The Other Side Of The Story: CME On "Understanding Margin Hikes" And Why "They Are Not A Means To Move A Market"

Tyler Durden's picture

It is not surprising that following a relentless barrage of margin calls, many have speculated, jokingly or not, that the CME has recently set out on a path of outright warfare with commodities investors and speculators, which was further escalated after the exchange decided to hike WTI margins on a day when priced broadly declined and not in a violent manner either. As the article author herself notes, much to the incredulity of some of her readers: "margins are set as part of the neutral risk management services we
provide. They aren’t a means to move a market one way or another, or to
encourage or discourage participation from one kind of market
participant or another."
The response was in question to when the CME will reduce margins now that the price of silver has tumbled by 30%. We would actually love to get an answer to that as well...

Understanding Margin Changes, from Kim Taylor of the CME

With recent geopolitical events and natural disasters driving
volatility in financial markets, margins – good-faith deposits to
guarantee performance on open positions – have spent more time than
usual under the limelight.

So we thought it might help to provide a very brief primer on margins as part of this conversation.

At CME Group, we’re intently focused on risk management. In over a
century, we have not experienced a default. In more than a century,
there has never been a failure by a clearing member to meet a
performance bond call or its delivery obligations; nor has there been a
failure of a clearing member firm resulting in a loss of customer funds.
As part of our overall risk management program, margins are adjusted
frequently across all of our products based on market volatility. When
daily price moves become more volatile, we typically raise margins to
account for the increased risk. Likewise, when daily price moves become
less volatile, margins typically go down because the risk of the
position also decreases.

Margins are set as part of the neutral risk management services we
provide. They aren’t a means to move a market one way or another, or to
encourage or discourage participation from one kind of market
participant or another. Rather, margin is one of many risk management
tools that help us assess overall portfolio risk to protect market
participants and the market as a whole.

There are two main margin philosophies that clearing houses can have.
First, a clearing house could set margins sufficiently high to cover
all possible volatility environments. Changes are less frequent, but
margins are higher. Second, and the CME Clearing approach, is to ensure
that margins are set to cover 99 percent of the potential price moves.
Margins then are lower in less volatile periods and higher in more
volatile periods. Changes are often made when the volatility environment
experiences a sustained change.

Who determines margin, and what goes into setting margin levels?

At CME Group, CME Clearing is responsible for setting margins. In
doing so, we consider several factors to compute the gains and losses a
portfolio would incur under different market conditions. Then we
calculate the worst possible loss a portfolio might reasonably incur in a
set time (usually one trading day for futures markets).

CME Clearing determines “initial margin,” which is the margin that
market participants must pay when they initiate their position with
their clearing firm, as well as “maintenance margin,” the level at which
market participants must maintain their margin over time. We mark
positions to market twice a day to prevent losses from accumulating over
time. We typically change margins after a market closes because we have
a full view of the market liquidity of that trading day. And, we also
provide at least 24 hours notice of margin changes to give market
participants time to assess the impact on their position and make
arrangements for funding.

In the case of silver, we have made several changes in margin in
recent weeks to adjust to volatility in the marketplace. By the close of
business Thursday, May 5, the margin when a position is initiated will
be $18,900; throughout the life of that trade, we would expect $14,000
in maintenance margin would be kept at the clearing house. By the close
of business Monday, May 9, the margin when a position is initiated will
be $21,600, and we would expect open positions to keep $16,000 in
maintenance margin at the clearing house. This is similar to when you
sign up for a checking account – a bank will typically require a minimum
initial deposit and can then stipulate that you maintain a certain
balance going forward.

It also is important to mention that the way margins are calculated
has to be tailored to the market served. For example, portfolio margins
for our listed derivatives are based on the CME Standard Portfolio Analysis of Risk (SPAN).
CME SPAN is the industry standard for portfolio margins used by more
than 50 other global exchanges, clearing organizations, service bureaus
and regulatory agencies. Margins for credit default swaps and interest rate swaps are quite different because those markets behave differently and have different kinds of variables that produce risk.

As an industry-leading clearing provider, our risk management
methodologies have to work to protect the markets we serve. Our interest
is in providing security for the entire market – no matter which way it

We encourage you to bookmark our performance bonds page on our website, or subscribe to our margin change announcements, so you can stay posted on the changes we routinely make to margins.

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nope-1004's picture

Kim Taylor, why are you selling your soul in the name of crooked banksters?  Who do you think you're fooling?

Say what you want, and in doing so you just discredit yourself more and more.

At CME Group, we’re intently focused on risk management.

That's the lie.  The truth is:

At CME Group, we’re intently focused on manipulating commodities that are influenced by Benocides' reckless money printing policies.

Thank me later Kimmy.


cossack55's picture

      " .....and we are waiting for lucrative employment offers from JP Morgan and Goldman Sachs."

You forgot that part.

Pegasus Muse's picture

Oh, you mean like this gal.     

FCC Commissioner who voted ‘yes’ to NBC buyout heads to Comcast

Thomas's picture

In the very least, the five hikes attests to how far behind the eight ball they got and how fast they had to catch up. Thus, it attests to what a bunch of meatballs they are (which are probably spiking in price also.) Thus, these guys should not be in charge.

smlbizman's picture

i have to agree with you, much like a landlord who has neglected to raise his rents for years and now is going to make up for lost time....

on the other hand is their any chance they see the writing on the wall and are not going to be the last ones leaving the party....for when it happens it will just happen aaannnd it will be gone...maybe they are getting nervous, they being cme, cmx. fed, et.als..

if you were a bookie, would you stretch yourself that thin?

than again i may not even be close in my thinking

p.s. i have a rooting interest in the silver in my hand

FrankDrakman's picture

Sorry, I see the CME acting in a perfectly rational way. When silver was $15/oz, and only moving a few cents day, your margin risk was small, and so margin requirements were small. As the price skyrocketed, and we saw moves of over $1/day, the risk was much higher. In just a couple of days, your margin could be completely wiped, and you'd be forced to sell at a price that might give you a big loss - and since commodities trade on much lower margin than equities, I see this as a perfectly sensible move on the CME's part to ensure that all trades are settled without default.

Now, other posters on the thread have posited that these changes were leaked to JPM and others, so that they could front-run the expected sell-off caused by increased margin. I don't know any of the people involved from JPM, CME, CFTC, or others, but given what we've seen from the banksters, this collusion would not surprise me in the slightest.

EscapeKey's picture

I look f/w to my landlord hiking rents five times in a week.

They knew the target from day one, yet milked it for all its worth, and leaked it to inner circle market participants.

Yeah right this was all about "volatility" and "risk".

rocker's picture

@ EscapeKey ...Great thought, never thought of it like that. Looks like JPM, GS and BAC figured out how to front run this trade. Shit, they will be richer and have another quarter of perfect trading on the prop desk. Can we say rigged markets.  Yup.

I will believe the CME has our best interest in mind when they do five margin calls on OIL. Only then. You see, they all know that OIL is used everyday and they will milk every dollar out of the poor until they can buy their houses and lives for nothing.  The U.S. Banksters are nothing less than crooks fed by the FED's free money to rape the now lower middle class.  You see, they think the middle class are those who make a mere 250K a year. Everybody else are their slaves. When oil dropped under 100 a barrel the other day, Barton Biggs said, "It's like a tax cut".  What a puke. What about those who are retired living on a fixed income.  We Are Japan Now.

Troll Magnet's picture

we wish we were for their nuke crisis.

toothpicker's picture

They are already employed by JPM G666

Keri at Bankster Report's picture

You know, it is just a little funny, isn't it?  "The lady doth protest too much, methinks." CME certainly seems to be making a lot of "explanations" for what it considers to be perfectly "normal" risk management decisions.

I just had "Street Smart" on Bloomberg going in the background, and I heard Matt Miller aske a guest about the margin hikes in silver, saying, "Doesn't it seem fishy? Who's the man behind the curtain doing that?" (That is a direct quote from Miller; it was at about the :45 minute mark of the show)  The guest said that it wasn't, and pointed out that historically margin increases have little effect on prices.  Miller then pointed out the recent increases and the (at least time-corresponding) 30% drop, and the guest said that he'd called the top at $49 and predicted a slide to $37 before he (the guest) was informed of the increases during the last days of April.

In a segment before that, Miller asked a different guest who was talking about GLD if the guest thought that the CME margin hikes in silver were intended to discourage people from investing in certain commodities. The guest said he couldn't speculate on that.

I mention this because apparently we are not the only ones who think x# margin hikes in x# days is a little, well, "fishy."  Miller is just another guy interested in markets who sees this, like most here, as abnormal.  And how many times now has the CME had to explain how "normal" it is?  Again, personally I am not against margin hikes over the long run, but like I said before, the CME knows that there are a lot of different ways to skin a cat, and they know the ways that gets everyone's attention.

akak's picture
CME On "Understanding Margin Hikes" And Why "They Are Not A Means To Move A Market"


cowdiddly's picture

But Kimmy said they are just risk management services that we provide. I guess when you go to a sell only market like the last time the market got ahead of your insiders short positions it will just be another wonderful service you wil provide for us.

old naughty's picture

76 HA's?

Oh, I get it, one for each char CME spewed, inclusive of the spaces.

Goldman Hufs's picture

On a positive note, at least we know she didn't her job based on looks...

Troll Magnet's picture

yikes!  why o why did you post that link?!?

a haircut and she could be a man!

GetZeeGold's picture



I totally forgive her for selling out......what other option did she have?


CME is looking out for you bitchez.





e_goldstein's picture

Nah, it's more like "we're doing this for your own good, retail investors. Now bend over and take it, because we love you."

TraderTimm's picture

I'd like to know why it takes nearly three years to catch the crooks in their midst. Perhaps their "intent focus on risk management" is leaving other areas overlooked?

Follow along at:

Hope you don't mind if I summarize, but the full text is in the pdf. "Disciplinary Actions" section. All offenses mentioned are in the NYMEX pits, energy unless noted otherwise.


Craig Cechini (CRAG) - Fined $140,000 and suspended for three months, barred from trading for an additional six months. The rap: Lack of proper records, pre-arranged trading, holding or withdrawing orders for the convenience of another, violation of prior orders to cease and desist.


Michael Cokeley (MICK) - Fined $7,500, customer restitution of $378 (hah), not allowed to reapply for membership for 3 months. The rap: This one is interesting, seems he didn't register someone as a clerk, and made trades for them in the clerk's account. Nice Try.


Peter Iocolano (PI) - Fined $175,000, remit his ill-gotten gains of $15,640, suspended for four months and banned from trading any account for two years. The rap: Pre-arranged trading from 2008 (what the... what? 3 years AGO?) traded opposite customer orders, recorded trades out of sequence, etc..


Richard Meister (RXM) - Fined $75,000, restitution of $10,815, Barred from holding a membership of any CME controlled exchange for one year. The rap: Front-running customer orders, permitted his clerks to initiate trades, failure to 'supervise' his clerks resulting in his gains, failure to produce records due to an investigation request.


William Squiers (SQR) - Fined $35,000, disgorge profits of $1,250, Six week suspension of membership and trading privileges. The rap: Pre-arranged trading in a ten-lot, round-turn SILVER futures trade (also from 2008, wow.. gave them time, eh?) also another pre-arranged trade on a nineteen-lot Silver trade, and *another* ten-lot pre-arranged trade.


Glad to know the best in "execution" and "risk-mangement" is waiting for your order. Don't sweat it, they'll catch them eventually. Any criminals doing trades in today's markets will be caught *for sure* by 2014, honest.



PenchantForHoarding's picture

Good call - thanks for sharing. I've been trading these day by day to leverage all the volatility... smart advice to keep overarching math in mind should a 1-2 day position become a 1-2 week+ one.

MiguelitoRaton's picture

They are not a means to move a market, but merely to manipulate a market.

Oracle of Kypseli's picture

When they know that the market is going to be smacked down hard in advance, they prepare themselves for unintended consequences.

So, in a way, they actually discourage going long and secure themselves if the raid is too fast and small fry have no time to cover or post margin

Yen Cross's picture

Small Fry should never exceed 10% of margin, and learn how to hedge!

Goldman Hufs's picture

And how would they know a market is going down?  Additionally, if they are trained at mitigating volaitility why did it take them five shots in nine days to "get it right"?

Oracle of Kypseli's picture

Oh! They sure do know. They are complicit.

The reason they do it in increments is to induce fear that raises can come at anytime.

Yen Cross's picture

Naive. A sweet rebutal though.

Yen Cross's picture

Gold is Bras(s these days. You know your trade. Thanks for the input. One question. (R) you long Timmmay?

slewie the pi-rat's picture

smack down, BiCHeZ!

this is from tomorrow, friday the 13th

thank me later...

More about basics than 'flash crash'

tickhound's picture

"Meanwhile the US Federal Reserve is likely to start another round of asset purchases once the current one ends in mid-2011"

basics, bitchez

Al Gorerhythm's picture

You hit the nail! The bull crap covers the fear generated by rising prices. The market wasn't volatile, it was just rising inexorably towards the events that were about to meet their horizon.

Namely:- At CME Group, we’re intently focused on risk management. In over a century, we have not experienced a default. In more than a century, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations; nor has there been a failure of a clearing member firm resulting in a loss of customer funds.

Their focus on risk management was to eliminate the risk of default, the risk of failure to meet delivery obligations and the risk of failure of a performance bond call on the clearing members. It was the clearing members who were up to their balls in cold rising fear. It was the risk of JPM not covering at massive losses and the risk of board members who are perennially short, having their lunch money extracted from their accounts.

Like you said; Bull Shit.

NOTW777's picture

"we consider several factors" and calls from bernank, dimon and other chosen insiders

bigelkhorn's picture

That guy from FFT is very good and called the market crash back in 2008.

He reckons there is a good chance the market might bounce here. I just
watched his live video today, He is very good and I love his membership site.

its over at

PulauHantu29's picture

Just as Nixon's price controls failed miserably (oil shot up 300% after it ended), margin hikes and artifical suppression will fail to stop market forces.

I agree with Sprott, Schiff, NWML, UT Pension fund, Kyle Bass, and on and on that PMs + oil are THE place to be esp if these "geniunses" at the Fed and Wall Street lose control again and the dollar plunges 50-60% overnight.

SheepDog-One's picture

You can UNjunk as well you know.

tickhound's picture

Speaking of junk...

If you made me... If I had to buy a currency... If you made me have to pick one...

I've decided to go long the US $ but only in Gartman terms.

Arius's picture

what is it? i love the guy ... /sarcasm/


detersbb's picture

"The Other Side Of The Story: CME On "Understanding Margin Hikes" And Why "They Are Not A Means To Move A Market"

No Judge,


The bullet that I fired into the victims head at point blank range was not meant to kill or harm it, it was merely meant to scare him off.


Intent does not matter, effect does.


The road to hell is paved with golden...

FIAT_FixItAgainTony's picture

...parachutes of wall street insiders?

in4mayshun's picture

Zerohedge has the smartest readers in the world. I have never laughed so much and seen so many whitty comments on a website before.

Thats good though, all the ignorant people are to busy commenting on Youtube to mess with ZH.


Manthong's picture

showers of margin hikes.

Yen Cross's picture

THANK YOU! Trade sideways. thats what it is. Hey anyone look @ baltic and xlf lately. The CNBS'ers caught ya off guard? The VIX is nothing until (CLUB FED) quits printing!

Goldman Hufs's picture

Correction:  The FIVE bullets that I fired into the victims head...