CME raises margins for non-hedged accounts

Members will be treated as speculators for outright positions

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May 3 (Bloomberg) -- CME Group Inc., 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 inderivatives 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 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., Goldman Sachs Group Inc. and Morgan Stanley 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.

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