New Futures Margin Requirements

This article is from Reuters today. It is already impacting the markets today (DT - if there is an issue regarding copying this here please delete this - Thanks.):

http://www.reuters.com/article/2012/05/04/us-cme-margin-idUSBRE84300620120504

CME members win 90-day reprieve from higher margin rules

By Josephine Mason

NEW YORK | Thu May 3, 2012 8:01pm EDT

NEW YORK (Reuters) - The CME Group was granted a 90-day reprieve from imposing new rules that will hike margins for some exchange members by as much as a third, one day after news of the increase riled locals and roiled markets.

The new rules, which would have increased trading costs for exchange members who are classified as speculators, will now come into effect on August 5 instead of on Monday, it said in a release.

Members will continue to enjoy special terms that allow them to meet the lower "hedger" margin requirement during the 90 days.

"During the extension period, CME Clearing will work with the CFTC (Commodity Futures Trading Commission) to address member-customer concerns," the CME said. The exchange said it had requested and been granted the delay on Thursday.

While traders are likely to be relieved, the abrupt announcement and initial confusion over the plan could add to frustration with the CME. Earlier on Thursday the exchange had to scramble to defer a shift to extended trading hours in its Chicago grain futures due to a regulatory snafu.

"They probably got a bunch of heat from the members," said J. Mark Kinoff, president of Ceres Hedge, who owns a CBOT membership.

From the Chicago trading pits to the New York oil and metals markets, "locals" who typically trade with their own money were aghast at the change in policy. Few had anticipated the changes, although they are part of the financial reforms that regulators have been working to implement for two years.

"You have regulations coming into algos (algorithms), into banks' prop (proprietary) trading and now we're having issues with locals having to put up more liquidity. It's got to hurt liquidity," said a senior executive at a large futures commission merchant.

Some traders said news of the new margins had roiled the Chicago Board of Trade corn market on Wednesday as local speculators liquidated spread positions rather than face the need to put more capital on margin to maintain positions. Some also blamed the shift for losses in New York oil futures.

Initial margin, the amount of collateral required to open a new trade or meet a margin call, is typically set by exchanges at two different levels: a higher "speculator" margin to reflect the more volatile nature of those positions; and a lower "hedger" margin for farmers, producers and other firms.

In the case of COMEX metals, for instance, the speculator margin is 35 percent higher than the hedge margin. With the change, any exchange members who are required to meet a margin call would have had to put up 35 percent more capital.

END OF EXCEPTION

That exception on margins will end because of new federal Dodd-Frank exchange rules, which mean members will have to pay the higher speculative margins to initiate a new speculative position. There is no change for members who qualify as hedgers, and will be able to continue paying the lower hedge margin.

An official at the CME's clearing operation said his department had been inundated by calls from traders seeking clarification, some of whom mistakenly believed the new margins applied only to financial contracts, not commodities. The official confirmed that it applied to all products.

The changes only apply to those who hold exchange membership, a group that typically includes local, individual traders who are among the most active but also the smallest -- and those most likely to feel the pinch of higher costs.

"It's going to drain liquidity out of the market. It's a shame because the people this market was made for, this is going to make it difficult for them," said Kinoff.

The CME's energy and commodity exchange rival InterContinentalExchange has already taken measures to distinguish between hedgers and speculators, although the impact is expected to be lower than at the Chicago exchange as it has few members.

At ICE U.S. the margin for speculators used to be 40 percent higher than hedgers, but was lowered to 10 percent to be in compliance with the Dodd-Frank rules and ICE Clear Europe, where Brent crude and gasoil trade, has already announced plans to raise the spec margin by 10 percent from May 7.

It was not immediately clear whether the ICE had also received permission to delay implementing the changes.

I asked a trader friend of mine who has a seat at the CME. His comment was that this is the exchange actually fixing one of the riskiest things for a clearing firm with local based accounts. That is the use of spread trading as outrights. This demanding of more margin by clearing firms has been going on for a long time and now it is CME driven as well. Basically it is forcing the local trader who leases or owns a seat at CME now to have a balance sheet to trade. This certainly will force out many of those guys. It really will not directly affect the off the floor speculator. The reality is that the CME is now a corporation and not The Old Boys Club anymore.

Thanks for that clarification jpslaga.