ON SEMGROUP AND MARGIN REQUIREMENTS

WALL STREET JOURNAL
Jul 29, 2008

The collapse of  SemGroup LP, which filed for bankruptcy after losing $2.4 billion on energy contracts, has focused attention on margin requirements — cited in the company’s documents as a culprit behind its woes. “Increased margin requirements have had a severe negative impact” on the company’s liquidity position, documents said. During the three months ended March 31, the firm and its affiliates posted $1.96 billion to satisfy margin deposit requirements, more than double the amount for the same period the prior year. Futures exchanges like the New York Mercantile Exchange, where SemGroup traded, set margins so that customers have enough money set aside in case their trading bets go awry. The exchanges have been raising the amount necessary to participate in a crude oil trade this year, because of soaring prices and volatility. Financial-market experts point out that while trading firms may struggle with margin requirements, increased margin doesn’t become an issue unless the trade is a loser to start with. “It’s a standard argument” when traders “get into trouble,”says HANS STOLL, a finance professor at Vanderbilt University’s school of management.