CME Hiked Cleared OTC London Gold Forward Margin By 40% Yesterday

There is much talk of a gold margin hike this morning. For one thing this is not news: it happened early afternoon yesterday. Second, it impacts a relatively innocuous contract. But of course, in the footsteps of the Chairman, at this point it is not what one does, but what one promises to do. As such this move is seen as merely a telegraphing of what the CME will do to GC should gold spike over $1900. We say do it already, and make gold margin 100%. What will the CME do then when everyone moves to trade the contract in Asia, or is happy to trade with 100% cash collateral?

Official Statement From Spanish Regulator On 15 Day Financial Short Selling Ban, Which Also Includes OTC Derivatives

Just as in the case of France, here is the official statement from the Comision Nactional de Marcado de Valores, disclosing the Spanish 15 day prohibition on shorting stock. The banks impacted are Banca Cívica, S.A., Banco Bilbao Vizcaya Argentaria, S.A., Banco de Sabadell, S.A., Banco de Valencia, S.A., Banco Español de Crédito, S.A., Banco Pastor, S.A. Banco Popular Español, S.A., Banco Santander, S.A., Bankia, S.A., Bankinter, S.A., Caixabank, S.A., Caja de Ahorros del Mediterráneo, Grupo Catalana de Occidente S.A., Mapfre, S.A., Bolsas y Mercados Españoles, S.A., Renta 4 Servicios de Inversion, S.A. Unlike Frace, Spain has also explicitly banned not only short cash transactions, but also any position in OTC derivatives "which involves creating a net short position, or increasing an existing one." Next and last: the Italian statement, as frankly nobody cares about Waffles.

Another Exchange Halts Levered OTC Gold And Silver Trading

Last week it was Forex.com, now it is Oanda. As a reminder "Forex.com, a large retail foreign-exchange operation, on Friday told clients it will discontinue its gold and silver over-the-counter products marketed to retail investors who are U.S. residents. It asked investors to close their positions by July 15." This was first reported on Zero Hedge. "Trading gold and silver over the counter -- bypassing a futures exchange -- offered investors a chance to enter a highly speculative, leveraged market that also left many investors at risk of fraud, according to one trade group. “In order to trade, it needs to be done in a exchange, or it can’t be done at all,” said Dan Driscoll, a vice president with the National Futures Association. The industry group asked Congress for such changes, due to numerous cases of fraud in such contracts. Doing business with a futures exchange offers retail investors more protections and transparency, he said." There you go: it's the extensive fraud that did it. And just as we predicted, this is only the beginning to heard all PM investors into the waiting clutches of the CME's margin demands.

The Real "Margin" Threat: $600 Trillion In OTC Derivatives, A Multi-Trillion Variation Margin Call, And A Collateral Scramble That Could Send US Treasurys To All Time Records...

While the dominant topic of conversation when discussing margin hikes (or reductions) usually reverts to silver, ES (stocks) and TEN (bonds), what everyone so far is ignoring is the far more critical topic of real margin risk, in the form of roughly $600 trillion in OTC derivatives. The issue is that while the silver market (for example) is tiny by comparison, it is easy to be pushed around, and thus exchanges can easily represent the illusion that they are in control of counterparty risk (after all, that was the whole point of the recent CME essay on why they hiked silver margins 5 times in a row). Nothing could be further from the truth: where exchanges are truly at risk is when it comes to mitigating the threat of counterparty default for participants in a market that is millions of times bigger than the silver market: the interest rate and credit default swap markets. As part of Dodd-Frank, by the end of 2012, all standardised over-the-counter derivatives will have to be cleared through central counterparties. Yet currently, central clearing covers about half of $400 trillion in
interest rate swaps, 20-30 percent of the $2.5 trillion
in commodities derivatives, and about 10 percent of $30 trillion in
credit default swaps. In other words, over the next year and a half exchanges need to onboard over $200 trillion notional in various products, and in doing so, counterparites, better known as the G14 (or Group of 14 dealers that dominate derivatives trading including
Bank of America-Merrill Lynch,
Barclays Capital, BNP Paribas, Citi, Credit Suisse, Deutsche
Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS,
Societe Generale, UBS and Wells Fargo Bank) will soon need to post billions in initial margin, and as a brand new BIS report indicates, will likely need significant extra cash to be in compliance with regulatory requirements. Not only that, but once trading on an exchange, the G14 "could face a cash shortfall in very volatile markets when daily margins are increased, triggering demands for several billions of dollars to be paid within a day." Per the BIS "These margin calls could represent as much as 13 percent of a G14 dealer's current holdings of cash and cash equivalents in the case of interest rate swaps." Below we summarize the key findings of a just released discussion by the BIS on the "Expansion of central clearing" and also present a parallel report just released by BNY ConvergEx' Nicholas Colas who independetly has been having "bad dreams" about the possibility of what the transfer to an exchange would mean in terms of collateral posting (read bank cash payouts) and overall market stability, and why a multi-trillion margin call could result in the biggest buying spree in US Treasurys... Ever. 

The $55 Billion OTC Derivative Revenue Question

Recently the general public had the unpleasant experience of seeing what the real face of Warren Buffett looks like when it comes to derivative reform: a man ready to maim and kill to prevent even a minor loss when it involves controlling what he previously called "weapons of financial mass destruction." Sigh - yet another another hypocrite unmasked. However the battle over derivatives is just beginning. As the attached presentation from erdesk.com indicates, the big banks are not about to let a $55 billion annual revenue stream go away without a massive fight. And despite what Blanche Lincoln thinks, with Financial Reform suddenly stalling hopelessly in yet another indication that Chris Dodd's many years of robbing the middle class blind need to end yesterday, derivatives are not going anywhere in a hurry: with $11 billion in IR, $22 billion in FX, $10 billion in Credit, $10.5 billion in commodities and $1.5 billion in mortgages, most of it split between Goldman, DB, CS, MS and JPM, for anyone to think that the firms who run the world will cede such a core part of their business to the exchanges is naivete defined. We recommend the attached simplified overview to anyone who has a passing interest in not only the fascinating $600+ trillion world of OTC derivatives but of ongoing (futile) attempts to reform it.

rc whalen's picture

Now we know why BRK, CAT and the other big corporates came oozing out of the woodwork last year to defend the OTC derivatives market. JPMorgan (JPM), Goldman Sachs (GS) and the other OTC dealers let Warren Buffett's Berkshire Hathaway (BRK) and the other "AAA" corporates play at the roulette table w/o any chips. Isn't this the man who called OTC derivatives weapons of mass destruction?

Former Goldman Commodities Research Analyst Confirms LMBA OTC Gold Market Is "Paper Gold" Ponzi

When we put up a link to last week's CFTC hearing webcast little did we know that it would end up being the veritable (physical) gold mine (no pun intended) of information about what really transpires in the commodities market. First, we obtained direct evidence from Andrew Maguire (who may or may not have been the target of an attempt at "bodily harm" as reported yesterday) of extensive manipulation in the silver market. Today, Adrian Douglas, director of GATA, adds to the mountain of evidence that the commodities market, and the CFTC, stand behind what is potentially the biggest market manipulation scheme in the history of capital markets (we are assuming for the time being that all allegations of the Fed manipulating the broader equity and credit markets are completely baseless). Using the testimony of a clueless Jeffrey Christian, formerly a staffer at the Commodities Research Group in the Goldman Sachs Investment Research Department and now head and founder of the CPM Group, Douglas confirms that the "LBMA trades over 100 times the amount of gold it actually has to back the trades."

Christian, who describes himself as "one of the world’s foremost authorities on the markets for precious metals" yet, in the words of Gary Gensler, said "that the bullion banks had large shorts to hedge themselves selling elsewhere- how do you short something to cover a sale, I didn’t quite follow that?" and proves that current and former Goldman bankers are some of the most arrogant people alive, assuming that everyone else is an idiot and will buy whatever explanation is presented just because the CV says Goldman Sachs. Yet Christian confirms that the gold market is basically a ponzi: "in the “physical market” as the market uses that term, there is much more metal than that…there is a hundred times what there is." And there you have it: as Douglas eloquently summarizes: "the giant Ponzi trading of gold ledger entries can be sustained only if there is never a liquidity crisis in the REAL physical market. If someone asks for gold and there isn’t any the default would trigger the biggest “bank run” and default in history. This is, of course, why the Central Banks lease their gold or sell it outright to the bullion banks when they are squeezed by high demand for REAL physical gold that can not be met from their own stocks" and concludes "Almost every day we hear of a new financial fraud that has been exposed. The gold and silver market fraud is likely to be bigger than all of them. Investors in their droves, who have purchased gold in good faith in “unallocated accounts”, are going to demand delivery of their metal. They will then discover that there is only one ounce for every one hundred ounces claimed. They will find out they are “unsecured creditors”.

rc whalen's picture

At our firm we frequently receive calls from clients and readers asking about the likelihood of the passage by the Congress in Washington of reform legislation regarding over-the-counter (OTC) derivatives, financial regulation and/or mortgage securitization. Our answer is small to none given the political trends and the state of the lobbies in Washington, most specifically the large bank lobby that protects the Sell Side monopoly in OTC derivatives and securities. The fact that Senator Richard Shelby (R-AL) is still apparently not comfortable with the entirely watered down House proposal to reform OTC derivatives, for example, tells you all you need to know. Stick a fork in it.

Gross OTC Notional Picks Up, $605 Trillion (10% Increase) In Gross Notional Derivatives Outstanding

When we dissected the BIS OTC derivatives numbers two weeks ago, we were expecting the release of the updated semiannual report to be released shortly. Luckily the BIS did not make us wait too long: the latest data indicate that the progression toward wanton expansion of risk continues unabated. Total gross notional increased by 10% from the prior reading to $605 trillion, mostly as a function of an increase in Interest Rate derivatives. Yet courtesy of an artificially "stable" and undervolatile environment based on a unprecedented extra liquidity which drowns all secondary risk indicators, the net notional risk exposure (market values) declined by 21% to $25 trillion.

Whalen And Griffin On OTC Derivatives

From yesterday's hearing before the U.S. Senate on Over The Counter Derivatives. The full archived webcast can be found here - some perspectives from Citadel's Griffin and Robert Pickel, CEO of ISDA, but most notably a very exhaustive report from Chris Whalen of IRR. While I am not as much a proponent of regulation of CDS as Whalen is, he provides an impressive narrative of recent events which, if one were so inclined, could provide CDS-haters enough ammo to make a sufficiently strong case.