CCPs urged to widen collateral net as commodities spike

Broader acceptance of emissions certificates and letters of credit could relieve margin pressure

Clearing banks are asking central counterparties to expand the universe of non-cash collateral they will accept against commodity contracts, as heightened volatility and escalating margin demands put clients under intense pressure.

Russia’s invasion of Ukraine has threatened global supply chains, triggering a surge in the price of key commodities including, oil, natural gas, wheat and nickel. Clearing banks are demanding hundreds of millions of dollars in cash as variation margin to meet these mark-to-market moves. Large increases in initial margin are adding to the strain, as commodity clients are forced to stump up extra cash and collateral to cover rising counterparty exposure.

UK gas futures traded at Ice Futures Europe more than doubled between February 28 and March 8, hitting £5.39 per therm for a total lot value of £5,390. Base margin levels inputted into Ice’s margin model – known as the scanning range – jumped from £1,185 to £1,586 on March 4, a 34% increase. By March 9, this had further increased to £1,855.

“That’s a big jump for our clients to manage,” says a senior US clearing source. “I would say we are all hands on deck right now.”

A European clearing bank source warns that many CCPs are “quite fast” at calling for additional margin, checking price movements every 10 to 15 minutes, which are promptly passed down to clients. 

“Clients don’t like it [the intraday calls for cash],” says the source. “They understand the need for it, but it’s draining their resources. They’re trying to find ways to minimise collateral cost, so some of them might start sending non-cash, others want to post alternative collateral. We are engaging with CCPs to see if they can post alternative collateral.”

Examples of this alternative non-cash collateral include emissions certificates and letters of credit, which are accepted at some CCPs, but not others.

For example, CME accepts letters of credit though Deutsche Borse’s European Commodity Clearing (ECC) and Ice Clear Europe do not as these agreements are not permissible collateral under the European Market Infrastructure Regulation (Emir). 

Ice accepts gold but does not list emissions certificates as eligible collateral. ECC accepts emissions certificates but not gold or equities. It also accepts letters of credit as collateral, but only against spot trades.

Clients don’t like [the intraday calls for cash]. They understand the need for it, but it’s draining their resources

Senior US clearing source

Other FCMs agree collateral eligibility is too limited at some CCPs in commodities clearing. 

LME Clear accepts gold as well as LME warrants as collateral. For example, aluminium warrants can be used by members to cover aluminium exposure. 

A spokesperson for Ice did not immediately respond to a request for comment. A spokesperson for ECC confirmed that it accepts emissions certificates and recently waved a minimum 105-day holding period before the instruments become eligible for collateral use.

The calls come amid huge price volatility in many key commodities contracts, which some expect to continue as Russia’s military offensive rages on.

Front-month SRW wheat contracts at CME, which expire on May 22, jumped 33% between February 28 and March 8, to $12.14 per bushel. Margin on a $60,700 lot stood at $5,100 per contract on Tuesday. Collectively, Russia and Ukraine account for around 30% of the world’s wheat exports.

Nickel contracts traded at LME were halted early on Tuesday (March 8) as prices topped $100,000 per tonne, up from just $30,000 the previous Friday.

The US and UK announced a ban on imports of fossil fuels from Russia on Tuesday to maximise pressure on the oil- and natural-gas-rich nation. Ice’s benchmark TTF contract for European natural gas jumped from €99 on February 28 to €227 on March 7. Between March 1 and March 2, the front-month April contract increased from €121.7 to €165.5. The exchange increased margin requirements on the contract by 36% on Friday, from €43.1 to €58.70. The scanning range was further increased to €81 today (March 9).

Clients impacted by initial and cash margin calls include corporate hedgers that may be selling futures to hedge production, and may not have a balanced position with their FCM. However, even intermediaries which have locked in prices to sell forward to consumers have begun to suffer, since huge initial margin increases impact them too, says the European clearing bank source.

On the right side

Not all clients were caught on the wrong side of the moves. A source at a third US FCM said many of his clients were long commodities going into Monday.

“We’ve had some larger than normal calls, and a couple of markets have gone in different directions,” he says. “But they have all been with clients that have deep pockets for us, so liquidity is not a concern. There has been a subset of clients I’ve been calling for intraday liquidity, but otherwise a number of our clients have been on the right side of this move,” says the FCM source.

“Now hopefully they take positions on the big swings the other way round. We’re always cheering them on the way up, but don’t hold this in case it normalises within three days.”

The sources are anticipating further increases in margin requirements at key exchanges including CME, ECC, Ice Clear Europe, LME and others this week.

While waiting for clearing houses to adapt, some clearing firms are recommending applying a margin multiplier to commodities positions.

“Given the level of volatility, over-margining is something every single FCM should consider and use accordingly for each product and specific client,” says the European clearing bank source.

Editing by Helen Bartholomew