A few emails like this have hit our inbox this morning:
Have you seen this CME margin thing? Isnt this global meltdown on Monday???????????? Seen on 0hedge and The Trader.
Last night the CME Group — the futures exchange which got rocked this week by the MF Global news — sent out an email about margin requirements, which got picked up by ZeroHedge, which wrote a post titled
CME Goes To Collateral DefCon 1: Makes Maintenance Margin Equal To Initial For… Everything!?
The email that the CME sent out looked like this:
Basically, the CME Group announced that the initial margin that traders would be required to post to make a trade would be equal to the margin required to maintain the trade, and it was interpreted as meaning that everyone would have to post more collateral to keep their margined trades on.
However, Kid Dynamite has broken it down and explained that it’s totally benign.
… the initial margin is almost always larger than the maintenance margin(initial margin is how much collateral you have to post when you buy the contract. Maintenance margin is lower because otherwise you’d have to replenish your margin every time the contract falls in value – instead you only have to do it when you reach certain “maintenance” thresholds).
So the initial/maintenance ratios were previously greater than 1.0. They are being LOWERED to 1.0. There are two ways for this to happen, obviously: 1) Raise maintenance margin requirements or 2) lower initial margin requirements. If the CME was hiking maintenance margins across the board, it seems that they could have more accurately used the term: “maintenance/initial” ratio to describe the change.
ZeroHedge has also updated the post, so it seems that everyone is in agreement. Margins aren’t being hiked on everyone, they’re being lowered, most likely so that ex-MF Global customers can transfer trades without having to post a ton of new margin to keep their trades on.
UPDATE: The CME confirms that there won’t be some mass liquidation tomorrow.
They sent out this email to everyone to clarify:
CME Group Clarifies Maintenance Margin Ratios; Exchange to Reduce Initial Margin
Ratio to 1.00
CME Group today is clarifying its notice to clearing firms regarding margins. In light of the issues customers transferring out of MF Global are facing, while still maintaining appropriate risk management protections for the market, CME Clearing is setting the “initial” margin upcharge at zero. This upcharge is normally applied to customer accounts when they are receiving a margin call.
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.
Yesterday, CME Group successfully transferred MF Global customer positions to a new clearing member with part, but not all, of their funds, as approved by the bankruptcy trustee and the court. By reducing the initial margin “ratio” to 1.00, we ensure that margin calls that are issued to these transferred MF Global customers will be limited to bringing their accounts into compliance with the lower, “maintenance” margin levels. Maintenance margins are set to provide appropriate risk management coverage. Initial margins are set to provide an additional buffer against future losses in the account.
This is a short term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event.
We apologise for any confusion our initial advisory may have created.