CME Raises Margins for Non-Hedged Accounts to Meet CFTC Rule
Comment of the Day

May 03 2012

Commentary by David Fuller

CME Raises Margins for Non-Hedged Accounts to Meet CFTC Rule

Here is the opening from Bloomberg's report on this development:
CME Group Inc. (CME), the world's largest futures exchange, is raising futures margins for non-hedged positions to comply with new regulations.

Members will be treated as speculators for outright positions, paying a higher margin, said the exchange, which trades everything from energy, agriculture and metals to interest rates and equity indexes. Members are now treated as hedgers rather than speculators even if they have a speculative position. The change is effective May 7, it said in a statement.

President Barack Obama last month urged Congress to bolster federal supervision of oil markets, including bigger penalties for market manipulation and greater power for regulators to increase the money traders must put up to back their bets. Regulators are seeking to limit speculation in commodities and ban so-called proprietary trading at banks.
"Guys that are highly leveraged would have to find more capital or they've got to bring their position size down," Adam Davis, a commodity trader at Merricks Capital Services Pty, said from Melbourne today. "You can reduce a position size in two seconds. Finding more capital might take you two months."

The exchange is implementing a Commodity Futures Trading Commission rule for all speculative trading accounts that are regulated as futures or swaps, said the CME yesterday.

"The CFTC rule takes away the implicit hedge status of members, forcing them to pay a higher margin to take flat price and spread positions home overnight," said Roy Huckabay, the executive vice president for the Chicago-based Linn Group, a CFTC-registered futures clearing firm for individual traders, hedgers and funds. "This would by nature reduce the number of contracts they trade unless they put up additional collateral."

David Fuller's view This news weighed on prices for most commodities today, causing the Continuous Commodity Index (Old CRB) (weekly & daily) to test its December low. A sustained break back above 560 is now required to reduce current scope for an extension of the overall downtrend.

The main target of this change in margin requirements is the price of crude oil WTI (weekly & daily) and Brent (weekly & daily) because gasoline prices in the USA have become an important election issue. High oil prices have also slowed global GDP growth, just as we saw last year. This is also reflected by the decline in CCI above, now in its 13th month.

The good news is that a lower reset for commodity prices will help to reduce inflationary pressures from this sector. This will give central banks more leeway to stimulate GDP growth in coming months.

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