Saturday, November 5, 2011

CME Tweet Implies They Intend to LOWER Initial Margins Rather Than Hike Maintenance

The CMEGroup has just tweeted an explanation of yesterday's margin announcement from an obscure blog called Kid Dynamite.  While claiming to not be associated with the CME, KD's piece theorizes that the CME actually intends to LOWER initial margins to equal the maintenance- to PREVENT margin calls for the just transferred MF Global accounts.
The CME Group's tweeting of this article as an explanation of the move implies that lowering initial margins to prevent margin calls for transferred MF Global accounts is the intended purpose of the move-or else the CME Group is intentionally promoting disinformation.
Currently, the CME has yet to update the margin requirements for CME Group products- we will closely monitor the CME page over the weekend and provide an update if/when the CME group updates their site.


An explanation of yesterday's margin announcement from : The $CME

From the KidDynamite article Tweeted by the CME:
Note the phrasing of the CME’s announcement: they used “initial/maintenance” ratio. Now, the initial margin is almost always larger than the maintenance margin (initial margin is how much collateral you have to post when you buy the contract. Maintenance margin is lower because otherwise you’d have to replenish your margin every time the contract falls in value – instead you only have to do it when you reach certain “maintenance” thresholds).
So the initial/maintenance ratios were previously greater than 1.0. They are being LOWERED to 1.0. There are two ways for this to happen, obviously: 1) Raise maintenance margin requirements or 2) lower initial margin requirements. If the CME was hiking maintenance margins across the board, it seems that they could have more accurately used the term: “maintenance/initial” ratio to describe the change.
I am guessing that this change is, of course, related to the account transfers of MF Global customers. Since accounts are being transferred to new clearing firms, that may trigger re-posting of initial margin requirements.
Now, I can’t be sure, but I suspect that CME’s announcement from last night is a lowering of the initial margin requirements, to avoid the necessity of former MF Global clients having to post increased margin as a result of their positions being transferred to a new firm.