The CME Margins Advisory: Manic Monday or Business As Usual?

On November 4th, the CME put out short and obscure margin advisory stating it is raising rates to ensure adequate collateral coverage, apparently to back futures trades to ease the bulk transfer of accounts held by MF Global Holdings customers.


I wanted to discuss the panic that ensued after Zerohedge sounded the alarm Friday, Nov. 4th, about the imminent margin calls predicted for Monday morning and its overall effect on the silver market.  Here's an excerpt from the ZH article in reference to the implications of the fallout of the announcement: “Which means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call. Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, we anticipate the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America… and the world.”

This message is spreading like wildfire on the social networking sites prompting youtubers to make videos appealing to people to dump their silver contracts first thing Monday morning. Check out this one I stumbled across on Youtube.  It is a very compelling message.... It makes me want to get out of paper...Oh yeah, I already did that early 2008!


Here's Kid Dynamite's take on the announcement.  He writes “... 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.”


In response to the on-line reaction, Saturday, Nov 5th, there was a press release from CME to apologize and clarify the previous advisory. "Nov. 5, 2011 -- /PRNewswire/ -- CME Group today is clarifying its notice to clearing firms regarding margins. In light of the issues customers transferring out of MF Global are facing, while still maintaining appropriate risk management protections for the market, CME Clearing is setting the "initial" margin upcharge to zero. This upcharge is normally applied to customer accounts when they are receiving a margin call. The intention and effect of these changes are 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.

This is a short term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event. We apologize for any confusion our initial advisory may have created."


The lack of clarity and professionalism in the initial announcement has the CME’s reputation in question.  And in this instance, many people are accusing the CME Group of changing the rules to service their own position.


This is what whistle blower Andrew McGuire had to say about this subject to King World News today “Now it’s obvious that a self regulated organization like the CME has its own clients’ interests at heart and not the interests of the public. So I’m absolutely incensed that any dispersions have been put upon Gensler for any failure to discover the MF Global problem when they (the CME) were actively blocking his request for extra staff. The CFTC has been facing an incredible headwind from the CME and their members to stop any form of progress on the Dodd Frank Act. This is yet another example of the power of the banking cartel and their constant abuse of power.”


Here is another less benign view from an editorial by Bix Weir (Bix is rather radical but I tend to agree with his overall message): "You know what that will most likely mean for silver…ANOTHER MASSIVE SILVER SLAM! The ONLY institutions that can make these kinds of margin deposits without selling off assets are the big banks. VOILA…massive long silver liquidations. On a brighter note, it is likely the LAST silver slam we will have to ride out…EVER! This is the END GAME of 40 years of computer price manipulation. Expect it to get a little crazy”.

I got out of paper early 2008, thanks to the warnings by the likes of Philip Judge, Franklin Sanders, and Peter Schiff et al. I sleep much better now that my involvement in market is to preserve my wealth in inflation proof assets and serendipitously capitalizing on the initial and massive break out they will both make in the coming months/years.  For the people who remain long in physical gold and silver, these are very interesting and exciting times and I smell another potential buying opportunity beginning next week.


I am extremely curious to find out what happens in the market on Monday (Nov. 7th, 2011). Will there be massive liquidation? Or will the market only have small sells offs and basically remain unchanged? I guess I will put an addendum to this entry as it unfolds.


Best to you.
As you know I am not a financial advisor in this jurisdiction or any other. As well, I am not a speculative investor and remain a proponent of physical bullion ownership only; no paper.

EDIT (Nov. 8, 2011):

What an anti-climax! It looks like CME back-pedaled after the amount of complaints received from their initial advisory last Thursday and therefore it was business as usual on Monday.
A couple of things of interest from today:
1) Now that the dust has settled, some may be overjoyed to find out that “CME Is Legally Liable For MF Global Customer Losses”, says Avery Goodman at Seeking Alpha.
 2) A Market Nugget from Debbie Carlson of Kitco.
Market Nuggets: CME Group: Verifying All MF Global Account Transfers Are Accurate, Complete; Collateral In Trustee's Control
08 November 2011, 1:50 p.m.
By Kitco News
(Kitco News) - The CME Group says in a letter to members dated Tuesday that it is working to verify that all account transfers are accurate and complete regarding MF Global’s customer accounts. "When the verification process is completed and we confirm that all monies and positions have been transferred correctly, customers will be given access to cash in their accounts," says the exchange, which had frozen the access to that cash. However, the exchange says all property is subject to the control of the trustee, which is SIPC. "In the ordinary course, he will reduce all assets, including securities, letters of credit, warehouse receipts and other delivery certificates to cash, and make a pro-rata distribution among the commodity customers based on their relative account balances," the exchange says. Customers of MF Global have complained that regulators are treating them as similar to unsecured creditors, rather than clients whose funds were to be segregated from the firm’s money. Their concern is that they will receive just a portion of the cash they had in their accounts.
Debbie Carlson of Kitco News; dcarlson@kitco.com

By Kirsty Hogg

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