What Commodity Market Meltdown? The CME Margin Notice That Has Everyone In a Tizzy

Posted by kid dynamite on November 5th, 2011:

Last night the CME sent out a margin advisory. They do this all the time, changing margin requirements in different products, but this notice was different: The notice was picked up (and spread, like financial news Herpes) by ZeroHedge, who predicted a plethora of margin calls on Monday, and of course, imminent Financial Armageddon. There is of course an alternative potential explanation.

Note the phrasing of the CME’s announcement: they used “initial/maintenance” ratio. Now, 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.

I am guessing that this change is, of course, related to the account transfers of MF Global customers. Since accounts are being transferred to new clearing firms, that may trigger re-posting of initial margin requirements. Reading from CME’s memo: “Quick Facts on Margin at CME Clearing,”

“CME Clearing determines “initial margin,” which is the margin that market participants must pay when they initiate a position with a clearing firm. The clearing house also determines “maintenance margin,” the level at which market participants must maintain their margin over time.”

Now, I can’t be sure, but I suspect that CME’s announcement from last night is a lowering of the initial margin requirements, to avoid the necessity of former MF Global clients having to post increased margin as a result of their positions being transferred to a new firm. This isn’t chump change but….

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