US options & futures holders will be forced to deposit billions in additional capital to the CME to avoid margin calls. This may pressure all asset classes on Monday
There is a liquidity crunch in the options & futures markets for commodities worldwide. CME, the exchange for such transactions in the US, had made the initial margin and maintenance margin equal for every commodity with options and futures. This implies that options and futures holders will be forced to deposit addition capital to the CME in the form of maintenance margin, simply to hold their positions. This will put markets under pressure on Monday. The lack of liquidity and additional margin requirement comes in the aftermath of the bankruptcy of MF Global.
The London Metal Exchange has suspended MF Global from trading with immediate effect, following a similar move by the CME Group, which operates the Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile Exchange. MF Global had filed for bankruptcy protection following bad bets on euro-zone debt. The brokerage’s meltdown in less than a week made it the biggest US casualty of Europe's debt crisis, and the seventh-largest bankruptcy by assets in US history.
One of the biggest market concerns now is systemic liquidity, which is virtually non-existent. Interbank liquidity in Europe is at an all-time low, and possibly for the US banks. But this is just as true at the commodity exchange level, where it appears the aftermath of the MF Global collapse is just now being felt. CME's margin hike will force market players to cough up billions of dollars in a single day. Since this cannot be easily procured in one business day, we may see margin calls and forced liquidations of margin accounts across America and the world.
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Maybe someone can explain the likely impact of this as i'm not sure how big a % of the overall CME "Performance Bonds" are.
Thanks in advance
Unless people/firms (loads & loads of them) can come up with the increased margin then their positions will be liquidated by the close of business on Monday.
This woud be messy to put it mildly.
I'm surprised of 2 things:
1) that the CME will be allowed to do that considering the dire consequences that will follow (possibly another 'black monday').
2) how little interest has been generated by this story so far.
C, what are your views on this move and likely outcome for next week.
Cheers