CME changes initial margin requirements in response to MF Global account transfers

[pmbug]

... as of close of business on November 4, today, the CME just made the maintenance margin, traditionally about 26% lower than the initial margin for specs, equal. For everything. Which means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call. Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, we anticipate the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America...

http://www.zerohedge.com/news/cme-g...s-maintenance-margin-equal-initial-everything



Looks like we may yet see that huge buying opportunity next week on physical bullion. I hope the bullion dealers will still be selling if the spot/futures price gets monkey hammered. They may get cleaned out.

 

[white&yellow999]

one can only wish.

 

[pmbug]

Trader Dan has two posts with thoughts about the implications of the CME action:

... It will also precipitate some very volatile trading conditions.
...
This might throw my previous assessment of silver and gold technical action out of the window. Stay tuned as this is going to get even more wild than I previously imagined.
...

More: http://traderdannorcini.blogspot.com/2011/11/cme-group-hiking-margins-across-board.html

and an exploration of potential reasons why it was done (IMO - a very important question that needs answering as some potential answers are very disturbing to consider):

In communications with my broker this evening he suggested that this might be a way for the CME to let some of the firms accepting accounts from MF Global off the hook from attempting to make one margin call after another and attempt to complete a huge number of bank wire transactions in such a short period of time.
...

More: http://traderdannorcini.blogspot.com/2011/11/further-thoughts-on-cme-maintenance.html

Be careful out there if you are playing in the paper casino.

 

[DSAbug]

http://twitter.com/#!/CMEGroup

CME is recommending people check out a blog that indicates that margin requirements are being LOWERED to PREVENT margin calls.

http://kiddynamitesworld.com/the-cme-margin-notice-that-has-everyone-in-a-tizzy

Zero hedge is way too alarmist.

 

[DSAbug]

And zerohedge updates.

 

[pmbug]

Thanks da. Appreciate the update.

 

[KMS]

Going to be a busy week for everyone, regardless. Just glad it is not as bad as ZH initially made it out to be.

 

[cshawcuk]

Lowered or highered seems like scare tactics to keep the paper prices lower..A lot of people sold and then rebought when they found out ..making money for the brokers

 

[DSAbug]

Look.. it's not a conspiracy to screw people over.

The reason for the change was because of MF global.

When these positions are transferred via ACAT, different firms have different rules on how they are accounted for in various margin departments.

For example, when bear blew up, we transferred our accounts to Goldman. Goldman immediately issued a margin call on our account because they counted our account as initiating those positions with their firm and they were taking on that additional risk. We wired money in and after they started treating it as maintenance margin we transferred the money back out.

Eventually, we transferred to interactive brokers and went through the same process all over again. Unlike Goldman, their solution was to add additional days to the clearing process to avoid having margin issues.

So, contrary to what conspiracy theorists want to say, them treating initial and maintenance margin was throwing a bone to all these accounts transferring over the past week. The exchanges avoided additional volatility and forced selling. Give them props because frankly, this was not only what was best for the market, it was what was best for customers.

And btw... Tyler is completely wrong about the "risks" being taken on. As long as the ACATs settle, no additional risk is being taken on. Also, ACATs only fail to settle when positions don't match and an ACAT wont be approved if positions and CASH don't match.

 

[pmbug]

Yeah, once I understood what the CME was actually doing, it all made sense. They should have done a better job of communicating from the get go though. They were not explicit and left a lot of room for interpretation.

Looks like we are not going to see that fire sale after all (at least not today and not because of the CME or MF Global).

 

[DSAbug]

Yeah, once I understood what the CME was actually doing, it all made sense. They should have done a better job of communicating from the get go though. They were not explicit and left a lot of room for interpretation.

Looks like we are not going to see that fire sale after all (at least not today and not because of the CME or MF Global).

It's practically like doing the trade all over again so think of it like buying a security and waiting for it to settle. That's what people like Tyler on zerohedge probably don't have experience with.

Since I've worked exclusively with small funds, I've had to wear many hats and I've done 8 different account transfers in 8 years and 8 different primes. It typically takes 3 days for positions to clear following an ACAT but it varies and the duration of the transfer depends on how long it takes for the fund to get it's info to their new prime. Then, that new prime has to setup an account and then the 3 day transfer occurs. I am guessing that by the weekend these positions will be "cleared" and people can trade again.

It's disruptive but it's also not a major event like people are making it out to be. Some funds might be stuck for a couple weeks though if they aren't familiar with the process and don't have experienced employees. I know some funds were blind sided and didn't even get accounts setup until Thursday. I know of one guy who only had 10k in his account (all cash) and still hasn't done anything.

 

[pmbug]

Dan Norcini has a nice post this morning explaining how initial and maintenance margins work for people who are unfamiliar:

Many of those who read this site are equity traders and do not live in this exotic world of commodity futures trading as I do and others who read this site. Also, some are relatively new to the world of trading in general and perhaps are reeling at all this talk of "initial margin requirements", "maintenance margin levels", "margin calls", etc. I therefore thought it might not be a bad idea to provide a very brief explanation of what these things are so they can understand what all the fuss was about this past 24 hours as we sought to understand what was taking place as a result of the original advisory notice put out by the CME Group which was then fortunately clarified later on.
...

More: http://traderdannorcini.blogspot.com/2011/11/margin-call-process.html

 

[DSAbug]

That is a very good explanation.

 

[KMS]

Nicely done, guys.

 

[Nuggets]

Agreeing with KMS here... nicely done. I especially appreciate how nobody stooped to insulting the intelligence of board members for being 'wrong' about a story, or in this case, what became via ZH, a rumor of sorts - which I sure saw other places.

I've grown tired of forums where people are trying to out-awesome one another. Not only am I bone tired of the meme, 'do you research!' - which is merely used as code for, 'I work hard and I am smarter than you, whereas you are lazy and not as bright". It's an awful, awful 'Epic Fail' of a meme ;p

Some of us more quiet folks are not in the financial world. Some of us don't even WANT to stick a toe in that pit, but we have been made to, given world events.

Some of us have careers as far removed from 'making money' as is imaginable, but we are just trying to stay afloat in this madness. People like me, we value greatly the insights of more expert posters. Gloating ads nothing to the value of the insights, but it certainly poisons gratitude and more.

On a bigger scale, this becomes a self fulfilling prophecy that is in fact very detrimental to a society. People with 'special knowledge', especially if it is knowledge that can be of great consequence to others' well being, bear a moral burden of sharing that information. A 'free society', such as we still struggle to perfect, can not survive in a climate of exclusionary self interest. The time you all take to explain these critical matters to your neighbors is time well spent.

Imagine doctors knowing about things you could do to stay healthy and avoid a severe medical condition, but not alerting the public of the threat or what they can do about it. Should we honestly stop at Medicine when asking for moral behavior from our professional class? I think that's a terrible idea - and I cite Humans on Earth as evidence.

We all should see by now how taking care merely of ones self - hoarding not just money but more critically, knowledge - is corrosive. Our system is poised to collapse as a direct result of these very behaviors. It is NEVER the time to say, 'Screw the Sheep'. Never. This mentality is extremely dangerous. It's the voice of the 'house slave' speaking when you hear those words. Those aren't 'sheep'. Those are your neighbors. Your friends. Your loved ones. You NEED to get through to them, or be there for them when they FINALLY come asking you about Gold or whatever.

So ya. Verbose. I know.... Just wanted to say thank you, harp on a positive, and take a moment to encourage more of the same constructive approach that I see here.

Be safe peeps.

 

[pmbug]

Very nice post Nuggets. We're all sharing a journey here no matter how far along we've traveled so far or in which direction. We all have something to offer one another and the potential to learn something new.

The more you use a forum - asking questions, expressing thoughts, sharing answers, etc. - the more you get out of it. Interaction is the lifeblood of a forum/site like this one. The more you engage it, the more you get out of it. As such, it pays to be nice - especially when you don't see eye to eye with someone. That's when you have the greatest opportunity to either learn something or teach something. The wise person is always open to both possibilities.

 

[DSAbug]

I especially appreciate how nobody stooped to insulting the intelligence of board members for being 'wrong' about a story, or in this case, what became via ZH, a rumor of sorts - which I sure saw other places.

Isn't that what the kitco forums are for?