Increased Price Limits Associated with Reduced Volatility

In response to rising prices and volatility in the corn markets, in May 2011 CME Group proposed an increase in daily price limits for corn futures trading, subject to CFTC approval. This article explains the historical effects of price limits on these markets. It provides solid data, in response to concerns from corn market participants that increasing price limits would increase volatility, that historically the opposite has been true: Increased price limits have been followed by lower market volatility and margin requirements.

Corn Price Limits and Margin Requirements includes discussion of:

• How the corn price limits work
• Why CME Group raises price limits and margins in certain cases
• The effect of price limits and the loss of price discovery
• Whether higher price limits lead to higher margins

There are two graphs that provide data on:

• Corn daily price limits as percentage of nearby settlement prices: April 2006 to April 2011
• Corn price limits and hedge margin requirements around the 1993 price limit increase

A chart of price data compares results of price limit increases from 1993, 2000 and 2008.

This article was written by senior staff at CME Group.