By Greg Peel

The Dow fell 389 points or 3.2% while the S&P dropped 3.7% to 1229 and the Nasdaq lost 3.9%.

Financial markets had remained relatively calm over the escalation in the European crisis which has brought Italy into the spotlight, if one makes comparisons to the August-September period which was all about Greece. Either the general feeling was that Italy's problems could be resolved, particularly with the resignation of Silvio Berlusconi, or perhaps markets were simply trying to convince themselves everything would be okay. That all changed last night.

Last night international clearing house LCH Clearnet decided it was overexposed to potentially volatile Italian sovereign debt and thus decided to increase the margins on bond trading. It was no small increase ? margins on 7-10 year Italian bonds rose from 6.65% to 11.65%. We often see such margin increases in commodity futures, such as in copper and silver in recent times, which were once considered more volatile than sovereign debt. But the bottom line is if you can't afford the new margins on the positions you're holding, you have to reduce your positions.

The timing may have been necessary, but is otherwise very unhelpful. In short, the margin increase alone saw Italian ten-years cross the line at 7% last night to be trading at 7.25%. It was at this point each of Greece, Ireland and Portugal conceded to the IMF that a bail-out was required. Add up the debt of all three, then multiply by 2.7, and you have Italy's debt at E1.9trn. It is estimated the bail-out fund for Italy would need to be E1.4trn. At this stage the plan is to leverage up the EFSF to E1trn.