With this in mind, Initial Margin rates for LME calendar spreads are surprising (see table): The recent LME valuation spread is highlighted in green, being the difference between the Dec/Dec prices (+ve for contango, -ve for backwardation), and the other figures show the Initial Margin in US$/Mt for:
• a long spread (“Borrow”), • a short spread (“Lend”), • a borrow at $100 Contango, i.e. Forward price is +$100 higher • outright position on the front month Chart 1: US$/Mt basis 14 Sept’ 18
AL
DEC18-DEC19 VAL SPREAD BORROW LEND
BORROW AT $100 CONT OUTRIGHT DEC18
DEC19-DEC20 VAL SPREAD BORROW LEND
BORROW AT $100 CONT OUTRIGHT DEC19
Source: ADMISI Risk / ION Margin Direct
Note how the Initial Margin doesn’t change if the spread is borrowed or lent, or if the spread is borrowed at $100 contango rather than at the market valuation. Indeed, a low-risk borrow at full finance requires the same Initial Margin as high risk spread lending at full finance.
Also note that the outright position for Dec19 Zn requires less IM than the Dec19-Dec20 Zn spread.
Short dated carries: The previous Initial Margin rates showed no differentiation between the risk of borrowing or lending contango spreads or the spread rate used, but IM rates for short dated carries look even stranger.
The following table shows the IM rates for one day borrows across 18-19 September and also 26-27 September, with the table showing:
• the valuation spread (basis COB 14 Sept 2018), • the IM per Mt, on a borrowed position • Full Finance (FF) for that period basis maximum rent and 3% interest, and
• the Risk on the borrowed position, being the difference between FF and Valuation, (ignoring the potential impact of light/heavy warrants on LME Tom-Next due to a sharp price move)
Chart 2: US$/Mt basis 14 Sept’ 18 US$/MT BASIS 14 SEPT' 18
18 SEPT TO 19 SEPT VAL SPREAD IM PER MT, BORROW
FULL FINANCE (FF) AT 3% INTEREST FF MINUS VALUATION (BORROW RISK)
26 SEPT TO 27 SEPT VAL SPREAD IM PER MT, BORROW
FULL FINANCE (FF) AT 3% INTEREST FF MINUS VALUATION (BORROW RISK) Source: ADMISI Risk / ION Margin Direct
AL $0.50
$23.00 $0.74 $0.24
$0.56
$25.00 $0.74 $0.18
CU $0.25
$13.04 $1.04 $0.79
$0.75
$14.04 $1.04 $0.29
NI
-$0.50 $12.00 $1.64 $2.14
$1.04
$11.00 $1.64 $0.60
ZN $0.75
$30.00 $0.74 -$0.01
$0.42
$30.00 $0.74 $0.32
17 | ADMISI - The Ghost In The Machine | September/October 2018
$32 $89 $89 $89
$169
$32 $96 $96 $96
$165 CU
$41 $54 $54 $54
$491 $35
$103 $103 $103 $478
NI
$288 $133 $133 $133
$1292
$195 $359 $359 $359
$1258 ZN
-$43 $138 $138 $138 $216
-$55 $239 $239 $239 $210
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