What Does CME Know?

Hmmm…. I was asked about this in an interview yesterday (it’ll be published in the next few days) and thought it was worthy of a Ticker comment as well:

Washington, DC—At the request of CME Clearing Europe Limited (CMECEL), pursuant to Section 7 of the Commodity Exchange Act, the Commodity Futures Trading Commission issued an Order on March 13, 2012, vacating the registration of CMECEL as a derivatives clearing organization.

The Order of Vacation is available on the CFTC’s website (see Related Links).


Well, the firm did ask — they didn’t get thrown out, they walked off.

One can only surmise that they have detected a potential problem that they don’t want to be a part of.  Might it be a question of whether the CDS on European debt have any sort of actual margin against them, and if not, whether they might get “urged” (or worse) to backstop those bets?

I suspect so.  I further believe, as I’ve repeatedly noted, that the European banking system is dramatically over-levered and no attempt has been made at all to take that leverage down.  This was remarkably stupid prior to 2007 but now is into the realm of criminally stupid, not that anyone seems to care from a regulatory point of view in the EU.  A good part of the reason for that willful blindness is simply the structural flows from Germany (in particular) to the periphery — in short the entire European “experiment” is predicated on continuing to hide the transfer of wealth from German citizens to the periphery who cannot afford the goods exported from Germany to their nations.

If and when the Germans decide they’ve had enough of this crap — or the rest of the PIIS decide to say “since Greece got to pay half, we demand equal treatment or you’ll get nothing” the game will truly be over — and that blowup is likely come with little or no warning. Now add to that backdrop the oft-repeated CME claim (right up until MF Global blew up) that no customer of a CME firm had ever lost a nickel of segregated funds and you’ve got the making of a real mess.  The system survived the first “dislocation in the farce” but would it survive another?

Probably not.

This move by the CME thus looks to be defensive — and well-founded.

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