CME issues Clarification on Performance Bond Requirements

This afternoon, the CME Group issued a clarification on their communique detailing the increase in performance bond requirements for it clearing member customer accounts with non-hedged positions. Evidently there was a great deal of confusion regarding the wording of the original release.

The Dow Jones wire service interpreted the original communique in the same manner as I did. I am not sure about Reuters but either way, the wording was so poor, that it forced another release to clarify it!

Here is the Dow Jones report:
 3:03 (Dow Jones) CME notifies members of its clearinghouse that starting
Monday, members will need to effectively double the initial margin collected
for non-hedge trading positions, with no exception for members' customer
accounts. The move is required by CFTC as part of Dodd-Frank, While market
participants have known about it for some time, CME apologized Wednesday for
the "short notice" of the change. As per CFTC rules, hedges must reduce risk
for commercial users of derivatives markets, linked to such a company's assets
or liabilities. (jacob.bunge@dowjones.com)


In speaking with a rep from the CME, the change will affect a relatively small subset of traders and not have the drastic impact, that many traders, myself included, originally believed based on the initial news release.

Following is the complete news release:

DATE: May 2, 2012
TO: Clearing Member Firms
FROM: CME Clearing
SUBJECT:
Important Clarification
Note: the original version of this advisory was misleading regarding the applicability of the new rule and the manner in which "initial to maintenance ratios" work.

12-187 Performance Bond Requirements for Member Accounts: Effective this Monday, May 7, new CFTC Regulation 39.13(g)(ii) mandates each DCO to require its clearing members to apply "initial to maintenance ratios" for customer accounts with non-hedged positions. There is no exception for speculative customer accounts of exchange members that fall within the Regulation. The Regulation applies equally to positions that are regulated as futures and to positions regulated as swaps.
Note that the requirement only applies to non-hedged member accounts. Member accounts containing hedged portfolios are always assessed only at the maintenance requirement level. Most CME Group members engage in hedging activity on a routine basis -- for example, they make a market in one set of our products and lay off their risk in another set of products at CME Group or other markets. Such positions are still subject to hedge treatment. Note, however, that if you are a member and you have only outright positions you will be subject to the new rule.
For example, suppose you are a member and you qualify for hedge treatment. You have a portfolio with a maintenance requirement level of $100. The sole requirement you have is that $100 level.

On the other hand, suppose you do not qualify for hedge treatment, and your portfolio has a maintenance requirement level of $100 and an initial requirement level of $110. As long as you have $100 worth of value in your account, no margin call is issued. But Page 2 #12-187/May 2, 2012 if your collateral value falls below $100, then a margin call is issued to bring you back up to $110.

Previously, for futures, the use of "initial to maintenance ratios" applied only to accounts that were neither hedge nor member. Accounts are coded by FCMs as member, hedge or spec, and only accounts coded as spec had an "initial" requirement level that was higher than the "maintenance" level.

Note also that even for non-hedged member accounts, the higher "initial" requirement level only applies if (a) the account had no positions on the prior day, or (b) the value of collateral on deposit has fallen below the lower "maintenance" requirement. On all other days, it is the lower "maintenance requirement" which applies – which is the same level that the FCM is assessed – and so long as the account maintains a cushion of collateral value over the maintenance requirement, there is no margin call.

We believe that FCMs will be able to accomplish this change for member accounts which do not qualify for hedge treatment, simply by changing the account type that drives the margin calculation in books, from member to spec.

We apologize for the short notice about this change. See also Clearing Advisory 12-136, published March 28, about the use of initial to maintenance ratios for non-hedged positions in swaps, at:

http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv12-136.pdf

Dodd-Frank Strikes the Commodity Markets

I will try to write more on this later as I am still working the session but news came out last evening that CME was requiring all member firms to comply with regulations arising from Dodd-Frank which basically is forcing margin requirements for all "Non-Hedges" to effectively double as of this coming Monday.

Talk about short notice!

The ramifications of this are obviously huge and no doubt are adding to an already volatile mix of madness. Those traders with losing positions are going to be impacted even more since the new requirements may well push them over the line as far as margin calls and force them to either liquidate or come up with more cash, immediately.

I think some of what we saw in the markets today is traders already anticipating this with the result that we had a significant amount of position squaring.

more later... hopefully....

Here is a chart showing the carnage in the commodity sector. Of course not all of this was caused by Dodd-Frank but it certainly did not help the case of those who are generally LONG COMMODITIES to have such lousy economic data coming out of the US in today's session which generated risk off trades. Combine that with the fact that their margins are going to be doubled soon and it does not take a rocket scientist to understand why we are seeing such strong selling across the commodity sector today.

Like I heard elsewhere - there are two main things wrong with Dodd-Frank; Dodd and Frank. One is out of the Senate (thank heaven) and the other is retiring from the House (a double thanks).

One Minute Chart of Gold - 7,501 contracts

By request of a reader S Roche, I am providing a one minute chart showing the enormity of the trade in gold early this morning (4-30)

Monthly Gold Charts

Isn't it amazing that some are so ready to call for an end to the bull market in gold. From a monthly chart perspective, there is nothing to indicate such an occurrence.

In 2008, the CLOSING MONTHLY GOLD PRICE dropped 26.5% from its best to worst level before it renewed its uptrend.

More recently, gold has dropped a mere 14.4% from it bests closing monthly level to its worst level reached with a handle of "15" in front of the gold price.

Keep in mind that purely from a long term technical chart perspective, the metal remains in a solid uptrend.

As a side note - for those of you would never seem to grow tired of castigating me for using the phony government CPI data in calculating my inflation adjusted gold price chart, please make an attempt to restrain yourself. You are always welcome to create one of your own and send it to us for publication which I will gladly to do.

FAT FINGER IN SILVER TOO?

Traders continue to chatter about the so-called "FAT FINGER" trade in gold that occurred early this morning, a trade which dropped the gold price $15 in minutes and consisted of an order of 7,500 contracts. Many seem to agree that it was a trade placed in error.

The problem is that we also witnessed a similar surge in the volume done in the nearby silver pit at the exact same moment. Note the time right after the 5:00 AM hour (Pacific time) on the following 5 minute chart and see how large the volume was compared to that for the remainder of the session.

No matter who did the trade, ( I remain of the opinion that this was a raid designed to knock the metal lower in hopes of creating a cascading running of downside sell stops), the fact is that it failed miserably. Besides, if it was a "FAT FINGER" ( a trade placed in error) how did the same fat finger knock silver down so sharply? Was that too a simple "error".

Note how both metals recovered the losses and added some additional gains even with the mining shares weaker and the broader equity markets lower. Even copper was lower today for a while before it too moved higher.

I still believe that traders are becoming more convinced that another round of QE is coming sooner rather than later. At least that is what is being reflected in the price action.

Gold Takedown Rejected

Take a look at the following 5 minute chart and note especially the volume readings posted below each individual price bar. Look just past the 5:00 AM Pacific time hour and you will see the enormous volume spike accompanying the sharp downdraft that occured in the gold price dropping it $15 in the course of minutes. Analysts are still grasping for an explanation.

The most common is that it was another one of those "fat fingered trades". Have you ever noticed how many fat fingered human beings apparently camp out in the trading community. Last time I checked a skinny finger could hit an "enter" key just as easily as a fat finger could.

My view on this is that gold's psychology changed late last week as it begin seeing some seriously interested buyers whose entrance back on the long side was able to take it up through a minor chart resistance level near $1650 and set it on a course to test overhead resistance at $1680, a key chart level. That is a no-no in the world of the Western Central Banks who cannot tolerate this rebellious upstart of a metal telegraphing to the entire world the failure of their attempts to paper over the problems ailing both Western Europe as the US.

That called forth reinforcements to take the price lower to try to corral the unruly upstart and put it back into the box. As you can see, the selling was met with more buying that completely erased the losses and then added some more gains for good measure.

We are right back to being in position to try to tackle $1680 again. Weakness in the mining shares however is working once again to dampening excitement in the actual metal.

Trader Dan on King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.

http://tinyurl.com/6utdgbt

US Q1 GDP grows 2.2% - Copper moves Higher?

This morning's big news item was the fact that US Q1 GDP growth came in at 2.2%, well under expectations of 2.6% growth predicted by analysts and well down from Q4 2011 growth of 3.0%. Under "normal" circumstances, such a number would have been expected to put downward pressure on the bellwether copper market. 'Twas not the case however as copper shot up on the news bursting through the 50 day moving average in the process. What gives? Simple - we are now in an environment in which the more bad news we get, the more optimistic traders are becoming that the next round of QE is coming right up.

That is what gold began sniffing out in yesterday's session and appears to be continuing today. We have been accustomed to seeing these rotten numbers generate the risk aversion trades, trades in which commodities in general are dumped and the Dollar is bid higher. We are now seeing a change in trader perceptions, which after all is what runs markets, in which the steady trickle of news showing a deteriorating growth pattern in the US is being met with increased expectations for QE sooner rather than later.

In other words, it is QE ON instead of RISK OFF.

As long as this perception continues, gold is going to move higher. The trick is just how bad do traders think the news has to get before it forces the hands of the Fed.

I think it should be noted here that we also have politics at play as far as the Fed is concerned. Governor Romney, the presumptive Republican nominee for President, has made it clear that he is not a big fan of Chairman Bernanke. Bernanke serves at the pleasure of the current President Obama. If Obama loses the upcoming election, Bernanke is OUT AND HE KNOWS IT. Now, maybe he no longer wants to play MASTER OF THE UNIVERSE, but methinks very few men are able to gladly relinquish such power. My guess is that he is going to make sure that if his boss goes down in flames at the next election, at least it will not be on Bernanke's account for not acting to keep the markets from sinking lower.

Bernanke has also kept the door open for additional QE but coyly suggests that the time is not just yet. In other words, he is keeping his options open but does not want to get too assertive about it precisely because of what we are now seeing occur in some of the commodity markets such as copper. If traders become CONVINCED (they are not there yet but leaning in that direction now more heavily) that Bernanke is going to pull the trigger on the next round of QE, they will bid the price of essential commodities higher so quickly that if you snooze you will miss it! The Fed Chairman is trying to keep that from happening, particularly with energy prices. He already has a problem with the grain markets, particularly soybeans; the last thing he needs is for crude oil to take off to the upside because the hedge funds go giddy on him.

REmember that the Fed's game has been to talk up the stock market but try to talk down the commodity markets. There are only TWO MARKETS that the Fed wants to see going up - EQUITIES AND BONDS. They want everything else going down, including the Dollar, if they can accomplish that.

This brings us back to gold - it continues to exhibit strength but has not yet cleared the single major hurdle preventing it from tearing higher, namely that stubborn $1680 level. It is creeping closer to this barrier but has not yet managed to test it. Perhaps that will come next week. We will see. One thing is for sure. All of the usual suspects who were so giddy and so presumptuous to declare the bull market in gold is over, are going to look like buffoons if Bernanke and company indeed pull the trigger and fire off another round of QE.

Besides, with China buying oil from Iran and paying for it in gold, as my pal Jim Sinclair has so brilliantly noted, the game has changed as the Western powers are being served notice. One wonders if they even get the message.