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

8 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

8 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

8 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

8 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

8 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 8 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 8 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 8 years ago

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

FII limit for purchase of G-secs to be raised soon: Finance ministry

A finance ministry official said that the FIIs have almost exhausted the Rs43,650 crore ($10 billion) investment limit for purchase of G-secs and they would not be able to buy more securities unless the ceiling is enhanced

New Delhi: The government is likely to soon increase the purchase limit of government securities (G-secs) by the foreign institutional investors (FIIs), a move that will help it meet the enhanced market borrowing target without hurting liquidity position in the system, reports PTI.

The FIIs, a finance ministry official said, has almost exhausted the Rs43,650 crore ($10 billion) investment limit for purchase of G-secs and they would not be able to buy more securities unless the ceiling is enhanced.

As per the latest data, the FIIs’ investment in G-secs were at Rs42,388 crore.

“We could increase the limits for FIIs investment in G-secs soon as we need money,” a finance ministry official said without specifying the proposed limit.

G-secs comprise treasury bills and dated securities issued by the central and state governments.

The government last month revised its market borrowing programme for 2011-12 and decided to raise an additional Rs52,800 crore. Following the revision, the government will raise Rs4.7 lakh crore from the market, up from Rs4.37 lakh crore in the previous fiscal.

There are apprehensions that increased government borrowing would reduce the credit availability for the private sector.

The government had earlier relaxed the norms for FII investment in long term infrastructure bonds.

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Commodities crash in global markets today, copper down 7% and silver falls highest in 27 years

Slowing growth first in the West and then in China and the rising greenback have led to massive unwinding by speculators in commodities on Friday

Is the great commodity story that was going along smoothly finally petering out? If you go by today's developments, it really seems so. Copper was down by more than 7% and silver was down by 9%. Among the other commodities that were sharply down today were nickel, lead and zinc.

However, the fall in crude oil prices was muted and gold showed even more resilience. The yellow metal was down only by about 2%.

After a dream run, what caused the commodity crash? What are the global implications due to this trend-breaker?

Thanks to the moves announced by the Federal Reserve, the dollar is again looking more like a safe haven—the greenback is rising sharply again—and this commodity crash is only due to speculative unwinding. Speculators were neck-deep in copper and silver.   

Despite being called the 'poor cousin' of gold, silver has been one of the sharpest movers over past year, thanks to the skyrocketing prices of the yellow metal.

Silver rose from just under Rs30,000/kg in August 2010—all the way to Rs73,000/kg by April 2011.

A big crash followed in May, when the metal fell by as much as 30%. But in the first place, there was no justifiable reason for silver to shoot up the amount that it actually did—this was one rally purely fuelled by speculation.

Analysts are not sure if the Fed will inject more dollars into the system. Now where can silver go from here? If the dollar keeps going up and if Ben Bernanke does not come up with another liquidity-injection scheme, the metal will lose strength.  

On top of these events, the CME Group also hiked its margin requirements on gold, silver and copper futures on Friday. The CME is attempting to curtail speculation in these commodities—gold margins will be raised by 21%, silver margins by 16%, and copper margins by 18%. These changes will come into effect at the close of trading on Monday (26th September), CME said after close of trade on Friday.

Copper, called a metal with PhD in economics, because higher demand directly translates into robust economic activity, was going along at a rapid pace—despite the overall slowdown—because it was assumed that the Chinese economy would not slow down. Chinese warehouses are overflowing with copper.

So the market went along with the assumption that China would just gobble up more copper every time the metal weakened.

China's economic growth has fallen. This was a signal to speculators that copper demand would fall, since the last source of big demand is now questionable.

And the metal with the PhD is now sending out a clear warning—a soft patch for the global economy and a further (possible) fall in markets.

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