CME Boosts Margin for Rate Swaps 12% on U.S. Default Concern
CME Group Inc. (CME) increased margin levels by 12 percent for the interest-rate swaps that its clearinghouse guarantees, citing the risk that negotiations over avoiding a U.S. government default will spur volatility.
The owner of the world’s largest futures market will boost the requirement over four days, with the first of the four planned 3 percent increases taking effect today, according to a notice posted on Chicago-based CME Group’s website.
The announcement was made as Senate leaders resumed talks aimed at avoiding a U.S. default. Today, Congress is poised to end the 16-day government shutdown and raise the U.S. debt limit. Unless Congress increases the limit, the federal government will be operating only on cash and incoming revenues starting tomorrow, and will begin missing payments between Oct. 22 and Oct. 31, according to the Congressional Budget Office.
“CME Clearing is closely monitoring the developments related to the U.S. reaching its debt ceiling,” CME Group said in the notice. “Anticipating possible market moves specific to this event, CME will increase margin for all” over-the-counter interest-rate swaps.
The exchange owner has $6.4 trillion in notional value of rate swaps that are active in its clearinghouse, said Laurie Bischel, a spokeswoman. Notional value is the amount used to calculate payment flows in swap contracts and doesn’t represent actual money changing hands.
The 12 percent margin increase could amount to $1.5 billion to $2 billion in additional margin before the effect of netted positions is accounted for, Niamh Alexander, an analyst with KBW Inc. in New York, wrote in a note to clients today.
“We expect the industry can relatively easily meet these demands and don’t expect much impact on CME’s business,” she said. “If anything the underlying cliff hanging negotiations in DC are probably good for business with all this volatility and hedging around it.”
Volatility in U.S. Treasuries as measured by the Bank of America Merrill Lynch MOVE index fell to 75.81 yesterday, compared with this year’s average of 72.48. The measure jumped to a seven-month high of 117.80 on Aug. 8, 2011, after Standard & Poor’s reduced the U.S. credit rating amid another dispute over increasing the nation’s debt limit.
Also yesterday, rates on Treasury bills due in October soared and the U.S. attracted the least demand at weekly bill auctions since 2009. The $35 billion in three-month bills were sold at the lowest bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, since July 2009. The ratio for $30 billion six-month bills was the lowest since October 2009. Rates on bills due Oct. 24 jumped to the highest level since the securities were sold in April.
CME Group’s clearinghouse guarantees futures and swaps contracts based on interest rates, Treasuries, gold, oil, the creditworthiness of companies, and currencies. Clearinghouses require margin as protection against losses should traders default on their obligations.
“This is a temporary measure and is subject to review depending on market conditions,” CME Group said in the notice announcing the increased margin for interest-rate swaps. “It will be rolled back upon resolution of market uncertainty stemming from this specific event risk.”
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