis of individual friendship. The New York Produce Exchange Rules of the Grain Trade (rule 30) explicitly recognize the possibility that no original margin will be required.

MARGINS ACTUALLY REQUIRED.—Reference to 1, 2, and 3 cent margins doubtless relate to conditions and prices prevailing before the market was disturbed and prices inflated by the war. A 10 per cent margin on $2.50 wheat is 25 cents, while a 10 per cent margin on 30-cent oats is 3 cents. Margins are in practice referred to in terms of points or cents per bushel rather than per cent of value, although the rule is stated in terms of per cent.

Where margins are called strictly they are likely to be disproportionate to profits on open trades. A 5-cent margin may be tied

1 In case it should occur that by reason of changes in the market, or of delivery upon, or the settlement of a portion of the contracts upon which security has been deposited and to which such security is properly applicable under this rule, that a larger sum remains on deposit than is contemplated by section 1 of this rule upon then existing unadjusted contracts between the parties, and either party to such contract should refuse to release such excess of deposit, the president of the Board is authorized, upon a representation of the facts and admission or proof that such excess ought to be released, to order such release and payment to be made to the party to whom it rightfully belongs, by the indorsement of an order to that effect on either the original or duplicate certificate or certificates issued for such deposits; provided, in case of such disagreement no surrender of the deposit shall be ordered pending any arbitration touching the rights of the parties under the said contract or contracts, or in case the party refusing to adjust the dispute shall signify his willingness to submit the matter to arbitration." This appears as section 6 of Rule XXIII in 1877.

2 Letter dated Sept. 14, 1914, from the Board's counsel to the chairman of a committee for the consideration of a new clearing-house system, evidently referring to section 7 of Rule XX.

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up with a 2-cent paper profit. A profit will not necessarily release margins on that side and the changed price will cause a call for further margins on trades on the other, or losing side, unless a settlement can be effected. Hence commission houses are in general anxious to settle open trades as promptly as possible. Scalpers in particular are anxious to get rid of them.

It is implied in the Board of Trade rule on margins—and it is a natural consequence of methods of future trading, especially as regards settlements (as will appear later)-that the commission house is absolutely responsible to the other party on all future contracts, regardless of whether the customer will meet his obligations on them or not. The margin rule is a significant illustration of this general principle.

MINNEAPOLIS AND KANSAS CITY RULES.-Minneapolis and Kansas City have practically the same formal rules as regards the calling of margins as has Chicago, that is, 10 per cent permissive. In fact, however, margins are put up with the clearing house, which is substituted for the other party in all future trades, and the clearing house calls a small margin additional to the requirement that all trades be brought to the market each day. This method is described in Chapter V, section 5.

Section 5.-Margins of customers.

MARGINS OF CUSTOMERS NOT GOVERNED BY RULES.-The formal rules of the Chicago Board of Trade make no provision for margin deposits by a customer with his commission house. Rules and practices regarding margin deposits between clearing house members, however, naturally establish a standard which affects the practice of commission houses in dealing with their customers.1

The reasons for a deposit by the customer are, of course, identical with those for deposits between houses. But in the former case the customer must secure the commission house (not directly the other party to the contract) against loss, and the customer is presumed not to need similar protection against the house, hence the deposit is made by the customer with the house instead of by both the house

The Chicago Open Board of Trade appears to be the only exchange which deals explicitly with the subject of margin deposits by customers, but this rule also is merely permissive. Section 99 of its by-laws reads as follows:

"Association members acting as brokers may require their customers to deposit margins equal to 10 per cent of the contract price of their trades, and further margins from time to time as the fluctuations of the market may require, so that there may be a 10 per cent margin on deposit at all times. Failure of any such customer to deposit margins during the next banking hour after demand shall confer upon his broker the right to close out the trades of such customer, and to charge any loss to his account. Inability of the broker to make personal demand upon his customer for additional margins, by reason of the absence of the customer from his office, or from the city, or for any other reason, shall authorize the broker to close out the trades of the customer whenever the margins of the customer have been reduced below 5 per cent of the contract price of his trades."

and the customer with a third party. Under circumstances other than those surrounding the present highly developed methods of future trading, the margin might be regarded as a part payment of the purchase price of the property. In stocks it is often just that. In order that this view of the matter be applicable to grain, howéver, the customer must be buying the future as a means of getting the grain. Instances where this occurs are almost unknown or are almost all due to abnormal conditions. Even in this case the margin is not strictly an initial payment on the purchase price.

MARGINS OFTEN NOT REQUIRED.—If the customer's credit is good a margin deposit may be considered unnecessary. One considerable commission house is said by the active partner, because of the character of its trade, not to ask for margins of its regular customers. Nevertheless, paper losses on outstanding trades will be required to be made good; that is, open contracts must be kept good "at the market." But even this depends upon the policy of the commission house and the credit of the customer. A customer may be granted a "line of credit "; e. g., trades may go against him to the extent of $5,000 before any margin is called. It is said that formerly a large and conspicuously successful speculative trader could get such credit to the extent of $25,000 from almost any house on the "street." The granting of unusually liberal" credits to customers has been the subject of complaint to the directors of the Chicago Board as constituting a violation of the commission rule, and the allowing of credit at all has similarly been complained of, but no restrictive measures appear ever to have been adopted. A 10-cent margin is usually exacted of traders, but during periods of excitement it has sometimes been raised to 20 cents. In quiet times (not recently) 2 or 3 cents a bushel has been accepted as sufficient margin, even from small traders.

Pit traders, in particular, seldom put up margins. They expect houses to carry them on credit so far as may be necessary. The margins that would be required in these cases, however, are small in proportion to the volume of trading, because scalpers are nearly always even on the market at the close.

MARGINS USUALLY CASH.-The margin deposited by a customer is supposed to be cash, since the deposits on margins between houses are cash, but the rule hardly amounts to more than giving the commission house an excuse for requiring cash from customers. If the desire is merely for protection, and if the customer also has a stock account adequately margined (presumably with securities), there is no reason why a special margin be required against the grain futures, unless the use of the cash is itself convenient to the commission house.