CME Issues Clarification On Margins: To Usher More Risk, Less Liquidity In MF Aftermath

Tyler Durden's picture

Yesterday, in what is the worst-phrased and most misleading press release to ever come out of the CME, the exchange issued a notice that going forward all Initial margin would be equal to Maintenance margin. Our gut interpretation was that "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." Judging by the broad response, our initial reaction is what a prudent, logical human being would assume: after all, it is precisely the undercollateralization of customer accounts, and general underfunding at MF Global that is what brought that particular company down. Well, we wrong wrong. The CME, it appears has taken a page right out of the European playbook, and less than a week after an exchange-cum-Primary Dealer collapsed due to excessive risk taking, the CME has followed up its vague press release from yesterday by inviting even more risk in lowering the initial margin. Why is this a cause for even greater concern? As the CME itself says, "Initial margins are set to provide an additional buffer against future losses in the account" - so going forward that buffer has been reduced by about 30%. But what is the reasoning provided by CME: "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." So basically the CME is implicitly putting all of its existing and current clients and customers at further risk by onboarding the accounts of those clients who, like lemmings, held on to their MF Global accounts until after it was too late. Because while the lower Initial margin may apply to MF accounts, it will also apply to any Tom, Dick and Harry beginning Monday, who will suddenly see a 30% reduced gating threshold to put on a position. Any position, no matter how risky.

Naturally, if enough people suddenly jump to put on risk, and the market flips and all new positions end up underwater, who will bail out CME accounts if, like MF, there is just not enough capital on the balance sheet? MF Global?

That the CME has opted for this highly disturbing path is very troubling, and just as in Europe, where three months after the financial short selling ban, financials are trading lower than they have ever been, so the unintended consequences from this action will result in even greater stress to the system, as not a single local will leave any excess money in their account, and likely will force all specs to trade within a hair of triggering maintenance margin, due to fears of what may happen at the CME itself, now that is has implicitly onboarded moral hazard from the otherwise insolvent MF Global accounts.

It also means the systemic liquidity is about to drop to even lower and more depressed levels.

And completing the symmetry with the recent action out of Europe, we learn that said Initial Margin reduction is a "short-term accommodation" which will apply until further notice. As an indication, Europe has extended its short selling ban several times and likely will keep it until the bitter end. We expect nothing less from the CME, where the new benchmark will be one of even greater initial position leverage which is what this margin reduction effectively accomplishes.

Yet what is most troubling is the complete lack of care to the wording ot the initial press release, as if it was thrown together by a 1 month intern who had heard his boss scream something at them from the conference room. That an event of this systemic importance requires not one but two releases, which still leaves many questions open (why does this apply to non-MF accounts? How long will this last and why it is open ended - after all the MF onboarding is a several day event at most? What happens to new non-MF initial trades which cover just initial and immediately see margin calls as maintenance is breached due to the lack of a 25% initial buffer) is by far the most surprising, and unfortunately leads to questions about both the CME's professionalism and competence.

Here is the CME's clarification.

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Captain Benny's picture

Screw safety, leverage on top of more leverage stabilizes the system. TARP over it with something like EFSF!  CME is now releasing news _after_ market closes, then on twitter, instead of making it official right away.

No major margin calls Monday, but you can bet the MFG-transferred accounts are going to be exiting in general and looking to deleverage and run to cash.  This last week was hell for them and they want to get into a safer position.

sqz's picture

I agree with ZH's reading of the initial very badly worded advisory.

Is this not a type of systemic/TBTF consequence for the failure of one firm? Can anyone confirm that this action is unprecedented for any American exchange?

Finally, if it really is a temporary issue why would the CME not put a maximum time limit on it to cap the prudential risk across so many products? They could even have left it open to revert sooner than the limit.

When you see some of the differential margin changes they make in say commodities and now this, it is not surprising why people wonder if they make up the rules as they go along or worse.

Piranhanoia's picture

A warning to the priveleged from the Mr. Market that there is no more hiding systemic insolvency.  Place your final bets.

GetZeeGold's picture's now for any Tom, Dick, or Harry.

trav7777's picture

I'm getting the sense that mosely-claven's call for meltdown on Monday is not happening?

Gee, 600 fuckin posts of ZH echo chamber apocalypse calls and it turns out it was much ado about NOTHING?  No fuckin way.

Pants McPants's picture

Yup, trav, your hindsight is perfect.  Just like everyone else.

Well done I guess.

Calmyourself's picture

My post was not hindsight, intuition backed by nothing, but not hindsight..

Pants McPants's picture


I was responding to trav7777.  I don't see you anywhere above - have I missed something or do you double as trav7777?  (kidding)

James T. Kirk's picture

This first announcement by CME was intentionally vague, designed to do just what it did. Flush out market opinion, because you could use a number of different interpretations to explain it. I don't know much about futures markets, but I do know a thing or two about writing reports and documents. The initial letter was not mistakenly vague and ambiguous. It was intentionally vague and ambiguous.

trav7777's picture

we went through the same thing on Fukushima...everyone was in a state of mass panic, including bob diabolina, and I was the lone voice saying please calm the fuck down.  OK, I wasn't the only one, the professional engineers who work in nuclear power plants were with me, but I digress.

It would behoove everyone to just not freak the fuck out over things all the time and for the agitators who pump silver to cut the STACK NOWWWWW crap and start making plans to be barons of the post-apocalypse wastelands.  This shit reminds me of the crap Douchinger does with his dickercon which is a complete (and reliable) fade.  ZH needs to not become a fade even if half the posting members ARE.

whstlblwr's picture

Professional engineers are not with you, idiot. Bob diabolina v Trav7777? Oh we should follow Trav7777 he's only one with smart calm head on shoulders. LOL, you're FUCKING narcissistic idiot who takes self too seriously on blog.

TravsMom's picture

Boy, STFU when grown men are talking!

Carlyle Groupie's picture

"ZH needs to not become a fade."

I guess it depends on how you interpret the information. When you know who the clueless are they are just as strong a barometer as the clued-in. I've made some scratch from swaps, metals, and believe it not equities from surfing the hedge.

I like your posts Trav and have learned to fade you sometimes also on matters like Fukushima:

Banksters's picture


It frightens me that a barely literate, hate filled pus bag like you, has the capacity to access the web.   

trav7777's picture

lol...barely literate?  That's the singularly most absurd thing anyone has accused me of.  If you're going to insult, insult credibly, ok?

whstlblwr's picture

Okay, you're egotistical idiot.

d_senti's picture

You're certainly not barely literate, and I agree that many posters are prone to hyperbole, but you understand as well as we do that these things are huge frickin deals. Massive oil leaks, 9.0 quakes, tsunamis, nuclear melt through, unprecedented market manipulations, the financial system teetering continuously near collapse, and on and on. It's been a stressful time since 2008, and we've all been waiting around for the other shoe to drop. It's gonna happen, but I think most of us are rather impressed at how long the extend and pretend has lasted.

So instead of tooting your own horn as the sole public voice of reason, try not being a dick about it while still doing what you do, k? No, f-off? Ok, gotcha.

trav7777's picture

I tried that and the people like cliff and the other lemmings jump all over me.  They spout all kinds of idiotic shit and so eventually things devolve.  That's just the way it is.

As far as waiting for shoes to drop, I really don't see that happening.  Sure, I expect global war at some point, but I think that the whole notion of what a collapse looks like is exaggerated by people here.  I've tried to point out examples of that, people I've known for years who grew up in brasil during 2 hyperinflations.  Life was not so bad.  Even in war-torn Beirut, life goes on.  It's not going Madmax and all of this BS.

I say it over and over again and people don't want to hear that.  They don't want to hear that silver stacking probably won't make them rich or that Comex isn't going to imminently default or that the world won't end because of Fukushima.  So what do you expect me to do?

The financial system is a house of freakin cards and it's a paper mindset.  It has no reality other than what we give it.

fnord88's picture

Comfirmation bias. We all want the crash to happen so the fucking banksters get raped. I don't think many of us want to contemplate the possibility that they can do just enough to give us 10 years of stagflation, instead of deflationary death sprial or hyper inflation.


Like the poster on Mulder's wall. "I Want to Believe". I want to believe the bankers have fucked themselves as well as us, but it probably isn't going to go down like that. So now I want to believe OWS will burn it all down, but that probably will not happen either. Which mean I am probably stuck with slowly getting poorer, and losing more freedoms, which is just FUCKED.

tmosley's picture

That's funny, because the only ones calling for Mad Max are you and the Peak Oilers.  I certainly never called for "Mad Max".  But what exactly is wrong with having food and water?  Or guns and ammunition?  Or gold or silver?

Here's a hint--in your example hyperinflations, those who held dollars came out far, FAR ahead of those without.  In our case, there is no fiat currency that is safer than the dollar, so holding gold and silver is equivilent to dollars in the other case.  Further, there is a strong likelihood that our hyperinflation will be much worse than past bouts, because ours is the reserve currency, and the rest of the West is just as bad off as we are.  Hell, maybe the whole world is just as bad off.  That is, there won't be any big, powerful economies to help us get back on our feet.  No IMF to lend us money.  No international aid organizations will distribute food, water, and medical supplies.  Why?  BECAUSE THEY ARE ALL BASED HERE, AND OPERATE WITH DOLLARS.

The hyperinflation argument is totally seperate from my COMEX collapse theory.  If you want to disagree about these things, you can, but you don't disagree, or post any facts.  You just scream and shout that everyone else is wrong, and that you are right.  At least this time you actually made a post with some content rather than just screaming and shouting.

I should also note that I went back and looked over your Fukushima posts, and saw that you really didn't say what you were being accused of, and defended you.  But it was too late, apparently, as I had made your Nixonian "enemy list".  You have been on my ass at every (non)opportunity since, using lies, half truths, and out of context statements to defame me, just like those guys did you you in the Fukushima threads.  It seems to have wrecked your whole life in the meantime.  Hate is poison, and people don't like being around hateful people.  But you don't want to hear about that.

trav7777's picture

I guess when I say "it will not be Madmax" you somehow infer that to mean that I am saying it will be madmax.  I guess I underestimated your stupidity.

tmosley's picture

Yeah, you say "no Mad Max" when other people call for it, but then you say it will be in Peak Oil threads.  So what is Peak Oil going to do, huh?  Cause us all to sit in a circle and sing Kumbaya?

You consistently accuse others of doing what you yourself do, all while claiming to be somehow superior.

Why don't you go join the KKK already, then you really can be superior to your peers.  Hell, maybe even recruit them as your henchmen while you carry out your comic book plot to sterilize the world.

Eurodollar's picture

And this is the wonderful market in a nutshell :) Bulls vs Bears


Different opinions different actions.



oldman's picture


you can quit waiting---both shoes were dropped at the same time in 2008


Smiddywesson's picture

Gee, 600 fuckin posts of ZH echo chamber apocalypse calls and it turns out it was much ado about NOTHING?


Green for Trav.  As Reggie says, the money never leaves the casino.  That means the money isn't leaving the casino until the building collapses.  If there is a panic, TPTB will create a rally.  It ain't over yet kids.

Still, I stand by my statements that this feels like everything will come to a head within the next three months.  I can't trade based on feelings, but that's what my gut tells me.

dasein211's picture

The move was done to not force margin calls in Italian bond spreads.

jekyll island's picture

This is sweet!  I've never traded futures before, so for my first trade I think I am going to...short silver.  Who's with me? 

pitz's picture

Good luck with that; sounds like a sure-fire way to get your head ripped off.

Schmuck Raker's picture

No, IDTS. As I read it, it's only effect would be that positions that were NOT subject to margin(Maintenance) calls will still NOT be subject to margin calls, even though they might otherwise have been subject to margin calls(Initial) by dint of being forcibly TRANSFERED from MF.

Any positions that are subject to margin calls are STILL subject to margin calls. And, ITALY doesn't enter into it.


legal eagle's picture

So does that mean gold up, since everyone was so sure gold would be destroyed based on the initial reading?

SRSrocco's picture


At the end of a system, much like the death of a human, the vital signs go haywire.  Here we see how exchanges and the system reacts to the symptoms of death.  Besides the CME Group pulling this lowering of initial margins on monday, their basis for margins in certain products has much to be desired.

For those who have not seen my blog post on COMPARING the 2 YEAR NOTE MARGINS to SILVER, you can find it here:

I commented in the first post the following:

2 YEAR NOTE MARGIN $500/ $200,000 contract = 0.25%

Silver 5000 oz Margin $18,500/ $170,000 contract = 10.8%

Again this was using the maintenance margins.  If we look at GOLD here is what the CME Group has for its margin:

GOLD 100 oz Margin $8,500 / $175,000 contract = 4.8%

Here we can see golds maintenance margin is less than half that of silver.  Why?  Because as we all know... Gold does not suffer from Volatility.  It is amazing that silver has such a high percentage of maintenance to contract amount than any other commodity.

PURE LUCK I guess...

JustObserving's picture

Not as screwy as CME PRs. CME has to learn to write English at the 4th grade level.  Why did the initial margin decrease apply to all customers? Please give a date at which initial margins will be increased again.  Or is that data only meant for insiders?

gorillaonyourback's picture

since i own PM's i do care about the price,  so if commodities rise ill be happy, if they take a tumble and force people to sell their positions,  ill be down at the local coin and jewley store buying more.

i quess the question to ask is why?  why lower intial margin to maintance margin?

at first thought im thinking margin calls anie up or sell,,,,, but  they LOWERED the margin,  more money available to buy contracts,  maybe at the offset gold silver and etc... jumps a bunch?     SOUND RIGHT MY THINKING?

if thats right why induce more volitility is it that the cme wants the difference between the intial and maintenance margin to be paid at end of trading no floating anyones position, because in a sense the spread between intial and maintenance is a loan you dont have to pay until your down a certain amount

i think its a good thing one less thing the powers that be to use to influence or manipulate the gold and silver prices,,,,,, lets see how long it will last this 1 to 1 ratio

Darth..Putter's picture

If the paper price drops below the physical-willingness to sell then there is the true price discovery.


CME- We are willing to take more gold as collateral;

AND, We will allow you to take more risk by lowering the entry margins.


What a sales pitch!

island's picture

Yesterday I wrote this was "a snoozer" that TPTB would not let the CME wreak havoc.  When I first read the press release, I noticed the "1" didn't specify which (initial or margin) was going to be the standard. But like ZH and most rational people, I figured ZH was right -- it couldn't be the other way, given the instability of more leverage.

Captain Benny, you and my lesson from yesterday, have set me straight.  I now know that whether "leverage on top of more leverage stabilizes the system," it is viewed that way by the banksters and their political accomplices.  They either think the Global leverage and massive debt (currently being soaked up by soverign countries, and central banks) will be bailed out by Martians, or they truly want the Global financial system to blow sky high.  Whoopee. 

Michael's picture

Michael said; This will be reversed before tomorrow morning. The headline should read DefCon 5.

If you're going to invoke DefCon 1, please be be totally serious.


foofoojin's picture

yesterday i did the same thing. only i stuck my neck out on the first page doing it. but those who agreed with zerohedge thinking sure did get alot more up votes.

knukles's picture





Bullish for Everything but Unintended Consequences!
I say let's play "Destabilize the System Further."

Me First.
No, My Go!
No it isnt!
Yes it is.

etc, ad hoc, vootie.

GeneMarchbanks's picture

They saw the rumors...

Quinvarius's picture

The stock market would have imploded if they had gone ahead with that global margin raise.  You can't just yank that much liquidity and credit out of Wall Street and expect the damage to stay in the commodity pits.

Arius's picture

just a drill ...

risk off again ...

Mr Lennon Hendrix's picture

If CME Group is trying to confuse me, it is working.

FEDbuster's picture

How do you solve a debt and leverage crisis?  More debt and leverage!

CrazyCooter's picture

It could simply be that the system has spun out of control ... but the imminent crash just hasn't reduced the velocity of the passengers from X to 0 quite yet ...

I really sort of sat up when Pope Pedophile called for a new global central monetary authority a week or two ago. The Vatican is deeply involved in money/finance (e.g. Jesuits) so this was sort of an out of the blue poker tell. If you subscribe to this theory, then Europe is fucked. They tried the IMF bail out to no effect. The risk has rolled up into a ball too big for anyone to push around ... so absent a new monetary authority to handle it then it is going to be running over soveriegns pretty soon I think.

This is yet another example press release where the normal "in-concert" behavoir of "the cartel" is anything but ... the actors increasingly don't follow the same script.

Buckle up!

DISCLOSURE: Buckling up won't really help. You shouldn't have been on the ride in the first place. But it might make you feel better before impact.



trav7777's picture

the vatican?  Gosh, read machiavelli, the Pope has been smacked around and marginalized for 400 years

d_senti's picture

Trust me; you try and tell people that the Papacy hasn't been running the world since 400 AD and you'll get shouted down as a Vatican pawn.

CrazyCooter's picture

My paternal blood line is 100% Jesuit educated. My old man has been ex-communicated. My old man also has a finance masters from UT and used to be an auditor for a major state.

I know of what I speak.

The comments of Pope Pedophile are desperation. The Catholic church is in very deep shit.