Commodities Slump As Traders Exchange Rumors Of New Margin Requirements

Posted by John Carney, Mar 19, 2008, 4:07pm

Commodities slumped across the board today. Most market watchers are saying that aid for the mortgage markets encouraged some investors to move money from commodities to bonds. But commodities traders had more on their minds than bonds today, as rumors of additional margin requirements made their way across trading desks via instant messaging and phone lines.

What sparked concern was a rumor that the futures exchanges or regulators—or maybe both—were considering raising margin requirements for “non commercial” commodities traders—especially non-com energy traders. Non-commercial traders speculate on the price of commodities but do not ever take delivery of the commodities. Amaranth was a non-commercial trader, while Exxon-Mobil is a commercial trader.

The Commodity Futures Trading Commission, which is charged with overseeing trading in futures contracts, does not set margin requirements. This responsibility falls on the exchanges, such as NYMEX and the CME, which are viewed as having a better, ground-level view of the market’s volatility and risks. Spokespeople for the CFTC said they had no plans to begin regulating margin requirements.

A move to increase the margin requirements for non-com traders could be aimed at diminishing price-volatility, and might reduce commodity prices. This, in turn, might be viewed as aiding a faster recovery as investment dollars would be re-directed at areas of the economy that fuel growth. What’s more, it might tamper—or at least obscure—inflation fears by reducing prices in things like oil and gold.

The exchanges rarely distinguish between commercial and non-commercial traders, however. Market watchers DealBreaker contacted were skeptical that they would put in place such a distinction now. One economist also said that the move could actually fuel volatility, at least in the short term, by obscuring efficiency-creating arbitrage in the markets.

1Recommend this! 11Comments
Posted in: Commodities, Rumors
Tags: CFTC

Comments

Posted by guest, Mar 19, 2008 4:22PM

Natty closed close to unch'ed and CL was down a little over a buck in the front month. Does not sound to me like "sagging."

I doubt they'd differentiate between commercials and noncommercials for the reasons you cited plus it would reduce trading volume on the NYMEX and clearing firms would lose $$$.

Also, the M in XOM is spelled "Mobil," not "Mobile."

Posted by guest, Mar 19, 2008 4:47PM

are you on crack? CL and NG got crushed today

Posted by guest, Mar 19, 2008 4:50PM

oh iris

Posted by diablo, Mar 19, 2008 4:51PM

The broker/dealers are telling their hedgie clients to cut down on the leverage. The hedgie go ahead and take profits on commodoties.

It's about time, but really, this industry is self-regulated and things can change next week. Am I missing something? So commodities take a hit today, a little blow for commodity speculators. Will it persist?

Posted by guest, Mar 19, 2008 6:12PM

Increased margins mean MORE volatility is coming to energy prices be it up or down. Last week there were 181,000 shorts in NG held by non-commercials. If Nymex margins for NG go up, guess what they might have to do? Oooooooh babay!!

If energy prices keep falling, T. Boone Pickens' folk at BP Capital might get to breakeven on their energy price forecasts.

Posted by guest, Mar 19, 2008 9:26PM

From what I hear from a NYME floor trader (i.e. the guy probably know very little), the Fed got to look at BSC prime brokerage book this weekend and worried about the hedgies' huge one-sided commodities bets. They thought before the next bubble builds, this is a good time to take down leverage so they prodded the SEC to talk to the exchanges on raising margin requirement. Besides, having lower commodities price helps the Fed with lowering inflation expectation too. Also, the Fed is trying to woo hedgies to the fixed income side of the tables. Their Wall Street fixed income friends are pretty lonely these days with all the markets except treasuries stuck in the mud-like liquidity. The Fed is not playing fair? Well, since when are the words fair and Fed belong together? Go ask Jimmy Cayne.

Posted by guest, Mar 19, 2008 9:34PM

4:22

is smoking crack , another commodity that trades on the MYNEX

Posted by diablo, Mar 19, 2008 10:35PM

@9:26 PM

No surprise here. It's about time the Fed awakens the SEC. It's the Fed that risking its balance sheet. The SEC is asleep at the wheel because its current mission is to be useless. That is not helping and lack of action by the SEC will make this mess continue making unpredictable turns.

Posted by guest, Mar 20, 2008 12:00AM

Hah, the emperor's new clothes. Changing margin requirements on US commodities markets will make everyone forget the dollar is a piece of poo. Righto.

Posted by guest, Mar 20, 2008 5:28AM

Ron Paul says margin requirements are an impediment to free markets. As such we should dispense with margin altogether.

Posted by guest, Mar 20, 2008 9:22AM

"The exchanges rarely distinguish between commerical and non commerical traders" - isn't it part of the data that the CFTC releases? Considering their financial health depends on it, i think the exchanges pay pretty close attention. Also, considering that any failure of the clearinghouse at CME would result in a collapse of the financial markets as we know them, they mark all their clearing members to market 2x per day and have $75 bln in posted securities from clearing members to draw upon in case of a default. I'm not as sure about NMX and ICE, but CME's clearing structure is sound and I don't think any change in margine requirenments would make a difference.

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