Saturday, April 6, 2013

JCG’s- what to expect next…@ Margin Call time...

On Sunday, JCG’s will trade once more. There are few interesting developments:
  1. Interactive Brokers eliminated day-trade margin (usually 25% or overnight initial though IB generally prefers 50% of initial)
  2. Variation Margin Calls will have till the next business day to be settled if new cash is being posted.
Undoubtedly, IB, as usual is ahead of the curve, GoldmanTAX is only too happy to take their house risk to 500 to 1 rather than the current 400 to 1 and at the same time blow up their customers…so they are not changing margin requirements just yet. However, IB is ahead of the curve and this is an ominous omen. IB was well ahead of the curve in 2008 eliminating intraday margin for all equity futures prior to the collapse. They also, often run conservative initial and maintenance margin marks resulting in higher equity requirements than the exchanges when they feel like it is warranted. 

Pertaining to futures traders who have been holding JGB positions may have entered into a variation margin violations: 
  • accounts that dropped below maintenance margin intraday, this infraction would require them to post the equity to their account if only an intraday infraction occurred and the account will required to be brought to full initial margin compliance…by liquidations by the close of the session of new equity by sometime early the next day
  • accounts that closed below maintenance margin and is now required to post initial margin collateral. Generally, an account must close contracts prior to close of trading if new equity will not be posted. If new equity will be posted, they will have some time, as in the next day to wire funds. If new equity is promised but net recieved a trading account will likely go into restricted status and liquidations will occur.
If variation margin calls are not met then the broker has the liberty to close contracts to bring the account into compliance…you can bet that when you lose nearly 6 months of gains in the JGB futures in a few minutes, there will be variation margin violations and there will be people scrambling to post equity…when the JGB go lower for this and other reasons then those calls will only get bigger. Similar situations happened in Silver when it gapped from 50 to 40…and triggered stops and margin selling for pyramided positions…it did not take long for accounts to go into a debit equity state…and pressure account to within days be forcibly selling silver in the upper 20’s as i recall. I am imagining that this will likely be on the docket for many Japanese futures products and other financial instruments.

Though it may seem easy to relegate these issues to a the few futures traders that are out there, this is NOT correct, the traders of these type of futures are most often institutions and banks…many of whom are now sitting with large margin risks and need to start thinking about where they are going to find new collateral.
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