Is The CME Preparing For An Eventual Comex Default? – Dave Kranzler

I think a lot of precious metals futures contracts are going to undergo a disappearing act.  – John Titus of BestEvidence

TND Guest Contributor:  Dave Kranzler

The CME curiously reported that it received notice from the Federal Reserve that it is authorized to open an account at the Fed which would “allow it to better safeguard cash deposited by its traders”  CME/Fed Account.

This is event is notable for several reasons.  First and foremost is the fact that the CME was designated as a “systematically important” financial institution as part of the Dodd-Frank “hoodwink the taxpayer” Act.  If anyone can explain to me why a corrupted derivatives clearinghouse and trading exchange is “systematically important,” I will receive the explanation with an open mind.

To be quite frank, no bank is systematically important, especially the big banks which are continuously wrist-slapped for committing criminal acts of fraud and screwing the public. As has been demonstrated, the “systematically important” designation is nothing more that a guarantee to the banks that Taxpayer money will be tapped to ensure bonus payments may remain uninterrupted in the event of a bank collapse.

Another puzzling aspect of the CME’s decision to open a custodial account at the Fed is in the CME’s statement that the Fed account will allow it to better “safeguard” cash deposited by its traders.  Note that the account is limited to “clearing members proprietary margin” accounts.   This would be the cash put up by Comex clearing members – like the Too Big To Fail Banks (JP Morgan, Goldman, Citi, HSBC etc) – against margin requirements.

Why is a Fed custodial account any better than a custodial account held by a big bank?   Is this an unintended signal from the Fed that the big banks are no longer safe as custodians of cash deposits? 

To me this reeks of the CME enabling a mechanism that “ring-fences” any cash equity put up by clearing members for the purposes of protecting that cash against an event of default or bankruptcy.  It would give the CME control over this cash.   This is what occurred when Jon Corzine incinerated MF Global and JP Morgan was able to grab any and all available collateral for its own benefit.

Again, this suggests to me that CME is concerned about the risk embedded in the proprietary futures and derivatives positions of its clearing members.  I would suggest that the CME is specifically nervous about the precious metals futures positions held by JP Morgan, HSBC and Scotia.

With the absurd imbalance between Comex gold/silver contracts and the amount of underlying physical gold/silver bars held at the Comex for delivery, it’s not a question of “if” the Comex eventually defaults but a question of “when.”   Anyone who disagrees with this assertion is either in a state of pathetic denial or appalling ignorance.

Don’t forget that Comex contracts have a “force majeur” provision which enables the cash settlement of these contracts.  Given that the outrageously large short positions in gold and silver futures contracts are primarily held by the big banks, who also happen to be clearing members, the move by the CME to ring-fence cash collateral at the Fed which is deposited by the big banks who are short gold/silver futures expressly suggests that an event of default may be closer than any of us realizes.

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About Dave Kranzler:

 I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics.  Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.

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