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Major Exchanges Charting Gulf Contingency Plans : Trading: Their aim is to cope with volatility. The Chicago Merc boosts some margin requirements.


NEW YORK — The nation's financial markets and their regulators have been taking special steps and reviewing emergency plans in recent days in anticipation of the extraordinary turbulence that could be set off by the outbreak of a Mideast war.

On Friday, with the United Nations-imposed deadline for Iraq's withdrawal from Kuwait only four days away, the Chicago Mercantile Exchange raised the margin requirements for seven kinds of financial futures contracts traded in its pits.

Margins are the good-faith deposits that investors put up before buying futures contracts, and typically they are raised at periods of unusual volatility. In a statement, the Merc said the hikes were made "in light of the potential for market volatility if hostilities commence in the Middle East."

Initial margins for members on its Standard & Poor's 500 stock index futures, for example, were raised to $10,000 from $8,000.

The New York Mercantile Exchange, the world's largest oil futures exchange, has assembled a special emergency plan and submitted it to officials of the Commodity Futures Trading Commission for their review. Oil prices probably will be most affected by war in the Persian Gulf.

Among other steps, the Nymex plan provides for an improved exchange of market-related information with the New York Federal Reserve Bank, the CFTC and the Energy Department.

The Nymex plan also for the first time places limits on how much prices for the nearest two months of a petroleum or crude oil contract can rise or fall within a single trading session.

The new limit for the crude oil contracts, for example, is now $7.50. Once the price rose or fell by that amount in a single session, trading would be halted for an hour. The limit would apply again after the halt.

For options trading, the Nymex plan also increases the range of strike prices. The purpose is to allow a great range of hedging choices to investors in markets where prices are moving rapidly.

The strike price is the price at which the contract underlying an option can be bought or sold during the option's life.

The exchanges have also been discussing with their regulators the possible effects of a war.

In a recent letter, Andrea Corcoran, head of the CFTC's division of markets and trading, urged the exchanges to undertake "what if" analyses that would assess the financial impact of volatility.

Such analyses would help the exchanges determine which member firms should be closely reviewed "or required to make special arrangements, such as increasing capital or margins, or reducing position concentrations."

The market clearinghouses that administer trades have special computer software that allows them to analyze systematically what effects extreme price movements would have on their customers' solvency.

During the darkest moments of the October, 1987, stock market crash, a number of lenders began pulling back credit to big clients, threatening the system with insolvencies that could have had wide spillover effects.

Officials of the futures and stock exchanges, including the New York Stock Exchange, the Merc, the Chicago Board of Trade and American Stock Exchange, say they would rely in a crisis on the special mechanisms that they have laboriously put in place since the 1987 crash.

These plans provide, among other things, for a series of trading interruptions in volatile conditions. These "circuit breakers" are intended to give investors more time to analyze the conditions of the market and their own solvency, in hopes that such analysis will help calm volatility.

After the Dow Jones industrial average moves 50 points, for example, computer-directed program trades receive special handling; a move of 100 points on the Dow triggers a half-hour interruption in trading of Big Board stocks, the Merc's S&P 500-stock index future and the Board of Trade's major market stock index.

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