Bloomberg News

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

May 03, 2012

CME Group Inc. (CME:US), 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.”

CFTC Rule

The CFTC approved a regulation 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.

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 margin requirements for traders' positions and stiffen civil and criminal penalties for those guilty of manipulation to $10 million from $1 million.

“For the highly-leveraged speculators, depending on the magnitude of the increase in margins, they may have to resize their portfolios down,” said Davis from Merricks Capital, referring to the CME announcement yesterday. “Certainly it’s not conducive to higher prices in the short-term. In the long- term it will have little impact.”

To contact the reporters on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net; Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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Companies Mentioned

  • CME
    (CME Group Inc/IL)
    • $74.48 USD
    • 1.10
    • 1.48%
  • JPM
    (JPMorgan Chase & Co)
    • $58.65 USD
    • 0.41
    • 0.7%
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