CME, ICE Cut Margin Needs to Limit MF Global Fallout

Tallahassee, FL 11/7/11 (StreetBeat) - CME Group (NasdaqGS: CME) and IntercontinentalExchange Inc (NYSE: ICE) moved over the weekend to limit the fallout from the MF Global Holdings Ltd (Other OTC: MFGLQ.PK) bankruptcy on futures markets by lowering margin requirements on some accounts.

The CME also asked brokers who have taken over customer accounts from MF Global, which filed for bankruptcy protection on October 31, to not disburse any of the money until at least the close of business on Tuesday as it looks to verify the amounts involved. "The exchanges have lowered the margins to help the transition until the cash arrives," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney. "While it's a prudent thing that the exchanges are allowing people to transfer the positions away from MF Global, funds should also be transferred as well, instead of having people pay the margins twice."

Traders had worried that a rush to cover margin requirements on MF Global accounts transferred to other brokers could lead to heightened market volatility. There was little evidence of this on markets for CME futures like U.S. crude or wheat on Monday.

Volumes on ASX Ltd's Australian grain futures leapt on Monday, after slowing to a trickle last week, with January wheat trading a record quantity.

PROVIDING RELIEF
The ratio of the initial margin, paid when an investor has to meet a margin call, has been changed to zero versus the maintenance margin, CME said.
Initial margins are higher than maintenance margins to provide an additional buffer against losses.

For example, the maintenance margin on 2011 Nymex crude oil contracts is $6,000, and the initial margin is $8,100, according to the CME website. The margin reduction for MF Global clients is aimed at providing "market relief to customers whose accounts have been disrupted by this event," the Chicago-based CME said in a statement on November 5. "The margins differed according to products," Jeremy Hughes, a Singapore-based spokesman at CME, said in an e-mail response to queries.

IntercontinentalExchange Inc (NYSE: ICE), which operates the London-based ICE Futures Europe, said in a statement that ICE Futures U.S. is temporarily lowering the initial margin rate for speculative accounts to a level equal to the maintenance margin rate for all contracts. "This action is being taken to mute the impact of the transfer of accounts from MF Global Inc. to other clearing members," the exchange said.

ACOUNTS ON HOLD
The collapse of MF Global comes at a time when the Commodity Futures Trading Commission, Securities and Exchange Commission and bank regulators are writing some 400 new rules required by last year's Dodd-Frank financial reform law. The changes heightened futures firms' concern of an increase in operational costs and limits on how they invest customer funds for their own benefit.
CME Group, the biggest operator of U.S. futures exchanges, has directed members to delay the distribution of transferred funds and proceeds of the liquidation of any transferred positions until the calculation is over. There have been conflicting reports about the whereabouts of $633 million of missing customer money, whose disappearance derailed MF Global's effort this week to quickly sell a variety of assets.

"We will notify firms promptly as customers' accounts are verified and the hold is lifted," the CME said. The calculation is expected to be completed by the close of business on Nov 8, it said.

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