Bloomberg News

CME Raises Margins for Non-Hedged Accounts to Meet Rule

May 03, 2012

CME Group Inc. (CME:US), the world’s largest futures exchange, is raising futures margins for non-hedged accounts from May 7 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 currently treated as hedgers rather than speculators even if they are entering into a speculative position.

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.

“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 change in so-called performance-bond requirements was in response to a rule adopted last year by the Commodity Futures Trading Commission targeting all speculative trading accounts that are regulated as futures or swaps, the Chicago-based exchange said in a statement yesterday.

Commodity regulators are seeking to provide clearinghouses with a cushion of available customer collateral to reduce risks in derivatives trades. Exchanges traditionally have drawn a distinction between hedging and non-hedging positions when they have set margin requirements for customers, the CFTC said in its final rule, scheduled to take effect May 7.

“It is reasonable to assume that hedgers may present less risk than speculators,” the agency said in the rule.

About 40 percent of CME Group’s first-quarter revenue (CME:US) 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.

Complying with the CFTC rule will affect exchange members that have speculative positions, including traders who lease trading privileges, said Laurie Bischel, a CME spokeswoman.

Higher Margin

“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.”

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.

Trade associations representing companies including JPMorgan Chase & Co. (JPM:US), Goldman Sachs Group Inc. (GS:US) and Morgan Stanley (MS:US) have sued to overturn the CFTC regulation, one of the financial industry’s highest-profile challenges to the 2010 Dodd-Frank law that bolsters regulation of derivatives.

Price Drop

“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,” said Rich Ilczyszyn, chief market strategist and founder of in Chicago.

Crude-oil futures for June delivery fell 2.1 percent to $103.04 a barrel at 11:45 a.m. on the CME’s New York Mercantile Exchange, after dropping to the lowest price in more than a week. Gold futures for June delivery slid 1 percent to $1,636.80 an ounce on the CME’s Comex in New York.

Obama has asked Congress to fund a six-fold increase for surveillance and enforcement staff at the CFTC to put “more cops on the beat” overseeing oil markets. He is seeking to give the CFTC authority to raise margins for traders’ positions and stiffen civil and criminal penalties for businesses guilty of manipulation to $10 million from $1 million.

“Basically, we don’t see any impact on the market from the latest revision,” said Richard Gorry, a Singapore-based director at JBC Energy GmbH, an energy research company. “There might be some smaller players that could be forced out of a trade more quickly, but we don’t think that it will have any type of meaningful effect on the big boys.”

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.”

To contact the reporters on this story: Jeff Wilson in Chicago at; Phoebe Sedgman in Melbourne at

To contact the editors responsible for this story: Steve Stroth at; James Poole at

The Good Business Issue

Companies Mentioned

  • CME
    (CME Group Inc/IL)
    • $90.39 USD
    • -0.19
    • -0.21%
  • JPM
    (JPMorgan Chase & Co)
    • $62.55 USD
    • 0.07
    • 0.11%
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