CME Goes To Collateral DefCon1:Makes Maintenance Margin Equal To Initial For Everything

http://www.zerohedge.com/news/cme-goes-margin-defcon-1-makes-maintenance-margin-equal-initial-everything

The most important news announcement of the day was not anything to came out of Cannes (as nothing did), nor from Greece (the merry go round farce there continues unabated). No, it was a brief paragraph distributed by the CME long after everyone had gone home, and was already on their 3rd drink. It is critical, because not only is this announcement a direct consequence of what happened with MF Global several days ago, but because also it confirms one of our biggest concerns: systemic liquidity is non-existanet. We confirmed interbank liquidity in Europe was at an all time low earlier today http://www.zerohedge.com/news/behind-scenes-european-panic-interbank-liquidity-worst-level-ever , and can only assume the same is true for US banks. But what is very disturbing is that this is just as true at the exchange level, where it appears the aftermath of the MF collapse is just now being felt. What exactly was the announcement. Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product. Because 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... and the world. Just like when Lehman blew up, it took 5 days for Money Markets to break. Is this unprecedented elimination in the distinction between initial and maintenance margin the post-MF equivalent of the first domino to fall this time around?

From the CME (source): http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv11-399.pdf



And for those asking, here is a complete breakdown of all CME products and associated margins:

http://www.scribd.com/doc/71646141/Full-CME-Catalog

Monday. I don't play in those shark-infested waters, so can only guess the turmoil that will ensue.

Thanks for posting.

Update: Based on unofficial statements by the CME, it appears that the exchange has gone the way of inviting more risk by lowering Initial to meet existing Maintenance margin across the board. We will likely only know for certain on Monday. We suppose the proposed explanation will be to minimize margin exposure for onboarded MF positions. Of course, that this is very much counterintuitive at a time when risk is spiking and vol readings per SPAN are soaring, and instead is inviting even more risk, is apparently irrelevant to the exchange.

http://www.zerohedge.com/news/cme-goes-margin-defcon-1-makes-maintenance-margin-equal-initial-everything

.. this and the fact that Israel is rattling its sword against Iran... uh ohh....

A full scale world war is just what the Banksters need to divert attention from a full-scale economic meltdown.

if we don't invest in margins, will this affect us? How will it affect the stock market in general?

assets they have to meet the margin requirements. Equities and commodities will be dumped onto the market in massive amounts, and the markets for these will have tremendous downward price flows.

There has now been an update to the original article, that appears to be the inverse of a margin raise. We will all see Monday what happens in the markets.

see update here: http://www.zerohedge.com/news/cme-goes-margin-defcon-1-makes-maintenance-margin-equal-initial-everything

cheers

-Laelth

Just hang on to our hats and watch our retirement funds plummet? Or is there anything we can do?

I don't see anyone freaking out about this but a bunch of fringe gold and silver blogs. Raising required margins is a good thing long terms and this applies only to commodities futures. Yes I know it's a big market, but still...

Correct me if I'm wrong, but don't lenders have a lot of discretion on when lenders have to or even want to make a margin call on specific borrowers. This does not look like a financial apocalypse.

unrec ...

only a layperson's understanding of the securities and derivatives being traded. But when the exchange on which those derivatives are traded (in this case, the Chicago Mercantile Exchange) raises or lowers its margin requirement, that's different from an individual brokerage (like Schwab, for example) raising its margin requirement.

I think a plain reading of the original release suggested this had the potential to be pretty major, unless the press release about the increase in required reserves were issued in error.

Tyler Durden of ZeroHedge (and Stockholmer here) were entirely within their rights to flag this issue for attention.

I've now returned to the ZeroHedge site and found this (if possible) even scarier update:

- snip -

Yesterday, in what is the worst-phrased and most misleading press release to ever come out of the CME, the exchange issued a notice that going forward all Initial margin would be equal to Maintenance margin. Our gut interpretation was that "Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product." Judging by the broad response, our initial reaction is what a prudent, logical human being would assume: after all, it is precisely the undercollateralization of customer accounts, and general underfunding at MF Global that is what brought that particular company down. Well, we wrong wrong. The CME, it appears has taken a page right out of the European playbook, and less than a week after an exchange-cum-Primary Dealer collapsed due to excessive risk taking, the CME has followed up its vague press release from yesterday by inviting even more risk in lowering the initial margin. Why is this a cause for even greater concern? As the CME itself says, "Initial margins are set to provide an additional buffer against future losses in the account" - so going forward that buffer has been reduced by about 30%. But what is the reasoning provided by CME: "The intent and effect of these changes is to decrease the size of any margin calls resulting from the bulk transfer of MF Global customers to new clearing members, not to increase them." So basically the CME is implicitly putting all of its existing and current clients and customers at further risk by onboarding the accounts of those clients who, like lemmings, held on to their MF Global accounts until after it was too late. Because while the lower Initial margin may apply to MF accounts, it will also apply to any Tom, Dick and Harry beginning Monday, who will suddenly see a 30% reduced gating threshold to put on a position. Any position, no matter how risky.

Naturally, if enough people suddenly jump to put on risk, and the market flips and all new positions end up underwater, who will bail out CME accounts if, like MF, there is just not enough capital on the balance sheet? MF Global?

That the CME has opted for this highly disturbing path is very troubling, and just as in Europe, where three months after the financial short selling ban, financials are trading lower than they have ever been, so the unintended consequences from this action will result in even greater stress to the system, as not a single local will leave any excess money in their account, and likely will force all specs to trade within a hair of triggering maintenance margin, due to fears of what may happen at the CME itself, now that is has implicitly onboarded moral hazard from the otherwise insolvent MF Global accounts.

- snip -

More at link:

http://www.zerohedge.com/news/cme-issues-clarification-margins-usher-more-risk-less-liquidity-mf-aftermath

********************

In words a layperson can understand, in order to accommodate the needs of MF Global customers who were left high and dry, the CME will allow risk and volatility to go even higher by lowering margin requirements on every type of futures and options trade! Un-friggin-believable.

I don't have any problem with people posting this stuff here. And Zerohedge can say anything they want.

I have no love for the scammers and cons at this level of paper trading. Still, zerohedge, withing hours took a rather mundane press release, screamed bloody murder from the fine print, then within hours proclaimed what the release "really" said, was nearly the exact opposite and just as scary if not worse.

I guess we'll see Monday. This sort of hyperbolic instant analysis spreads noise and smoke, not light.

I think it is legitimate to worry about market manipulations and manipulators. Admittedly, I just searched related stories and didn't see any mainline financial analysts freaking out on this - and they are a pretty jumpy group. And sometimes thay are dead blind and dead wrong. I'm no expert. Maybe this is the next financial Tsunami or maybe it is just a few dudes tying to scare the precious metals futures trading one way or the other for an hour or two Monday. Probability says it is more likely the latter. Even more likely is that vague, dire freak-out predictions generate more site hits.

So...i'm just going to go with Un-friggin-believable.

clarification that exactly reversed the meaning of the original layperson's reading of the release. Durden can hardly be blamed for reversing himself if the CME itself is issuing 'clarifying language' that does a 180. Indeed, kudos to Darden for updating his own story.

zerohedge is off to races on other obscure speculations.

I really don't see how anyone pulls any useful investment news off that site. They sure post lots of stuff though.