The CME Group – the world’s “leading and most diverse derivatives marketplace) has increased the price of trading Treasury futures. This, according to a recent Reuters article, is an “effort to curb market swings created by growing fears of a government default.”
This latest action comes after CME increased the Treasury futures’ margin requirements. Usually, margin requirements are increased through an exchange which thereafter raises “haircuts to discourage excessive risk-taking, in a bid to reduce volatility.” Trading is discouraged by wild market swings which then damages revenue of an exchange. Just last night the exchange said it plans to increase the “haircuts”/discounts on the Treasury collateral that it is to accept at the end of business this Thursday. The last change it made like this was made in December 2007. Ultimately, this means investors and traders are going to need to “post more Treasuries to back their CME futures and options holdings.”
US Treasury Reaction
The American Treasury market has been undergoing significant tension recently. Worldwide investors are currently looking at the possibility of a US default next month if lawmakers are unable to make a deal on increasing the limit for the national debt. International investors are currently anticipating a Greek default and are also worried about the significant slowing of the American economy. American lawmakers had problems dealing with debt plans since they were not offering much option for compromise. This thus has upped “the threat of a ratings downgrade and default that could sow chaos in global markets.”
CME Response
Michael Shore, a CME spokesman, said that haircuts are reviewed every month and changes are made as needed. A 0.5 percent haircut on American Treasury bill as collateral. This is compared to the percentage rate which is currently zero.
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