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2) What went wrong with Nickel?

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Bloomberg

@business

Mar 14

Official

The LME will reopen its nickel market on Wednesday, more than a week after the exchange suspended trading and canceled about $3.9 billion of transactions as it grappled with an unprecedented short squeeze trib.al/DvBvLjj

3) Let's say that some entity (X) has $2b of collateral and puts on a $3b short in a contract trading at $1 (so 3b contracts). Markets start to go up in price--eventually they're at $1.33. Now the trader has: position size: 3b contracts = $4b collateral: $1b

4) X now has a huge position on, and is fairly leveraged--$4b notional, 4x leverage. Another 25% move and the trader is underwater; each 25% move beyond that costs _someone_ -- the exchange, or insurance, or whatever is backstopping it -- about $1b!

5) The traditional margin model says: reach out to X and warn then to top up, _or else_. But X has at least a business day to top up. If it's a Friday evening, then they have at least 72 hours. Except there's a war going on in Ukraine, and commodity prices are skyrocketing.

6) By the time the next business day ends, there have been 3 days for volatility. A 25% move bankrupts the trader. A 50% move means that someone's out $1b of insurance. That could happen in 3 days! And, in fact, it did, in Nickel. (Note the weekend gap!)

7) There are really two problems here. First, the exchange margin calls based on _time_, not _price_. What does that mean? Well, when X reaches 6x leverage on a $4b position, it's time to issue a margin call.

Replying to

Would you say that you internal risk engine can take a _volatility_ parameters input in the maintenance margin level? Example of continuous risk margining process based solely on _price_ $VXX this morning following the announcement from Barclays.