Marex Spectron, the commodities broker, will restrict many of its customers from taking new positions in oil futures contracts expiring in June as well as raising its margin requirements, in a move to insulate itself and its clients from further wild swings in prices.
The London-based group, which has grown quickly since the last financial crisis under the stewardship of a group of former Lehman Brothers bankers, told clients it was taking the action after seeing “extreme stress” in futures trading.
The move is another sign of the strain oil markets are under, after US crude prices crashed into negative territory for the first time ever this week, driven by a lack of storage space for the world’s plentiful oil in a time of weak global demand. On Monday, West Texas Intermediate, the benchmark US crude contract, traded below zero for the first time, closing at negative $37 a barrel. Storage is filling up fast in Cushing, Oklahoma, the delivery point for the WTI contract.
“In order to protect our clients’ interests we felt it prudent to put in place some temporary measures to mitigate some of the volatility,” Marex said in a letter to clients late on Wednesday.
The broker said it would “restrict” new positions in June futures for both WTI and Brent, the two biggest crude contracts, operated by CME Group and Intercontinental Exchange respectively. The June WTI contract is not due to expire for another four weeks, although Brent’s June contract expires on April 30.
“Liquidation of existing positions is permitted,” Marex said, and added there may be exemptions to the restrictions.
The broker will also raise the amount of initial margin, a form of insurance against the trade going wrong, that clients must pay. This will increase to 125 per cent of the exchange’s margin requirements, from the current level of 110 per cent. The measures will come into effect at the end of Thursday.
The volatile moves have put the spotlight on the middlemen who clear futures and options on behalf of their clients. Marex is one of the bigger non-bank futures brokers and clearers, holding around $1.5bn of customer assets in February, according to data from the Commodity Futures Trading Commission.
Interactive Brokers, a rival, said on Tuesday it faced an $88m loss after clients were caught on the wrong side of Monday’s outsized moves. Marex said in the letter that its balance sheet remained strong.
Analysts are expecting more turbulence in the coming months. CME Group has adapted the model it uses to calculate options to account for the previously unprecedented negative pricing. WTI’s historical plunge has also forced traders and brokers to rethink how they calculate risk. The USO, the world’s largest oil-backed exchange-traded fund, has been shifting money into later-dated contracts to protect its investors.
Citi analyst Ed Morse said investor nerves over storage are now being reflected in the June WTI contract, and the spreads between June and July prices, as well as Brent, despite production cuts from oil-producing nations due to start next month.