A 98th-percentile ETH week forces a margin rethink for leveraged clients
Should the exchange raise ETH margin requirements now to cover a 6.13% hour, or keep current levels and rely on liquidation to absorb moves like this week's?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 13 May 2019, ETH rose 37.99%, from 188.07 to 259.51, with a range of 50.96%, realised volatility of 165.4% annualised, and a largest 1h move of 6.13% on Thursday. Daily returns swung from +14.65% on Wednesday to -7.58% on Friday, and volume reached 3.72 times the prior 12-week average. ETH beat BTC by 21.05 percentage points, and the ETH/BTC ratio rose 18.0%. Funding data is unavailable. An illustrative exchange risk team sets margin for leveraged ETH clients.
Judgment
A week ranked in the 98th percentile of 65 weeks, with a 6.13% hour and a 50.96% range, is not the market the current margin was calibrated for. Raise ETH margin requirements for new positions and for clients whose positions were opened at the lower levels, setting them from the hourly and daily moves rather than the weekly return. Do not extend the same increase to BTC positions: ETH moved 21.05 percentage points further than BTC in the same week, even though the two moved together hour by hour at a correlation of 0.75. Accept the cost of lower leverage activity while volatilities stay near these levels.
What would change it
If ETH's weekly returns settle back inside the span of the prior four weeks, from -6.37% to 15.37%, for several consecutive weeks, with no single-hour move near 6.13%, the higher margin can be stepped down. Funding data becoming available would change how forced-liquidation crowding is estimated, not the margin level itself.
What sets this case apart
ETH outperformed BTC by 21.05 percentage points while their hourly correlation stayed at 0.75, so margin must be set per asset, not from a single shared portfolio exposure.