Economic chaos

[Ross]

If the following text is correct then Monday may mark
the start of global economic chaos .

It is of course possible that TPTB will intervene before markets
open ( I hope they do ) but it would be prudent to assume
that next week will be a very bad week and take whatever precautions
you can .

CME Goes To Collateral DefCon 1:
Makes Maintenance Margin Equal To Initial
Submitted by Tyler Durden on 11/04/2011 21:20 -0400

The most important news announcement of the day was not anything to came out of Cannes (as nothing did), nor from Greece (the merry go round farce there continues unabated). No, it was a brief paragraph distributed by the CME long after everyone had gone home, and was already on their 3rd drink. It is critical, because not only is this announcement a direct consequence of what happened with MF Global several days ago, but because also it confirms one of our biggest concerns: systemic liquidity is non-existanet. We confirmed interbank liquidity in Europe was at an all time low earlier today, and can only assume the same is true for US banks. But what is very disturbing is that this is just as true at the exchange level, where it appears the aftermath of the MF collapse is just now being felt. What exactly was the announcement. Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product. Because as of close of business on November 4, today, the CME just made the maintenance margin, traditionally about 26% lower than the initial margin for specs, equal. For everything. Which means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call. Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, we anticipate the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America... and the world. Just like when Lehman blew up, it took 5 days for Money Markets to break. Is this unprecedented elimination in the distinction between initial and maintenance margin the post-MF equivalent of the first domino to fall this time around?

http://www.zerohedge.com/news/cme-go...ial-everything

[CanadaSue]

Ouch - thank you.

[Ross]

The more I think about it the more I suspect great criminality
behind this move . Had the CME wanted to play fair , adequate
warning would have been provided .

One of the products involved is of course gold futures .
Since most entities buying "long" positions would be leveraged
many times the initial deposit , we might now expect much forced
selling and the price of gold to plummet accordingly
( presumably as intended ) .

A lot of players would be fearful of transfering transfering large
amounts of cash to the CME even if they can ( I know I would ) .
However cash may be unavailable anyway due to bank gridlock .

That means that many holders of 'long' positions either face
a catastrophic plunge followed by margin call extinction
or they must buy counter balancing "short" positions .
Many will elect to buy "short" positions because they have no choice .

This is a nasty circle jerk because TPTB have been driving
down the price of gold with naked shorts. Now they can unload
some of that junk paper on purposefully created victims while
buying back cheap 'long' positions to cover some of their
remaining outstanding shorts .
( I doubt the big players like JPM are affected by the new margin
requirements and would have been forewarned anyway ) .

Therefore this week may be marked by an initially plunging
gold and silver prices .

[LvDemWings]

Ross I have read that article and your highlighted area 3 times and still don't quite understand what it means. Can you give me the "for dummies" version please.

[Ross]

Frankly this stinks .

To do this at a time when the market is stressed by MF Global
either signals extreme desperation and/or extreme opportunism .

The clients of MF Global would obviously have been big holders of
positions and yet they are presumably in no position to rapidly
increase their margin deposit .

To my eyes this looks like a clear case of asset confiscation .

Furthermore a proportion of the creatures about to be devoured
by sharks are probably more like whales than sardines.

[Pablo Escobar]

Let's see if I got this right.

Cme has been docking with the margin requirements for months, raising and raisins and raising them. Many of theses jumps have been in more than 26 percent increments (going from a 10 percent margin requirement to 20 percent requirement is a 100 percent jump for example).

Thus this new rule is a nothingburger as it is materially less incrementally as what they have been doing for months

As an example, let's say your positions require a margin balance of 1000 dollars, that controls 6000 dollars worth of gold. But the price of gold goes up, requiring your margin deposit to increase. Historically, they were giving you a 26 Percent leeway before issuing a margin call. This 26percent leeway allowed the pain in the ass factor of having constant margin calls from going out.

This isn't end of the world stuff. It is however indicative of financial uncertainty

[Ross]

Ross I have read that article and your highlighted area 3 times and still
don't quite understand what it means. Can you give me the "for dummies"
version please.

Translation .
# Speculators on the market for futures are being shafted but the
big guys are being looked after .
# The CME know perfectly well that many players will be unable to
suddenly front up with enough money to cover the new deposit
requirements in this tight liquidity environment .
# TPTB who have been manipulation the price of Gold/Silver are
about to indulge in an orgy of greed at the expense of speculators.


Hint : The price of gold/silver is about to plummet but
the ability of TPTB to continue manipulation prices is about to also
fall but not totally end . That means that what you pay
for gold/silver now probably does not matter because at some point
the price will likely go ballistic . However I would not borrow to buy gold/silver
because then you become vulnerable .
Strictly cash purchases only , if you can .



PE I agree that savvy players would have expected this move .

The issue is that it is being made suddenly and at a time when
many players are prevented from meeting the new requirements.

I further agree that it may not signal the end of the world just a
new round of opportunistic theft . However it does come a time
when there are multiple indications of extreme liquidity stress and
fear so the cumulative effect could be profound .

( But thank-you for the calm voice of reason ) .

I leave with you the following quotes to ponder.

We confirmed interbank liquidity in Europe was at an all time low
earlier today, and can only assume the same is true for US banks.

Just like when Lehman blew up, it took 5 days for Money Markets to break.
Is this unprecedented elimination in the distinction between initial and
maintenance margin the post-MF equivalent of the first domino to fall this
time around?

[Pablo Escobar]

Ross, I agree we are royally screwed. I'm just shocked it's taking so long

[gsgs]

so the margin itself is not increased, just the tolerance level
when they issue a margin call ?
now to be issued immediately when the margin is exceeded
----------------
well, not so
http://www.moneylife.in/article/cme-...ure/21187.html

how much is it increased
---------------------------------------
http://www.agweb.com/blog/opening_pr...lion_need ed/

not so dramatic

[sandyd]

PE....I think it's taking so long because this is a 'war' between the big boys. We are more audience now than ever before due to communications. I'm sure games like this have been played before.

I agree with Ross...

a proportion of the creatures about to be devoured
by sharks are probably more like whales than sardines.

[Ross]

Overnight ( my time ) the CME have changed/clarified their position on margins.

Being barely awake and not yet having put coffee cup to lips
I will say no more at this time .

For those who wish to wade through it themselves here is the link.
http://www.zerohedge.com/news/cme-is...y-mf-aftermath

[Ross]

Apparently the Armageddon call was all a big misunderstanding
based on an unofficial CME press release ( or so they say ) .

We are now commanded to relax and forget all prior anxious thoughts.

Extract ...

Yesterday, in what is the worst-phrased and most misleading press release to ever come out of the CME, the exchange issued a notice that going forward all Initial margin would be equal to Maintenance margin. Our gut interpretation was that "Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product." Judging by the broad response, our initial reaction is what a prudent, logical human being would assume: after all, it is precisely the undercollateralization of customer accounts, and general underfunding at MF Global that is what brought that particular company down. Well, we wrong wrong. The CME, it appears has taken a page right out of the European playbook, and less than a week after an exchange-cum-Primary Dealer collapsed due to excessive risk taking, the CME has followed up its vague press release from yesterday by inviting even more risk in lowering the initial margin.

Extract source ...
http://www.zerohedge.com/news/cme-is...y-mf-aftermath



A readers comment from ZH

This first announcement by CME was intentionally vague, designed to do just what it did. Flush out market opinion, because you could use a number of different interpretations to explain it. I don't know much about futures markets, but I do know a thing or two about writing reports and documents. The initial letter was not mistakenly vague and ambiguous. It was intentionally vague and ambiguous.

Well they certainly got mine .

[Greta]

We are now commanded to relax and forget all prior anxious thoughts.

Is the world coming to an end Monday or not?

[AndreaCA]

Greta, the world won't be ending on Monday or any other day. However, it might be prudent to have enough cash on hand to stay functional for a few weeks in the event of economic "chaos."

Thanks Ross for posting this.

[Greta]

Greta, the world won't be ending on Monday or any other day.

Well, that depends on who you ask. Nonetheless, I was just kidding around with Ross.

And I do appreciate his insight on economic and financial matters.

[Malcolm]

So the "For Dummys" version is we are all at the mercy of...of.... loan sharks

[Ross]

the world won't be ending on Monday or any other day.

Dunno .These things take weeks to flow through the system .

This is a very large bankruptcy .

People assume that because sunrise occurred the next day then
all is well . I am not so sure , but I hope you are correct .

The CME appears to be guaranteeing funds to be made available to customers
but give it at least a month before you again harmonize with the rocking chair .


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