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Old 03-20-2020, 02:10 PM
OldOlds is offline
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Can someone explain "Clearing firm Ronin Capital unable to meet its capital requirements..."


https://www.cnbc.com/2020/03/20/clea...e-sources.html

The story assumes that I know what Ronin does, what CME is (Chicago Mercantile?), and that I understand whether this is a big F-ing deal or not...

I find financial markets fascinating, so more detail is more better.

[I figured since this seems related to the doomsday environment it should go here, but can be moved as appropriate]
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Old 03-20-2020, 02:53 PM
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CME is a TLA for cystoid macular edema, a painless disorder which affects the central retina or macula.
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Old 03-20-2020, 03:41 PM
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CME is a TLA for cystoid macular edema, a painless disorder which affects the central retina or macula.
In context it is Chicago Mercantile Exchange. However I don't know about the rest of it.
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Old 03-20-2020, 04:14 PM
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It's a medium deal. It's like as if one of your power generating stations went off line because of the corona virus: it's a big deal for the company involved, it has no effect on you because the other power stations take up the slack, but it indicates that there is a lot happening in the stock market, and it reminds you of what would happen if it all went to shit (like with the GFC/ mortage crisis).

A clearing firm is part of the infrastructure of the stock market. An infrastructure failure would be bad, like the GFC, but the failure of one company is just the failure of one company.

The capital requirement regulations are what save the stockmarket infrastructure from catastrophic failure every week. This company couldn't meet the regulations, so it's been removed from the system. (Or suddenly became much smaller) That is what is supposed to happen, nothing to see here.

Clearing companies handle the mechanics of the buying and selling. They have to have enough money so that if there are bumps in the prices, both sides of the deal still get what they agreed to: the clearing company takes any loss that happens because one side of the deal made promises they can't fulfill (like when I agree to pay, but then go bust before I pay). So, the more people go bankrupt or renege in the middle of a deal, the more money the clearing house has to have to keep the system going. If they run out of capital, they aren't permitted to operate any longer.

This company clearly hit some bumps: the stock market stepped in and sold some of their assets.
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Old 03-20-2020, 04:59 PM
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“Unable to meet capital requirements” means they were margin called. They couldn’t come up with the money so they were liquidated. Ronin was a proprietary trading firm that made markets and speculated on Vix futures which is an index of how volatile the stock market is (based on the volatility implied by the S&P500 options price). As you can imagine, thats been pretty, pretty volatile of late - in fact the Vix was trading 14ish in Feb and printed over 80 this week. Since they were trading futures, they only had to put up about 5% (that’s average for futures) of the cash value of the securities (well, index). If the price moved more than 5% against them, they had to add more money to the account. I’m simplifying here but that’s the gist. They were typical shit traders who never learned how to manage risk. Here’s an investing tip: wait for the third hedge fund to blow up or the third credit event and then buy equities. Like human deaths, corporate deaths always come in threes.*

* Not an actual investing tip. Kid Charlemagne will not be responsible for any losses due to following the third time’s a charm rule.
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Old 03-20-2020, 10:33 PM
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Quote:
Originally Posted by Melbourne View Post
It's a medium deal. It's like as if one of your power generating stations went off line because of the corona virus: it's a big deal for the company involved, it has no effect on you because the other power stations take up the slack, but it indicates that there is a lot happening in the stock market, and it reminds you of what would happen if it all went to shit (like with the GFC/ mortage crisis).

A clearing firm is part of the infrastructure of the stock market. An infrastructure failure would be bad, like the GFC, but the failure of one company is just the failure of one company.

The capital requirement regulations are what save the stockmarket infrastructure from catastrophic failure every week. This company couldn't meet the regulations, so it's been removed from the system. (Or suddenly became much smaller) That is what is supposed to happen, nothing to see here.

Clearing companies handle the mechanics of the buying and selling. They have to have enough money so that if there are bumps in the prices, both sides of the deal still get what they agreed to: the clearing company takes any loss that happens because one side of the deal made promises they can't fulfill (like when I agree to pay, but then go bust before I pay). So, the more people go bankrupt or renege in the middle of a deal, the more money the clearing house has to have to keep the system going. If they run out of capital, they aren't permitted to operate any longer.

This company clearly hit some bumps: the stock market stepped in and sold some of their assets.
Nice summary.
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Old 03-20-2020, 10:51 PM
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Quote:
Originally Posted by Melbourne View Post
A clearing firm is part of the infrastructure of the stock market. An infrastructure failure would be bad, like the GFC, but the failure of one company is just the failure of one company.
Here is a list of all of the CME clearing firms.

Also notice that this wasn't in the news until after everything was settled, which happened very quickly. What happened is not supposed to happen, but a standard procedure is invoked when it happens. The futures market is quite good at risk management that way.
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Old 03-22-2020, 06:39 PM
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It's a big deal for the hundreds of people at Ronin Capital that just lost their jobs. For the broader financial system, the failure of Ronin isn't a big deal. Based on what I've heard, they were short volatility (betting that the market would calm down/stop crashing). As has been said, their losses overtook their capital, and they had to auction off the remainder of their positions to other market participants. If we start hearing about the big market making firms (Eg: Citadel, Susquehanna, etc.) blowing up, things could get really hairy.
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