Goldman client margin soared $4.5bn during wild October

CFTC data shows a huge jump in required client collateral at Goldman Sachs. Theories for the increase include an influx of big clients, margin hikes at CME and market volatility


Client collateral held by Goldman Sachs leaped by almost $4.5 billion last October, figures from the Commodity Futures Trading Commission (CFTC) reveal – by far the largest one-month change seen by any futures commission merchant (FCM) last year. The move highlights how volatile margin numbers can be and has prompted speculation at rival FCMs as to the cause.

"I don't know what happened," says a clearing head at a rival bank. "No one else has really moved that much. The graph is nearly flat for most FCMs except for Goldman. It's the biggest move I have seen in any of this data."

Other clearing heads agree, saying that while large swings in client collateral are not uncommon, a move of $4.5 billion is unusual. One makes the point that a jump in collateral will translate into a higher capital charge for FCMs once the US supplementary leverage ratio takes effect.

The CFTC numbers reveal the sum of the collateral posted by clients of Goldman's FCM to cover listed derivatives trades on exchanges in the US and overseas. It excludes swaps collateral.

Theories for the jump include one or more large clients porting their business to Goldman, a jump in collateral requirements for commodities futures trades at CME Group, and a general increase in volatility and risk positions during the month. October saw big moves in a number of asset classes, including the 30-basis point intraday swing in US Treasury yields on October 15. On the same day, CME broke its single-day record for contracts traded across all asset classes – volumes hit 39.6 million contracts, compared to the previous high of 26.9 million set on May 29, 2013.

I don't know what happened... It's the biggest move I have seen in any of this data

The number is more than three times larger than any other FCM saw during October. For the same month, UBS added just over $1 billion in client collateral and Newedge added just over $750 million. Barclays saw the greatest reduction in required collateral, down by just over $800 million, with the drop coming predominantly from clients trading overseas. JP Morgan fell by just under $650 million and Credit Suisse by $433 million.

Over the course of 2014, Goldman's required collateral has risen or fallen by more than $1 billion eight times out of 11. The closest move in 2014 is for the month of July, when client collateral rose by $3.77 billion. The following month it fell by just shy of $2 billion. During November it also fell by just over $2 billion. Data for December has not yet been released. In comparison, JP Morgan, the second largest futures clearer by required client collateral, only saw one monthly move larger than $1 billion.

The swings are significant at a time when many clearing banks are fretting about the amount of capital the business will consume. Segregated client collateral is a proxy for the risk of an FCM's portfolio of client trades. If required collateral is large, then this will likely correspond to large associated capital costs.

It is not clear what drove the increase at Goldman. The firm declined to provide an official comment for this story and clearing heads at other FCMs have warned against reading too much into the moves.

"You could port in a client with $2 billion in segregated assets on a day when the market is down and so end up reporting a number that is flat," says one clearing source familiar with the number. "I have seen that numerous times where there is a big down market and the numbers look lower but then the next day it fixes itself. The figures do not tell the whole story."

A second source claims the move was partly the result of Goldman picking up a few large clients from other FCMs, with those clients porting large positions to Goldman, resulting in a jump in required customer collateral. In addition, a lot of clients either took more risk during the month or saw the present value of existing trades shift significantly, says the source.

The source also claims the CME increased its margin requirements for some commodities contracts in October after FCMs complained the clearing house's models were not adequately sensitive to the volatility of some products. The concerns were triggered in part by tumbling oil prices. Clearing heads at other banks confirmed CME had increased its margin requirements on some commodities contracts.

A spokesperson for the CME says: "Parameters of the margin models are reviewed and adjusted as necessary based on market conditions, historical and implied volatility and other factors. Changes to parameters are made in normal course, and there have not been any major changes in our methodology beyond that."

Goldman Sachs is the largest futures clearer by some distance when ranked by required client collateral. Its total required client collateral as of November 30 was $29.3 billion. The second largest futures clearer is JP Morgan at $22.4 billion, followed by Newedge at $15.8 billion.

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