Tags: cme | margin | rules | futures

CME Gets 90-Day Extension to Implement Higher Margin Rules

Friday, 04 May 2012 02:38 PM

CME Group Inc., the world’s largest futures exchange, requested and received a 90-day extension for implementing margin changes for members announced May 2.

The rule will be enforced on Aug. 5, the company said in a statement Thursday. The exchange trades derivatives in everything from energy, agriculture and metals to interest rates, foreign exchange and equity indexes.

Members will be treated as speculators for outright positions, paying a higher margin, as a result of the change which was to take effect May 7, according to CME. Members are currently treated as hedgers rather than speculators even if they are entering into a speculative position.

“CME Clearing will work with the Commodity Futures Trading Commission to address member-customer concerns,” it said, without specifying them.

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 amount of 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.

The change in performance-bond requirements was in response to a rule adopted last year by the CFTC targeting all speculative trading accounts that are regulated as futures or swaps, the Chicago-based exchange said.

Customer Collateral

Commodity regulators are seeking to provide clearing houses with a cushion of available customer collateral to reduce risks in derivatives. Exchanges traditionally draw a distinction between hedging and non-hedging positions when they set margin requirements for customers, according to the CFTC.

About 40 percent of CME’s first-quarter revenue was generated by financial contracts and 40 percent came from commodities, the company said last month. The largest financial contracts by revenue were interest rates at 21 percent, with equities at 13 percent. Energy contracts were the largest among commodities at 24 percent, with agricultural at 11 percent.

The CFTC approved regulations last year that would cap the number of contracts a derivatives trader can have. European regulators are also seeking limits on derivatives after French President Nicolas Sarkozy demanded steps to curb speculation, which he blames for driving up world food prices.

“If large trading houses have long positions, they may pare some of those positions to meet these margin requirements, and that would drop the prices,” according to Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.

Crude-oil futures for June added 0.2 percent to $102.70 a barrel on the CME’s New York Mercantile Exchange Friday.

Because the rule affects only exchange members, “the impact on the market is relatively minimal,” said Kyle Cooper, the director of commodities research at IAF Advisors in Houston. “Members trade, but they are still small in relation to the whole market.”


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