• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

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

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Fri, 11/04/2011 - 21:52 | 1847384 navy62802
navy62802's picture

This is going to be entertaining.

Fri, 11/04/2011 - 21:54 | 1847387 RobotTrader
RobotTrader's picture

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

Fri, 11/04/2011 - 21:55 | 1847393 thedrickster
thedrickster's picture

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

FAZ going down would be a true Greek tragedy.

Fri, 11/04/2011 - 22:09 | 1847462 disabledvet
Fri, 11/04/2011 - 21:55 | 1847394 Ecoman11
Ecoman11's picture

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

Fri, 11/04/2011 - 22:09 | 1847464 Cdad
Cdad's picture

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

Fri, 11/04/2011 - 22:31 | 1847518 Rynak
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.

Fri, 11/04/2011 - 23:23 | 1847673 UP Forester
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....

Fri, 11/04/2011 - 23:52 | 1847744 AldoHux_IV
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?

Sat, 11/05/2011 - 02:00 | 1847962 Albertarocks
Albertarocks's picture

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

Fri, 11/04/2011 - 23:22 | 1847671 nothing can go wrogn
nothing can go wrogn's picture

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

http://www.dailymotion.com/video/x71zxa_straight-talk-stock-market_fun

Fri, 11/04/2011 - 21:58 | 1847395 Faceman78
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.

Fri, 11/04/2011 - 22:01 | 1847425 slewie the pi-rat
slewie the pi-rat's picture

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

and, welcome!

Fri, 11/04/2011 - 22:12 | 1847476 treemagnet
treemagnet's picture

We want the ponzi to end. <sarc off>

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

Fri, 11/04/2011 - 22:17 | 1847495 tickhound
tickhound's picture

uh boy.  LOL!

Fri, 11/04/2011 - 22:24 | 1847523 RiverRoad
RiverRoad's picture

Bad news can be very educational.

Fri, 11/04/2011 - 22:34 | 1847549 mtomato2
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.

 

Tomato

Fri, 11/04/2011 - 22:48 | 1847583 Arius
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

Fri, 11/04/2011 - 23:02 | 1847619 mtomato2
mtomato2's picture

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

Sat, 11/05/2011 - 11:50 | 1848519 Hulk
Hulk's picture

Well done Sir...

Fri, 11/04/2011 - 22:50 | 1847590 Faceman78
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

Fri, 11/04/2011 - 23:01 | 1847612 mtomato2
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.

Sat, 11/05/2011 - 01:47 | 1847942 KrazyMax
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.

Sat, 11/05/2011 - 07:10 | 1848152 valley chick
valley chick's picture

thanks tomato !

Fri, 11/04/2011 - 21:57 | 1847402 slewie the pi-rat
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? 

 

Fri, 11/04/2011 - 21:58 | 1847411 Tyler Durden
Tyler Durden's picture

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

This is getting fun.

Fri, 11/04/2011 - 22:08 | 1847451 slewie the pi-rat
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?

Fri, 11/04/2011 - 22:11 | 1847471 disabledvet
disabledvet's picture

When will CNBC recuse itself?

Sat, 11/05/2011 - 00:49 | 1847859 JLee2027
JLee2027's picture

When there are no markets left to pump.

 

PS. The hounds video was awesome!

Fri, 11/04/2011 - 22:30 | 1847544 max2205
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?

Fri, 11/04/2011 - 23:29 | 1847694 Jim in MN
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.

Fri, 11/04/2011 - 23:37 | 1847717 anonnn
anonnn's picture

ZH impinges!

Sat, 11/05/2011 - 08:58 | 1848232 ViewfromUnderth...
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 40%...so, 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

and

"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

 

Fri, 11/04/2011 - 21:57 | 1847405 Westcoastliberal
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:

http://www.eutimes.net/2011/11/soldiers-end-of-the-world-email-sends-us-...

http://www.news25.us/story/15940398/neighbors-react-to-millay-arrest

Connect the dots, folks!

http://www.collapsenet.com/262.html

Fri, 11/04/2011 - 22:06 | 1847449 Waffen
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?

Fri, 11/04/2011 - 22:50 | 1847576 QEsucks
QEsucks's picture

deleted

Fri, 11/04/2011 - 22:50 | 1847592 Randall Cabot
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."

Fri, 11/04/2011 - 23:56 | 1847758 tmosley
tmosley's picture

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

Fri, 11/04/2011 - 21:58 | 1847407 zebrasquid
zebrasquid's picture

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

Fri, 11/04/2011 - 21:59 | 1847418 thedrickster
thedrickster's picture

Dude, across the board margin calls are clearly bullish.

Fri, 11/04/2011 - 22:03 | 1847431 RobotTrader
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.

Fri, 11/04/2011 - 22:08 | 1847457 thedrickster
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.

Fri, 11/04/2011 - 22:10 | 1847466 YesWeKahn
YesWeKahn's picture

Are you saying that there are more shorts than longs?

Sat, 11/05/2011 - 00:33 | 1847834 Pancho Villa
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.

Fri, 11/04/2011 - 22:10 | 1847469 bob_dabolina
bob_dabolina's picture

People don't buy stocks on margin? 

Fri, 11/04/2011 - 22:12 | 1847475 jdelano
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.

Fri, 11/04/2011 - 22:12 | 1847478 disabledvet
disabledvet's picture

"wrong Armageddon."

Fri, 11/04/2011 - 22:12 | 1847479 Cdad
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?

Fri, 11/04/2011 - 22:14 | 1847486 treemagnet
treemagnet's picture

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

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