What I have always liked about futures is there is less barrier to entry and you it does not cost you anything to use margin. In fact I do not know anyone who does not take advantage of margin. For example if the S&P 500 is trading at 1250 the value of one e-mini is 1250 x $50 or $62,500 or a big is worth 1250 x $250 or $312,500.
One of my biggest pet peeves is when people over-react to margin increases or decreases. If the market is effected by margin you have to believe that a) the trader is fully leveraged or b) the clearing firm or introducing broker is bankrupt. If either cannot afford the the few thousand extra dollars, both of them are fucked. The way I understand it is that as long as their is collateral to back of the CME margin requirement, individuals collateral it does not matter. It is up to the FCM to control that. The CME and CFTC does not monitor individual accounts only the FCM’s. I believe there is a fine if an account is trading and debit $25k or $50k but it is mostly hands off.
After 2008 the clearing firms have been much tighter for sure. I have no experience with retail brokerages but from what I gather there has always been tightness. Additionally many traders have their trading seat up as collateral. It is in the FCM’s best interest, commission revenue, to let them trade as big/many as possible while still staying solvent. Once again, they get passed the CME requirement from traders who do not use as much margin and with seats there are few cases when FCM’s bump up against that limit. For every 100 million in collateral you can have approximately 20k e-mini S&P 500 positions at one time. I used round numbers in that example but I think 100 million is very light for a FCM, and 20k in positions at onetime is a lot.
Currently margin increases have very little if no effect on the market in terms of causation. I always leave room for correlation though, however weak they might be. With that being said, there are going to be some shakeups from the MF Global can change everything. The reason this break down happened is because the one who is actually in control of the margin was over margined. The FCM’s hate to lose a commission producing client but the most important thing is staying solvent. When all of this is figured out I believe they will find that they were using customers funds to fulfill margin that allowed the bet to happen.
For more information on how margins are calculated check out my friend Jeffery Carter’s post.
UPDATE: Margin and debit balances must be taken care of within 5 days for a non clearing FCM.
UPDATE 2: “FCM’s accounts are non-disclosed at the exchange/clearinghouse. (This is true for futures; cleared-OTC accounts are fully-disclosed at clearing.) This means that CME does not know the identity of the account owner in the back-office systems at FCMs. They often don’t even know the real account numbers, since back-office systems typically support “short-codes” or “profit-center” codes. This means that someone could log into their trading system (TT, CQG, Pats, Globex, whatever) and book trades for account “ELIRADKE” and in the back-office ELIRADKE would be mapped to your account at the FCM. So, except during occasional audits, CME does not monitor individual trading accounts.
FCMs are responsible for charging accurate margin requirements for all their accounts. The must at least charge the account the Exchange Minimum for the account’s portfolio but often FCMs add on a scale-up of 10% or 25% or 50% based on the account’s credit-worthiness.
If an individual account is undermargined, FCMs must generate a margin call, which is tracked and aged until the margin call is met, either by the account owner posting cash or collateral, or by liquidating the position, or sometimes even by market movement. If the account owner does not meet the call after a day or two, the FCM can liquidate the position. After five days, the FCM must liquidate an unmet call. The FCM would not cover the margin requirement/call itself, except by doing commodity funding through an offshore entity. This is relatively rare.
Remember, though, an FCM does not just turn over the sum total of all client margin requirements to the clearinghouse. FCMs generate a PCS report every day (position change sheets) and submits that to the clearinghouse, which the clearinghouse uses to compute that FCM’s Performance Bond Requirement, which is usually lower than the sum of the client requirements.”
I was wrong about the way maintenance and initial margin was calculated. This makes it much more likely that the market can be affected by margin changes but once again assumes that the trader cannot come up with more money.
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