my jr school level photoshop talents
Summary: Imagine you are playing chess and are one move away from being checkmated. You decide to amend a rule to move your king magically out of danger, would you not use that rule? That is what may have happened with futures contracts. This post investigates in-depth the CFTC, Goldman Sachs, and the CME’s possible collusion to avoid significant damage to the financial system from bad futures positions.
Contents:
- HYPOTHESIS
- CME’S RISK MANAGEMENT
- REFRESH ON FUTURES CYCLE
- TIMELINE OF CFTC MEETINGS
- TRANSFER OF TRADES AMENDMENT
- HOW WE CAN VERIFY
- CONCLUSION
The last few weeks have been filled with a lot of anticipation of the fall futures rollover window. (We now know futures trading is allowed to be rolled over until the expiry date). I’m a firm believer that the previous spikes/price movements that occurred earlier in the year have been a function of settling the rollover window of quarterly futures contracts.
Now I think I have solved why there wasn’t the same price action during this window, and my hypothesis will go into depth on that. As usual, nothing here is financial advice, and my hypothesis could be wrong. The great thing about the scientific method is that it should eventually reach the truth. I am not asking anyone to debunk me, but rather if I am wrong, help me get this right. I want to get as many eyes on this theory as possible and hopefully, help uncover the mechanics of what is going on. I also want to shout out to u/toxsic99 for helping me dig. This is a long post for please try and get through it.
- HYPOTHESIS:
The CME group is a counterparty to Goldman Sachs/other SHFs, and has moved a giant bag of Memestock short positions. Additionally, the CFTC let them transfer those positions as realized losses would have significantly hurt the systematically important derivative clearinghouse and the global systematically important bank.
- CME’S RISK MANAGEMENT
A few weeks ago I stumbled upon some information regarding the Chicago Merchant Exchange Group (CME) that points to manipulation with Commodities Futures Trading Commission’s (CFTC) stamp of approval. We will get to that.
First, we need to investigate who the CME group is….
CME Group Inc. is an American global markets company. It is the world’s largest financial derivatives exchange, and trades in asset classes that include agricultural products, currencies, energy, interest rates, metals, stock indexes, and cryptocurrencies futures. It has been designated as a Systemically Important Derivatives Clearing Organization (SIDCO).
CME Clearing serves as the counterparty to every cleared transaction, becoming the buyer to each seller and the seller to each buyer, maintaining a matched book, and limiting the credit risk by guaranteeing the financial performance of both parties. In a bilateral system, each participant faces the concentrated, individual credit risk of the other party to the transaction. Satisfactory fulfillment of the transacted contract or agreement depends primarily on the creditworthiness and proper behavior of each individual party to each transaction. CME Clearing mitigates counterparty risk through becoming the counterparty to both sides of the transaction, while utilizing risk tools such as: the collection of a performance bond (also referred to as initial margin), daily mark-to-market cycles, and the collection of Guaranty Fund contributions, among other tools. By this mechanism, the concentrated credit risk of each transaction is transformed into a well-diversified and regulated risk supported by the financial safeguards system Link on risk
Let’s look at their performance bonds and Guaranty Funds for the past few years… Link to quarterly reports
In the last few months, the Performance bonds and Guaranteed Funds have ballooned to $141 Billion Dollars. That is roughly a $104 Billion increase in 18 months.
What are performance bonds?
Performance bond requirements are good-faith deposits to mitigate non-financial performance on open positions, acting as an ex-ante risk-based tool to cover potential future exposures. Through CME CORE, a web-based tool, CME Clearing offers full transparency to market participants by giving them the ability to calculate and evaluate performance bond requirements for all products cleared by CME Clearing. CME Clearing permits Clearing Members to deposit performance bonds sufficient to cover their net exposures for their proprietary positions. CME Clearing calculates performance bond requirements for each customer, collecting gross performance bond for the aggregate cleared swap customer account and customer segregated account, for exchange-traded derivatives.
What happens if a defaulting member’s position is worse than the balance of performance bonds & guarantee funds? Link
TD/DR In the last 18 months, the value of the CME group’s Performance Bonds/Gaurarentee Funds grew 381%. As these are used to mitigate risk in futures/swap contracts, it looks as 1 of 2 things may have happened in the last couple of months
- Their current customers may have some increasingly risky positions, and the vast increase in these bonds/funds reflects that.
- They may have had a significant increase in new customers and the increased bonds/funds are due to that
- REFRESH ON THE FUTURES CYCLE
These are graphs that were previously posted that show a significant uptick in the price during rollover windows. It was predicted that we were to see another spike from August 27th until Sept 17th. I am assuming those who are reading this are familiar with Criand’s Cycles DD.
- TIMELINE OF CME MEETINGS
On January 27th (during the baby squeeze), the CME reached out to the CFTC regarding a participant/participants who had exceeded a position limit and wanted an exception and an amendment to the rule, under these provisions the position needed to be concurrent with a limit set for March 15th, 2021. Link
Let’s see if having a giant swap position would technically qualify for such an exception with these amended rules….
Based on the new amendment it looks like they could hold the position
As the giant position was not settled by March 15th, the CFTC and CME group connected on April 11th to discuss the current situation at hand. It looked as if a participant/participants of their clearing house are in a lot of trouble and the credit risk was not settled. Link
Now, why would the CME group want to discuss segregation and bankruptcy with the commodities futures trading commission? That’s an interesting question. Let’s see if anything happened regarding the CME after this regulatory meeting…
A week after the April 9th meeting new documentation was released between CFTC and the CME group. It looks like an exception was granted regarding a person/s who was already in excess of a position limit, who needed an exception. Now it’s possible that this could be an independent event, but I suspect it could also be the same position that needed an exception in late January. Now, this is speculative but let’s say this position that needed an exception twice already is a ticking timebomb. Given the mechanics of futures trading, those same participants are required to settle the change in the underlying position.
If only we had a clue who might need that position exception. (Thank you Lobbying Disclosure Act!)
A week after the April 9th meeting new documentation was released between CFTC and the CME group. It looks like an exception was granted regarding a person/s who was already in excess of a position limit, who needed an exception. Now it’s possible that this could be an independent event, but I suspect it could also be the same position that needed an exception in late January. Now, this is speculative but let’s say this position that needed an exception twice already is a ticking timebomb. Given the mechanics of futures trading, those same participants are required to settle the change in the underlying position.
If only we had a clue who might need that position exception. (Thank you Lobbying Disclosure Act!)
https://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/dfmeeting_100220_1720
https://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/dfmeeting_070220_1703
https://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/dfmeeting_071020_1706
Now I’m not convinced that all 3 meetings were on the same day and may be more likely that it is a reporting error, but I find it extremely suspect that Goldman Sachs is the only bank to visit the CFTC within the first half of 2021 (minus the time MS joined the ISDA meeting). I propose that Goldman Sachs may be a counterparty on some of these Memestock positions.
(Side note the last meeting must have been super important as way more executives attended that than a usual meeting. Vice President Marta Poleszczuk who led most meetings just left Goldman Sachs after 16 years in June, that doesn’t give me a vote of confidence. Theo Lubke another managing director has also left Goldman after 11 years.)
Just for kicks and giggles how does Goldman’s derivatives position currently sit?
- TRANSFER OF TRADES AMENDMENT
On August 11th the CFTC sent a letter to Mr Chris Kirkpartrick of the CME regarding the implementation of a proposed amendment on the Transfer of Trades and Customer Accounts rules.
This amendment discusses a new provision for a clearing member who wishes to manage the liquation and hedging of a defaulting customer. This clearing member has the contractual right to transfer the position. These amendments were effective at the beginning of the last rollover window (August 26th 2021) LINK
What are the core principles of this amendment….
This is the new rule/rules added to the amended CME rulebook effective Aug 26th.
More evidence to support trade transfers
The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. It will send questionnaires to different financial organizations regarding risk, and other information. Please see below the answers to some questions regarding default and risk that were asked of the CME group. Link
- HOW WILL WE VERIFY THIS THEORY? Link
Well, so far we haven’t seen remotely the same volume that we expected during the last 2 rollover spikes. There has been some price movement that has been in Gamestop’s favor, but nowhere near what we saw previously. Therefore this thesis is indeed plausible. I was wondering if there would be any way to verify my hypothesis. Well, I have come up with 2 ideas.
1) We should see some declaration probably within a few short weeks on CME’s notices as per their house rules.
I would expect to see some participants listed within a week or 2.
2) I would expect to see some changes or something out of place regarding their next quarterly report due Oct 27th.
- CONCLUSION
Now if the price movement in the previous cycles was from settling the change of a futures position to the CME, then in theory either the CME is now holding the positions/or has moved the position due to the default of the counterparty. This theory is still plausible as we did not see our projected settling/price movement during this rollover window. I also propose that Goldman Sachs is indeed one of the counterparties in the meme stock futures trade. I am not saying they are a defaulting party, but I suspect they are in a world of hurt. Please note these positions still need to be closed, but what will be the catalyst for this will not be from futures.
We should in theory see at least 1 declaration notice of default in the upcoming weeks as per CME’s own rules and regulations.
Alternative possibilities
It is possible that those futures positions could have been rolled prior to the rollover window.
I have been told that it is also possible the position has been covered in a cash account in exchange for synthetics on the secondary market.
SHFs have let the expiry window run through and will settle the position (very unlikely)
Discussion
I want the readers to think about what the alternative to this is. I speculate the MOASS would not occur prior to having the regulatory pieces in place. I believe a controlled MOASS is preferred by those in charge rather than everything crash all at once without a plan. I wouldn’t expect the MOASS to occur until at the least NSCC 2021-010 is active.
If this is correct next week we should start to see some sell-offs as liquidations start. You should be wary of a narrative that these sell-offs are due to Evergrande. If there’s a correction is likely due to both.