Bonds, Currencies & Commodities
CME increases margin call; markets will be under pressure

US options & futures holders will be forced to deposit billions in additional capital to the CME to avoid margin calls. This may pressure all asset classes on Monday

There is a liquidity crunch in the options & futures markets for commodities worldwide. CME, the exchange for such transactions in the US, had made the initial margin and maintenance margin equal for every commodity with options and futures. This implies that options and futures holders will be forced to deposit addition capital to the CME in the form of maintenance margin, simply to hold their positions. This will put markets under pressure on Monday. The lack of liquidity and additional margin requirement comes in the aftermath of the bankruptcy of MF Global.

The London Metal Exchange has suspended MF Global from trading with immediate effect, following a similar move by the CME Group, which operates the Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile Exchange. MF Global had filed for bankruptcy protection following bad bets on euro-zone debt. The brokerage’s meltdown in less than a week made it the biggest US casualty of Europe's debt crisis, and the seventh-largest bankruptcy by assets in US history.

One of the biggest market concerns now is systemic liquidity, which is virtually non-existent. Interbank liquidity in Europe is at an all-time low, and possibly for the US banks. But this is just as true at the commodity exchange level, where it appears the aftermath of the MF Global collapse is just now being felt. CME's margin hike will force market players to cough up billions of dollars in a single day. Since this cannot be easily procured in one business day, we may see margin calls and forced liquidations of margin accounts across America and the world.

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COMMENTS

David

6 years ago

It is not a liquidity crunch. there is plenty of liquidity - it is created - springs forth from the act of margin borrowing!!! it is a commodity supply crunch - physical demand - the fear that comex will have to deliver what it cannot possibly possess nor make a contract to get.

Oli

6 years ago

It was a false alarm: the CME is actually reducing Initial Margin to do with the transfer of MF accounts...
http://www.cmegroup.com/tools-informatio...

Citizenindia

6 years ago

Finally the system itself is forcing corrective action. It may lead to significant falls in prices next week but atleast prices will come closer to demand supply driven levels. Thats what genuine markets are all about. Futures market was meant for better price discovery but had become a speculative tool. On a micro level it may work, but when thats happenin in trillions, one spark and the system may be driven to disaster. For countries like india, it could be great as the biggest problem for india is crude and if that comes to more saner levels, india can be the world's dream investment destination.

Citizenindia

6 years ago

Finally the system itself is forcing corrective action. It may lead to significant falls in prices next week but atleast prices will come closer to demand supply driven levels. Thats what genuine markets are all about. Futures market was meant for better price discovery but had become a speculative tool. On a micro level it may work, but when thats happenin in trillions, one spark and the system may be driven to disaster. For countries like india, it could be great as the biggest problem for india is crude and if that comes to more saner levels, india can be the world's dream investment destination.

Oli

6 years ago

My understanding is that this hike requirement only applies to 'Performance Bonds", and not for "every commodity with futures & options".
Maybe someone can explain the likely impact of this as i'm not sure how big a % of the overall CME "Performance Bonds" are.
Thanks in advance

REPLY

C

In Reply to Oli 6 years ago

Oli - I believe the performance bond is the collateral put up to meet the margin requirement... performance bonds are not a traded commodity.

Oli

In Reply to C 6 years ago

In that case it does apply to all instruments traded on the CME....
Unless people/firms (loads & loads of them) can come up with the increased margin then their positions will be liquidated by the close of business on Monday.
This woud be messy to put it mildly.
I'm surprised of 2 things:
1) that the CME will be allowed to do that considering the dire consequences that will follow (possibly another 'black monday').
2) how little interest has been generated by this story so far.
C, what are your views on this move and likely outcome for next week.
Cheers

Moneylife Team

In Reply to Oli 6 years ago

CME has eliminated the distinction between initial and maintenance margin. That is quite rare.

Further upsides only if 5,405 is taken out on a weekly close, otherwise market is range-bound

Crucial support is pegged at 5,169 points, and as long as the Nifty does not dip significantly below this level, the bulls will sit pretty even if the market drifts for a week or so

S&P Nifty close: 5,284.20




Market Trend

Short-term: Upwards   Medium-term:    Sideways   Long-term: Sideways

The Nifty opened flat for the week and drifted lower to almost close the gap area between 5,196-5,322 points. One should now keep a close watch on the 5,169-point level as the bulls cannot afford the Nifty to drop much below this. After the dip in the first half of the week, as was expected in last week’s report, the Nifty recovered during the last two days to close marginally lower, down 76 points (-1.43%). The sectoral indices which outperformed the market were BSE FCMG (+0.73%), BSE Power (+0.48%) and BSE Health (-0.01%)—while the ones which underperformed were BSE Auto (-3.37%) and BSE Metal
(-2.47%). 

The weekly Histogram MACD remaining above the median line played with the indication that the short term trend remains up and one has to see whether this corrective rise lasts for the next 4-6 weeks, albeit with some hiccups in between.

Here are some key levels to watch out for this week.

  • As long as the S&P Nifty stays above 5,281 points (pivot) the bears will be under pressure.
     
  •  Support levels in declines are pegged at 5,204 and 5,124 points.
     
  •  Resistance levels on the upside are pegged at 5,362 and 5,441 points.

Some Observations

The bulls have put the bears under pressure and needn’t get worried as long as the 5,164 level holds in any correction.

1.    Support in declines is pegged from the recent tops of 5,168-5,169 points.

2.    Further support in declines will be provided by the “gap area” between 4,827-4,861 points.

3.    The 5,405 level is the crucial resistance level (trend-line in lavender) to watch out for this week.

4.    A small top is likely during the first couple of days this week after which a dip could materialise.

Strategy

The Nifty faces stiff resistance at the 5,405-point level (from the weekly trend-line in lavender). Unless and until this is taken out, upsides are limited for the time being. Crucial support is pegged at 5,169 points and as long as the Nifty does not dip significantly below this, the bulls are sitting pretty even if the market drifts for a week or so. Like last week, one should expect a dip mid-week in a curtailed week of trading due to holidays.

(Vidur Pendharkar works as a Consultant Technical Analyst & Chief Strategist, www.trend4casting.com)
 

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