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CME Goes To Collateral DefCon 1: Makes Maintenance Margin Equal To Initial For... Everything!?

Tyler Durden's picture


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.

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, 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):

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


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Sat, 11/05/2011 - 12:34 | 1848616 Albertarocks
Albertarocks's picture

I only said "It's entirely possible".  Why is that horseshit?  I hope it applies to every commodity that the CME handles, but I'll say it again "It's entirely possible it only applies to the accounts transferred to the CME from MF Global, because in the eyes of the CME they would be considered new accounts".  That is a reasonable assumption.  Your juvenile knee-jerk response is what's horseshit.

Sat, 11/05/2011 - 14:28 | 1848886 JLee2027
JLee2027's picture

Everything is "entirely possible" which is just a phrase used to distract and imply something which is untrue.


So, yes, it's horse*hit!

Sat, 11/05/2011 - 15:23 | 1848973 Albertarocks
Albertarocks's picture

It's entirely possible you're just being a bit of an asshole.  I'm not certain about that, but it's entirely possible, lol.

And to add even more egg to your face, it turns out that I was right.  The press release wasn't all it was cracked up to be.   Read this new article.  And then take back your snideness, lol:

And this one:

It only refers to the accounts transferring from MF Global and as such is essentially a non-issue.

"Panic Room" indeed.

Sat, 11/05/2011 - 12:46 | 1848653 xcehn
xcehn's picture

One man's 'transparency' will always represent another man's 'fear mongering.'  Case in point:

"Beginning in early 2009 Durden had been on a jihad about Goldman, having sifted through trading data to make what he insisted was an airtight case proving that the bank's high-frequency or "flash" trading desk was engaged in some sort of large-scale manipulation of the New York Stock Exchange. Durden drew his conclusions by scrupulously analyzing trading data the NYSE released each week. So what happened? Naturally, the NYSE on June 24 changed its rules and stopped releasing the data, seemingly to protect Goldman from Zero Hedge's meddling." —Matt Taibbi, Griftopia

Sat, 11/05/2011 - 15:00 | 1848966 oceanview76
oceanview76's picture

In ZH's defense, the article said exactly what ZH interpreted it as and the CME might have just published the dumbest fucking advisory notice in their history of the exchange.  They should have had some better forsight than publish a half-assed-thought-through notice like that, that could have caused pandomonium if published on any other date and time.

Sat, 11/05/2011 - 12:28 | 1848613 dereksatkinson
dereksatkinson's picture

Ask yourself, why they would do this on a friday 2 hours after the close without advanced warning?

They did it to prevent people from putting on MORE positions ahead of the announcement.

Sat, 11/05/2011 - 12:29 | 1848615 Widowmaker
Widowmaker's picture

Laughing all the way to their bank, or laughing all the way through your treasury.

Pinstripes on pavement 2012

Sat, 11/05/2011 - 12:31 | 1848621 Ben Probanke
Ben Probanke's picture

It is the other way around. initial down to maintenance, not maintenance up to initial.

Sat, 11/05/2011 - 12:37 | 1848625 cristo
cristo's picture
Sat, 11/05/2011 - 12:41 | 1848644 Kina
Kina's picture

OK so this is now a lifeboat drill? Hope we all learnt something, next time it may be for real.

Sat, 11/05/2011 - 12:56 | 1848680 xcehn
xcehn's picture

It's all too real enough for me, whether the bomb is ticking or actually exploding. There will not be time to get to shelters when suddenly the SHTF, so best be in a constant state of readiness--what others would pejoratively denote as a state of fear, alarm, or panic.  Not everyone has the luxury of running to the Fed for a bailout to fix their risk addictions.

Sat, 11/05/2011 - 12:51 | 1848665 Zero_Sum
Zero_Sum's picture

I feel like I'm taking crazy pills!

Sat, 11/05/2011 - 13:19 | 1848719 ThirdCoastSurfer
ThirdCoastSurfer's picture

Leverage, and thus debt (or the ability to borrow), is a critical element of our society. Any reduction in debt is a reduction in trust and any reduction has a multiplying effect on the ability to profit.

Where profit can only be gained through risk, and where leverage is an expression of greed in the greed/fear paradox, then any forced reduction of greed by limiting exposure limits not just profit/loss, but also participation and thus liquidity.

It is more complicated than this, however. Where excessive liquidity exists, allowing greater choice through leverage provides a larger basket of options and allows a greater reduction in risk.

A reduction in borrowing power thus makes the most leveraged more dear and the least leveraged less. The net effect in an atmosphere of excess liquidity is to drive cash to the riskier investments.

Thus, where you would think that the market would decline, it will instead rise so long as opportunity/greed remains dominant. The least riskiest investments will suffer more, the volatility will increase and winners and losers will be more pronounced. 

Sat, 11/05/2011 - 13:21 | 1848727 Ben Probanke
Sat, 11/05/2011 - 13:37 | 1848759 Randall Cabot
Randall Cabot's picture



TO: Clearing Member Firms

FROM: CME Clearing

DATE: November 5, 2011



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.

Sat, 11/05/2011 - 13:31 | 1848748 YesWeKahn
YesWeKahn's picture

Ok ok, Robo's wet dream is over, no short covering rally.

Sat, 11/05/2011 - 13:37 | 1848763 c'mon man
c'mon man's picture

Lot of eyes on this article....66,000 reads in 16 hours....

Sat, 11/05/2011 - 13:39 | 1848769 blindman
blindman's picture

operation twisted tooth faery. more teeth, less teeth;
whatever. increase the leverage and remove the teeth.
but , there are only two rules in tooth faery-ville.
"take the tooth, leave the money." k.w.
but it is a hard rule, maybe just a suggestion ...
Confessions of a Tooth Fairy written and performed by Kristen Wiig & Melinda Hill

Sat, 11/05/2011 - 13:42 | 1848776 Fibz
Fibz's picture

So I guess this means everyone and their grandma is going long on Monday since margins have actually been lowered... lol.

Sat, 11/05/2011 - 13:42 | 1848781 SilverDoctors
SilverDoctors's picture

The CME just tweeted that they actually intend to LOWER INITIAL margins rather than hike maintenance margins to get to the 1:1 ratio- in order to PREVENT transferred MF Global accounts from having margin calls due to initial margin requirements at the new brokerage.

Sat, 11/05/2011 - 13:54 | 1848786 Smithovsky
Smithovsky's picture

Tylers, I like it how you only had negative things to say about:

Maintenance margin being increased


Maintenance margin not being increased but initial margin being decreased

Sat, 11/05/2011 - 13:50 | 1848807 kahunabear
kahunabear's picture

So, since they are likely lowering instead of raising requirements, this must mean PARTY TIME on Monday instead of TEOTWAWKI!!

Sat, 11/05/2011 - 13:55 | 1848823 Randall Cabot
Randall Cabot's picture

No, it probably means that all this CME margin hoopla is a net ZERO.

Sat, 11/05/2011 - 14:00 | 1848838 Ben Probanke
Ben Probanke's picture

its an absolute no event. 

Sat, 11/05/2011 - 14:06 | 1848850 Smithovsky
Smithovsky's picture

it just means that even more speculators can now join the party

Sat, 11/05/2011 - 20:33 | 1849587 UP Forester
UP Forester's picture

Woo-Hoo!  More meat for the grinder....

Sat, 11/05/2011 - 14:11 | 1848857 blindman
blindman's picture

@" net zero ".
i don't think so. leverage is increased backed by the next layer
of access to other peoples money, the lenders to the brokers, the banks
and ultimately the fed and treasury. central planning with other peoples
money who have no upside, just risk and the pleasure of being the cushion
for massive unwinding and contraction. teeth donors for unpredictable
faery compensation. so, net zero sounds right after all.

Sat, 11/05/2011 - 14:19 | 1848871 devo
devo's picture

I'm not too worried about gold or silver. Sure, they will be liquidated, but many people will be buying, too. I think the Europeans see their fate (the printing press) and will want this "real money" at lower prices. Their buying pressure might offet any liquidation. That's why I was thinking PMs would flatline or trade modestly lower. Some of you guys have been doing this a long time, though, and you seem worried so I'm probably wrong, but that's how I see it.

Sat, 11/05/2011 - 15:31 | 1849023 LongOfTooth
LongOfTooth's picture

Unfortunately it's now a non-event but I would have liked to see it play out.  I'm setting on a lot of dry powder and I was hoping that this would be a buying opportunity for the metals.  Oh well.


Sat, 11/05/2011 - 16:01 | 1849076 SRV - ES339
SRV - ES339's picture

Likewise with my silver position... cashed out with the recent chaos spike.

FWIW... I still don't see how Blythe could pass up this much cover, and am holding a while longer.

Sat, 11/05/2011 - 17:04 | 1849232 markets.aurelius
markets.aurelius's picture

Not so fast, my friend!  (This being College Game Day and all.)


CME Group Clarifies Maintenance Margin Ratios - Exchange to Reduce Initial Margin Ratio to 1.00

CHICAGO, Nov. 5, 2011 /PRNewswire/ -- 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 to zero. This upcharge is normally applied to customer accounts when they are receiving a margin call.


The intention and effect of these changes are 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.


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 apologize for any confusion our initial advisory may have created.


Sat, 11/05/2011 - 20:09 | 1849556 Faceman78
Faceman78's picture

Point proved.



Thank you.

Sun, 11/06/2011 - 12:27 | 1850508 DavidDavid
DavidDavid's picture

Once again, Durden has completely gotten this story wrong (as usual).

Mon, 11/07/2011 - 11:27 | 1853068 lovedr
lovedr's picture

And the massive resulting sell-off to cover margin...doesn't happen.

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