CMC Markets has decided to sharply reduce the levels of margin required on government bond contracts traded through it, a move that goes against the regulatory grain as it were.
CMC Markets‘ reduction in margin levels are quite substantial with deposit levels falling from 20% of the trade value to just 3.30% on a wide range of government bond contracts. For example, under the old regime if you wished to trade £50,000 notional of UK Gilts your initial deposit would have been £10,000 but under the new margin levels, that figure is reduced to just over £1650.00 that’s quite a difference. The new margin rates will apply to bond trading from the market open on September 29th.
Retail clients have often shied away from bond contracts in the past, perhaps because they sound complicated what with the inverse relationships between yield and price etc.
But in truth CFDs and spread bets on these type of products work in pretty much the same way as any other margin trading contract, and as CMC Markets analyst Michael Hewson points out in a brief note that accompanied the margin reduction announcement, government bond prices across the globe “have gone on a tear” since the beginning of the year and with central banks cutting rates and re-introducing QE (bond purchases) in the case of the ECB, their prices may be pushed higher still.
Of course, government bonds are a classic safe haven and as such their prices can often reflect market sentiment, when markets are risk-off bond prices tend to appreciate as money flows into bonds and out of riskier assets. However, when risk-on is the flavour of the day money moves out of bonds back to risk assets, such as equities, and bond prices will typically fall as a result.
The upshot of that is that CMC Markets has reduced the margins on a series of instruments that are perfect for big-picture asset allocation trades.
Presumably, these margin reductions are aimed at increasing the volumes of bond contracts that CMC’s client base trade through it and it looks like a shrewd move. How refreshing it is to see innovation and what we might call entrepreneurial flair from a broker in the current regulatory environment. The question now is will CMC Markets’ competitors follow suit or stick with the higher rates of margin that they currently apply to bond trades?
If the costs and level of capital commitment required to trade bond contracts, on margin, come down across the board then that can surely only be to the benefit of retail traders, so watch this space.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.