Commodities · M9 · 8 min
Market structure and crises
Work out the cash a futures position must pay after a price jump, and explain how negative oil and the 2022 nickel crisis tested exchanges.
In the news: When an exchange halts trading or asks for more cash after a price spike, the story is about margin.
The essentials
- Clearing house
- The body that stands between the two sides of every exchange trade, as buyer to every seller and seller to every buyer, so if one side fails the other is still paid. It is also called a .
- Initial and variation margin
- Both sides post initial margin when a trade opens, and more when markets get wilder. Gains and losses are then settled in cash daily as : a $6.50 rise costs a seller of 200 contracts $1.3m.
- Liquidity risk
- A hedged producer pays its futures losses in cash now, while the gain on its output arrives only when it sells. A big enough spike drains its cash, and an unmet gets the position closed out.
- Squeezes and position limits
- In a , sellers who can’t deliver or meet margin must buy back at once, pushing prices higher. Exchanges cap the contracts anyone can hold near delivery, a , to stop anyone cornering supply.
- Three kinds of crisis
- Negative in April 2020 was a storage crisis, Europe’s energy margin calls in 2022 a liquidity crisis, and nickel in March 2022 a squeeze, when the exchange cancelled about $12bn of trades.
Variation margin
VM = N × Q × ΔP
- N
- contracts (negative if you sold)
- Q
- contract size
- ΔP
- change in the closing price
How it works
1. Who guarantees a futures trade
When you buy a future on an exchange, you don’t have to trust the seller. A clearing house steps in between, becoming the buyer to every seller and the seller to every buyer. If one side fails, the clearing house still pays the other.
2. A deposit up front
To protect itself, the clearing house asks both sides for a deposit when a trade opens: initial margin, enough to cover a bad day or two. When markets get wilder, it asks for more, because a bad day could now cost more.
3. Gains and losses paid every day
Each day the exchange sets a closing price and moves cash between the two sides: . Sell 200 Brent contracts of 1,000 barrels and see Brent rise $6.50: you pay 200 × 1,000 × $6.50 = $1.3m that day. Because losses are paid daily, nobody can build up a large unpaid loss.
4. Hedged, and still short of cash
A producer that sold futures as a hedge pays that cash now, while the extra value of its oil arrives only when it sells. With $2m of spare cash and 200 contracts of 1,000 barrels, a rise of $2m ÷ 200,000 = $10 a barrel uses it all. If you can’t meet a , your position is closed out.
5. Short squeezes and position limits
If sellers of futures can’t deliver the commodity or meet their margin calls, they must buy back all at once, pushing the price up further and forcing more buying: a short squeeze. To stop any one trader cornering the supply, exchanges cap how many contracts anyone can hold near delivery: a .
6. Nickel, March 2022
Nickel prices surged in early March 2022, and holders of large short positions faced margin calls they struggled to meet. In the early hours of 8 March the nickel price passed $100,000 a tonne. The exchange suspended trading and cancelled that day’s trades, about $12bn of them.
7. Why cancelling trades was controversial
Cancelling protected the clearing house from defaults, but it broke a basic rule: a trade, once done, stands. Funds whose profitable trades were cancelled took the to court and lost in the High Court in November 2023. In 2025 the FCA fined the LME £9.2m for weak systems and controls.
8. Three kinds of crisis
Negative in April 2020 was a storage crisis: holders had nowhere to put the oil. Europe’s energy firms in 2022 faced a liquidity crisis: hedged and solvent, but short of cash for margin. Nickel was a squeeze. In each, margin turned a price shock into a sudden demand for cash.
Worked example
A producer is short 200 Brent futures (1,000 barrels each) as a hedge. Brent settles $6.50 higher over two days, and the exchange raises initial margin by $1,500 a contract. The producer had $2.0m of spare cash.
- Variation margin: 200 × 1,000 × $6.50 = $1.3m to pay in cash.
- Extra initial margin: 200 × $1,500 = $0.3m.
- Total call: $1.6m, leaving $0.4m of the $2.0m.
- Another rise of $2.00 would cost 200 × 1,000 × $2.00 = $0.4m: the cash would be gone, though the oil it will sell is worth $1.3m more.
A $1.6m call; the hedge is working, but a further $2 rise would use up the spare cash.
Check yourself
8 quick questions on the explanation above.
Practice
New numbers every set. Misses and guesses go into your review deck.
In the interview
Answer out loud in under a minute, then compare.
What happened in nickel in March 2022, and why does it matter for exchanges?
How can a hedged producer still go bust?
Why are margin rules double-edged?
Remember
VM = contracts × size × price change
Margin protects the exchange but turns a price spike into a cash call today: a hedge can be right and still drain your cash.
Sources
- Financial Conduct Authority — First FCA enforcement action and fine against a Recognised Investment Exchange
- Stephenson Harwood — London Metal Exchange wins High Court ruling over cancelled nickel trades
- South China Morning Post — LME’s nickel-crisis decision at heart of dispute in UK judicial review involving US$12 billion in cancelled trades
- Commodity Futures Trading Commission — CFTC Staff Publishes Interim Report on NYMEX WTI Crude Contract Trading on and around April 20, 2020
- Bank of England — Energy Markets Financing Scheme (EMFS)
Definitions and maths are standard textbook material; dated facts link to the sources above. Worked numbers are illustrative.