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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navy62802's picture

This is going to be entertaining.

RobotTrader's picture

That means all the "Double Whammy" and "Triple Whammy" ETF's will probably self-destruct.

thedrickster's picture

"this is the end, beautiful friend, the end"

FAZ going down would be a true Greek tragedy.

Ecoman11's picture

Someone please explain the mechanics of this and if it means the markets go up or down come Monday.

Cdad's picture

Sure...but just where do you see a market?  There is no guessing how one would react to this news would be theoretical.  

Rynak's picture

Here is the quick crashcourse:

Traders (and banks, but they indirectly have infinite cash anyways) do not pay full price, when trading commodities via the CME. I.e., if something has a spot-price of lets say 50$, the do not pay 50$. Instead, they only need to pay a certain percentage, with the rest of the price basically being bought on credit. This is called the margin. Via a margin account, you can for example buy double the amount of commodities you normally can afford, by partially buying on credit. It basically makes an exchange not just an exchange, but simultaneusly a bank.

Sounds all well and nice, but you see, the exchange can ANYTIME change the margin. So contrary to a bank loan, where the amount lended, and the interest, stays static once you made the contract, exchanges can modify the contract anytime however they wish. So, if the margin for example were 50%, and thus you buy double the amount of commodities you can afford - the exchange can then suddely change the rules, and say that you actually have to pay 75% of the spot price, just to KEEP your goods. You then have to quickly add enough cash to your exchange-account, to cover the higher cost... if you do not do so, your own commodities get auto-sold by the exchange, without you having to do anything.... your commodities get auto-sold, until your "account" is in balance again.

In short, via margin an exchange can arbitrarily change the REAL cost of ownership regarding a commodity. They can arbitrarily anytime say "oh wait, now this suddely costs Y instead of X. Hope your account has enough surplus, because else we will just sell your own commodities until your account is in balance again".

TL/DR?: Commodity selloff will happen. Not by the holders of commodities - but instead the exchanges will force-sell commodities of traders, against the traders consent.

UP Forester's picture

Think of bank mortgages in the 1920s-30s.

Homeowners and farmers that didn't have the deed were told by the banks to pay up, or move out.

POOF!  Banks that survived bought banks that didn't and owned a whole lot of shit people couldn't pay for on the spot....

AldoHux_IV's picture

So how much will the margin go up on the futures products according to the notice? Does 1 mean 100% of spot?

Albertarocks's picture

Did you happen to have a part in Idiocracy?  I mean, a lot of money were lended.  Right?

nothing can go wrogn's picture

Relax. The market goes up, the market goes down. But, over the long haul, the market goes up.

Faceman78's picture

Why do so many love bad news?

We all pay for it in the end, unless you are sitting on a pile.... which I very much doubt most are.

Come on... hope and look for the best... not the worst.

We are all unequivocally in this shit together.

So pull together.

slewie the pi-rat's picture

since this is your first post, we'll be forgiving

and, welcome!

treemagnet's picture

We want the ponzi to end. <sarc off>

So we can start a new one. <sarc on>

RiverRoad's picture

Bad news can be very educational.

mtomato2's picture

Yes.  Welcome grasshopper.  Maybe I can sort of explain.  Forgive me, fellows and gals, if I speak out of school for you.

By and large, ZHrs don't love bad news.  They simply want justice and truth to prevail.  And that hasn't been happening for a long, long time.  Although it's accelerating now at breakneck pace, this Ponzi Scheme of Epic Proportion has been building for years.  And some of us have awakened to find the water in the pot extremely hot!  If this pot doesn't get knocked off the skillet, and soon, everyone will be boiled alive.  The Powers That Be have noticed some of us coming to our senses, and are now trying to move as many resources from out of the hands of the middle class and into their vaults as quickly as possible.  Thus the acceleration of events and the breaking of every rule and market on earth.  There is no such thing as a fundamental any more.

The system has to collapse under it's own corrupt weight BEFORE all that wealth is transferred for there to be ANY chance of a middle class surviving and someday flourishing.  And that is why bad news is good news.  "Bad news" means the system is unraveling, collapsing, imploding under the weight of lies, corruption, greed and deceit.  The pot is scootching nearer the edge of the skillet, and maybe, hopefully, mercifully, the whole thing will spill out onto the floor before we are all consumed by the heat.

ZH is great, for one, because here you wont find a bunch of people PLOTTING to wreak mass destruction in an egocentric, maniacal way,  (well, there IS High Plains Drifter...  I'm just kidding...)  You will find people of all disciplines pining for a time when capitalism can actually be tried for maybe the first time in human history.  But it will NEVER survive in the riptide of the current oligarchy.  It simply can't be allowed.  Too many people would enjoy too much success.

Welcome, and happy reading.  And posting.



Arius's picture

you truth lover you ... i bet you are betting some money on that "truth" .... truth and justice is relative isnt it? ...depending from your point of view .... i mean, if you claim you are doing God's work on earth... hey, who am I to challenge it right ?

:-) risk on/off

mtomato2's picture

I humbly confess that I am not picking up what you're putting down...

Faceman78's picture

Surely, the bad news is not good news, if you follow what you preach.

You say there is a transfer of wealth, an eradiction of middle class assets so to speak.... so how does bad news like tonight become good news if all that is taking place is the uber rich collaborating to pilfer the middle classes?

This unravelling is working bang on correctly for "them"... not us.

imo of course

mtomato2's picture

I am grossely ignorant of the ramifications of this most recent event.  I was speaking generally.  Damn it, Jim, I'm a Mathematics teacher/ Skinnerian Behaviorist, not a trader!!!

However, the silver lining may possibly be that as events unfold, for better or worse, people are being jarred awake.  It's a race.  Can enough of us wake up in time to kill the ponzi before we're all dead.

Exciting times, my friend.  At least one of your "up" arrows is from me.

KrazyMax's picture

I appreciate your (and other's) atitude toward newbies... I've been lurking for quite a while and have learned a lot from just reading the comments.

Thanks again.

slewie the pi-rat's picture

yesterday, i was thinking about this and i read about MF having all the accounts a'la sticky wicket, maybe hafta liquidate some accounts and/or positions,  and i had this thought:  what if the crimex raises margin requirements tomorrow?

my next thought was how fuking crazy that first thought was...

now this:  DEFCON 1.  wtf? 

now i am wondering: did gary gensler put them up to this b/c he read zeroHedge yesterday, and all those nice things we said about him being the archetypal styoooopid fukhead special intersest regulator? 


Tyler Durden's picture

And in other news, Gary Gensler has just recused himself from the MF Global investigation.

This is getting fun.

slewie the pi-rat's picture

oh, no!

not the "appearance" of a conflict of interest w/ the banksters in the markets he regulates?

really?  who could have ever imagined? 

as gen. patton might have said:  what the hell is going on here, BiCheZ?

disabledvet's picture

When will CNBC recuse itself?

JLee2027's picture

When there are no markets left to pump.


PS. The hounds video was awesome!

max2205's picture

Smells like a try at moving dumb and weak positions into the big boys hands. Otherwise why blow up the market when Ben could just slip the CME some FedBenBucks?

Jim in MN's picture

Chicago sometimes tries to play like they can be a little feisty vs. New York/London.  Maybe CME is just pissed and wants to flush the 'MF wannabe' cock-a-roaches via this wee bit of forced deleveraging.  Of course the small fry will get caught in the turbine inflow and pureed....incidental or even net positive.

I really doubt that CME is in some wierd desperation position and is forced into this move.  More like a kick 'em while they're down thing...typical Chicago.

ViewfromUndertheBridge's picture

after I commented "Margin hike alert..." on the 'gold surge on Euro Stupidity' t'other day I sent more collateral to my account and reduced longs by, if more longs than shorts are liquidated Sun/Mon I hope my account survives to scoop up some discounted digital spot gold & silver...if not, I'll visit The Precious and draw strength.

You gotta love Jesse at his Cafe Americain the other day:

"By the pricking of my thumbs, something wicked this way comes." Wm Shakespeare, Macbeth


"The race is not to the swift, nor the battle to the strong, but to those who see it coming and jump aside" Hunter S Thompson, The Rum Diary


Westcoastliberal's picture

Seems to me it's TSHTF time...too many changes like this with a wobbly Europe, then we have an asteroid incoming, complete with a Pacific fleet tsunami exercise and an Emergency Action Notification System nationwide co-ordinated test, the last of which occurred during the Cuba Missle Crisis in the early 60s (CONELRAD, 640 & 1240).

Ready for more chills, check out the curious case of Army specialist William C. Millay, currently under arrest for alleged espionage in Alaska:

Connect the dots, folks!

Waffen's picture

HUH..WTF am I reading?  If the part about the attempted arrest and the unwillingness of the military to release him is true, it sounds like the administration tried to do a chill effect on whistle blowers, which gives the story credence.


Why would the administration care if it was just some worried kid?

Randall Cabot's picture

That's some crazy shit, man.


"... it is not beyond the possibility that a coup may be planned against Obama.

Likewise, the FSB notes, it must, also, be considered that Obama may be preparing to establish martial law in the United States and rule under the existing Executive Orders he has granting him unlimited power to do anything he wants.

Whatever the outcome to this most strange of stories may be it is not in our knowing, other than note, and as always, that American may very well be the most dangerous country in the world to be in right now."

tmosley's picture

EU Times is Sorcha Fail.  That is NOT reputable.  He is a doomer whore.

zebrasquid's picture

If there is a rush for liquidity next week, how is that good for stocks?

thedrickster's picture

Dude, across the board margin calls are clearly bullish.

RobotTrader's picture

Millions of guys are short.

Too many pre-positioned for "Armegeddon"

If all those guys on margin have to meet margin calls, stocks could explode higher.

thedrickster's picture

I had the same thought, then I had another....equity positions being liquidated en masse to meet SPX/Es margin calls, thereby increasing the magnitude of SPX/Es margin calls, thereby...rinse and repeat.

YesWeKahn's picture

Are you saying that there are more shorts than longs?

Pancho Villa's picture

Well, since the market has generally been up in the last month, perhaps the shorts might more likely to be hit with margin calls than the longs.

But on the other hand, when the CME hikes margins on PMs after they have risen, they generally go down.

Either way, Monday may be very exciting.

bob_dabolina's picture

People don't buy stocks on margin? 

jdelano's picture

Robo as a mindless bull you should probably keep up with your bloomberg and barrons-- as of last week investors are skewed bullish.

Cdad's picture

Umm...Robo...are you seriously trying to suggest that short sellers have more liabilities out there that could be called in than say...criminal syndicate Wall Street banks with balance sheets levered 20:1 and higher...holding crap like Netflix and Abercrombie and Geek debt?  Did you happen to catch that story about MF Global?

treemagnet's picture

Yeah, cause all the great rallies come out of margin calls.  Wake up tool.