"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Friday, November 4, 2011

CME Group hiking margins across the Board

If I am reading the communique from the exchange correctly, the margin requirements for ALL CME products is being raised by hiking the MAINTENANCE MARGIN requirements to the SAME LEVEL as INITIAL MARGIN requirements, effective as of the opening of trading Sunday evening/Monday morning, November7. The changes were implemented as of the close of trading Friday, November 4th.

If this is correct, and I think I am reading it correctly, this is the first time that I can recall seeing something like this occuring. It will also precipitate some very volatile trading conditions.

I suspect this is tied directly to the fallout from the MF Global debacle. Apparently CME group and its clearinghouse want to make sure there is sufficient liquidity present to cover all its obligations.

This might throw my previous assessment of silver and gold technical action out of the window. Stay tuned as this is going to get even more wild than I previously imagined.

Traders who are not margined up to their teeth and have a sufficient cushion in their accounts, will be okay. Those who are not are going to get hurt on any adverse price action. What I mean by this is simple - if a trader is long and the market sells off, his paper losses or loss of profits will cut into his account balance perhaps bringing the total margin requirements of his active positions below his account balance. He is going to get a margin call that day if not Monday morning or even Sunday evening. Once "called", the money is going to have to be wired that day or the positions will be liquidated.

Quite frankly, seeing this occuring is very unnerving as I wonder if there is more stress out there from the MF Global debacle than meets the eye. The Clearinghouses obviously want to make certain that they are well capitalized.

My guess is that many of the accounts from MF Global that were transferred and have not gotten the ENTIRETY of their former account balances reinstated, are going to be forced into liquidating unless they have adequate capital on hand elsewhere that is easily accessible and very liquid.
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10 comments:

  1. gjervisNovember 4, 2011 at 7:47 PM

    This is great for buyers of physical silver and gold

    ReplyDelete
  2. chris brittonNovember 4, 2011 at 8:27 PM

    What a mind job! How this is going to affect global markets at the open Sunday will be quite an event to witness.

    ReplyDelete
  3. MNovember 4, 2011 at 8:38 PM

    gjervis

    Shorts can be on leverage too.

    ReplyDelete
  4. danNovember 4, 2011 at 8:42 PM

    @ DAN

    WILL THIS CAUSE GOLD TO SELL OFF SO THAT TRADERS CAN HANDLE LIQUIDITY ISSUES.OR JUST ANOTHER WAY TO POUND GOLD INTO THE GROUND,WHILE MAKING THIER FIAT LOOK STRONG...JUST TPTB BS AGAIN

    ReplyDelete
  5. pmbugNovember 4, 2011 at 9:19 PM

    If gold and silver get monkey hammered, I wonder how many dealers are going to still be selling their inventory of physical PMs?

    ReplyDelete
  6. AGNovember 5, 2011 at 12:58 AM

    ...and the CME Group just said, "No more leverage".

    Not quite. They said "you can still buy a $175,000 gold future contract for $11,475, but we're raising the maintenance margin from $8500 to $11475, getting rid of your $2975 loss-cushion."

    I actually think this is bullish for gold because it's been going up recently. The short side, because it's been losing the past week, will have to add disproportionately more margin than the long side. The long side will have the initial margin plus the recent profit on account with CME, so they won't have to deposit any more money. The short side will have the initial margin minus the recent loss on account (below $11475 and above $8500), and since maintenance is now being raised from $8500 to $11475, they will have to deposit the extra funds. So a lot more shorts (than longs) will have to either 1) deposit more margin or 2) liquidate their position (buy back gold futures).

    ReplyDelete
  7. S RocheNovember 5, 2011 at 6:40 AM

    AG, you are assuming that the shorts have not been reducing their positions to lessen the pain and that the longs did not get greedy and increase their positions...on Sunday night, we will know.

    ReplyDelete
  8. S RocheNovember 5, 2011 at 7:07 AM

    According to CoT reports the following have a net long spec position:

    Silver
    Gold
    WTI
    Yen
    Aussie
    Corn
    Beans

    and net short:

    E-minis
    Natgas
    10 Yr
    Euro
    Wheat

    Thanks to Chindit on ZH

    ReplyDelete
  9. Geoff31858November 5, 2011 at 12:47 PM

    Newbie question... when you say "...[this] will also precipitate some very volatile trading conditions..." are you referring to just the gold market or markets in general? Thanks!..

    ReplyDelete
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    ReplyDelete

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