Home > For Professionals & Companies > SFE Products and Services > Clearing > Operations > SPAN Margining > SPAN Margining

• Print page

SPAN margining

• Introduction
• How does SPAN work?
• Example 1: SPAN margining of futures and options
• Example 2: An inter-month spread transaction
• Example 3: An inter-commodity spread
• More Information

Introduction

SPAN or Standard Portfolio Analysis of Risk¹ is a margining system developed by the Chicago Mercantile Exchange (CME) in 1988.

Since it's introduction, SPAN has become the most widely adopted margining system in the international futures industry.

The success of SPAN stems from its effectiveness in matching initial margin requirements to risk. By using a set of pre-determined parameters set by the Clearing House, SPAN assesses what the maximum potential loss will be for a given portfolio over a one-day period, and matches the level of initial margin to cover this risk. In calculating the amount of margin required, SPAN recognises the unique characteristics of options while also taking into account other factors such as inter-month and inter-commodity spread relationships.

The use of SPAN is of considerable benefit to SFE Clearing Participants and their clients as it provides results which more accurately reflect the true risk of positions held. The use of SPAN also allows SFE Clearing to be standardised with internationally accepted portfolio based margining methodology whilst increasing the attractiveness of SFE's markets to international investors who are already familiar with SPAN. Under Exchange rules, Members must margin their clients at least equal to what SFE Clearing would margin - effectively requiring all Members to margin their clients on a SPAN basis.

What follows in this brochure is a brief outline of some of the key elements of the SPAN system and examples of how SPAN is used to calculate margins for SFE futures and options contracts.

How does SPAN work?

In its simplest form, SPAN can be considered as a risk based portfolio approach system for calculating initial margin requirements.

Unlike other margining systems which make risk assessments based on individual positions within a portfolio, SPAN considers how the value of an entire portfolio of options and futures will respond to changes in futures (or underlying) prices and volatilities. The SPAN algorithm calculates worst case loss scenarios on a contract portfolio adjusting this loss for the net premium cost or benefit from liquidating any option positions and then adjusting for any offsetting profits generated by closely correlated portfolios in other contracts.

In calculating the profit or loss a portfolio will make, SPAN uses 16 'what if' scenarios where futures prices and volatilities are altered to varying degrees. The scenarios used are:

1. Futures unchanged; Volatility up
2. Futures unchanged; Volatility down
3. Futures up 1/3 range; Volatility up
4. Futures up 1/3 range; Volatility down 
5. Futures down 1/3 range; Volatility up 
6. Futures down 1/3 range; Volatility down 
7. Futures up 2/3 range; Volatility up 
8. Futures up 2/3 range; Volatility down 
9. Futures down 2/3 range; Volatility up 
10. Futures down 2/3 range; Volatility down 
11. Futures up 3/3 range; Volatility up 
12. Futures up 3/3 range; Volatility down 
13. Futures down 3/3 range; Volatility up 
14. Futures down 3/3 range; Volatility down 
15. Futures up extreme move (cover 35% of loss) 
16. Futures down extreme move (cover 35% of loss)

• All parameters, including futures price scan range, volatility scan range and extreme move are variable and determined by SFE Clearing.
• 'Futures up/down 3/3 range' is referred to as the 'full futures price movement'.
• Volatility up or down represents an increase or decrease in the implied volatility at the close of business on each trading day.
• Extreme move is typically set at twice the initial margin rate of the underlying futures contract.

The 16 scenarios above, form a 'risk array' which is calculated by SFE Clearing at the close of trading on each business day. Over 2000 risk arrays are calculated daily for all of the contracts listed on SFE. It is important to note that the risk array is calculated from the perspective of a long position, ie. being long the instrument rather than being long the market. When calculating the margin of a short position this array will be multiplied by the appropriate negative number of contracts.

The risk arrays are then applied to the selected portfolio of transactions, with the individual risk arrays being aggregated by scenarios. The largest loss (represented by a positive value) across the 16 scenarios becomes the SPAN margin for that portfolio.

This figure is known as a Scanning Risk and forms the first and key element in the initial margin calculation. This figure can then be adjusted for inter-month margins, inter-commodity concessions and spot month isolations. That is:-

Total Initial Margin = Scanning Risk + Inter-Month Risk - Inter-Commodity Spread

The three key elements are explained in the following practical examples.

Example 1: SPAN margining of futures and options

The following example illustrates how SPAN is used to margin a position consisting of both futures and options. Suppose a portfolio of 90 Day Bank Bills contains the following:

* SPAN assesses all spreads as whole integers.

At the end of each day risk arrays are produced for each option series by SFE Clearing and provided to Clearing Members in a Risk Parameter File ('RPF'). This risk array is the profit and loss profile of one long position in the specified contract.

Assuming the full futures price movement is $700 (or equivalent to approximately 29 ticks), the volatility shift is 0.12% and the current futures price is 95.01 for March 99, 94.87 for June 99, 94.69 for September 99, 94.24 for March 00, the implied volatility is 0.24% for March 99, 0.26% for June 99, 0.28% for September 99, 0.31% for March 00, the following risk arrays would result:-

These risk arrays for the option contracts are calculated by taking the difference between the original option value (settlement value) and the recalculated option value given the relevant scenario. In other words the option is calculated given the underlying futures price, volatility and days to maturity and is then revalued based on the scenario (say futures up 1/3, volatility down). The difference gives the risk array for that scenario.

To determine the margin, each array value is multiplied by the position size, giving the Scanning Risk. Then the 16 lines are each added across and the largest total loss is selected. Note that under the SPAN methodology, the maximum loss is the largest positive value.

Therefore, the SPAN initial margin for this portfolio would coincide with Scenario 11 and would equate to $11,200, as can be seen below:-

The Scanning Risk does not take into account inter-month spread movements and in determining the Scanning Risk it assumes perfect correlation between delivery months.

Example 2: An inter-month spread transaction

When the Scanning Risk of a portfolio is determined, SPAN assumes perfect correlation across delivery months. To take account of the potential for a less than perfect correlation between different delivery dates, SPAN is able to determine Inter-Month Spread margins where offsetting positions are held across delivery months.

SPAN has the capability of levying varying spread rates. This process, which is known as 'tiering', groups spreads within defined tiers dependent upon the months used in the spread. The Spread rates which apply for Example 1 are shown below:

For this example assume trade date 12 November, 1998. The March 99 to June 99 positions are grouped in Tier 2 (months two and three respectively) with September 99 and March 00 grouped in Tier 3 (months 4 and 6 respectively). In this example the 15 net long inter-month positions in March 99 have been offset against the 18 net short inter-month positions in June 99 (Tier 2 v Tier 2). The three net short inter-month positions left in June 99 (Tier 2) are offset against September 99 (Tier 3). In addition the one net long position left in September 99 can be offset against March 00 (Tier 3 v Tier 3). The total amount of margins payable on the portfolio after inter-month spread charges will therefore be:

Example 3: An inter-commodity spread

SPAN has the ability to calculate concessions to total initial margins payable due to offsetting positions in closely correlated contracts. The percentage concession is set by SFE Clearing and depends on the level of stable correlation between any two contracts.

Assume that the Clearing Member holds the following position:

In calculating the appropriate initial margins to levy on the portfolio in total, the Scanning Risk for all components of the transaction must first be evaluated.

In the case of the 200 sold 90 Bank Bill futures positions, the Scanning Risk or amount payable by way of initial margins would be $140,000. This is calculated using SPAN scenario number 12 (ie. Futures up 3/3; Volatility down). Therefore the calculation would be the full initial margin of $700 x 200 contracts = $140,000.

In the case of the 60 sold 3 Year Bond futures positions, the Scanning Risk or amount payable by way of initial margins would be $66,000. This is calculated using SPAN scenario number 12 (ie. Futures up 3/3 range; Volatility down). Therefore the calculation would be the full initial margin of $1,100 x 60 contacts = $66,000.

In the case of the 100 bought 10 Year Bond futures position , the same calculation is applied using SPAN scenario number 13 ( ie Futures down 3/3 range; Volatility up). This results in a calculation of the full initial margin of $2,400 x 100 contracts = $240,000.

If no offsetting mechanism was available, the total Scanning Risk or amount payable in initial margins would be equal to the sum of the above figures , ie. $446,000 plus any inter-month spread charges.

Using SPAN, SFE Clearing offers inter-commodity spreads between designated pairs of commodities. In the case of the 10-Year and 3-Year Bond contracts, we will assume that the spread is calculated on a delta spread ratio of 1:3, ie. one 10-Year Bond contract for every three 3-Year Bond contracts. This parameter is determined by SFE Clearing and is subject to adjustment. On that basis, 20 of the 100 10-Year Bond contracts (60/3 x 1 = 20) and all 60 of the 3-Year Bond contracts can be utilised in the spread.

In the case of the 10-Year Bond and 90 Day Bank Bill contracts, we will assume that the spread is calculated on a delta spread ratio of 2:5, ie. two 10-Year Bond contracts for every five 90 Day Bank Bill contracts. On that basis, the remaining 80 of the 100 10-Year Bond contracts and all 200 of the 90 Day Bank Bill contracts can be utilised in the spread.

In addition to establishing the ratio and priority of contracts used in the spread, SFE Clearing also assigns the spread a percentage 'concession' on the Scanning Risk which is dependent upon the pricing correlation of the instruments involved. Assuming an inter-commodity concession of 75% for a 10-Year Bond : 3-Year Bond spread, and 45% for a 10-Year Bond : 90 Day Bank Bill spread, 75% and 45% of the Scanning Risk for all the commodities will be rebated in recognition of the reduced risk profile of the inter-commodity spreads.

The total amount payable by way of margins is calculated as set out below:

Note that there is no 3 Year-Bond : 90 Day Bank Bill spread as all 3 Year-Bond positions were used in the 10 Year-Bond : 3-Year Bond spread.

More information

To assist Members and clients with information on SPAN, a PC-based SPAN calculator developed by the Chicago Mercantile Exchange (CME) known as PC-SPAN is available from CME.

¹'SPAN' and 'Standard Portfolio Analysis of Risk' are trademarks of the Chicago Mercantile Exchange. The Chicago Mercantile Exchange assumes no liability with the use of SPAN by any person or entity.

This document was prepared by the SFE. The Exchange takes no responsibility for errors or omissions or for losses arising from actions based on this information. This document does not substitute for the Operating Rules of the Exchange or of SFE Clearing and in the case of inconsistency, the Operating Rules prevail. Futures and Options trading involves the potential for both profits and losses. Only licensed futures brokers and advisers can advise on this risk.

Get price / announcement / info

Home | Contact us | FAQs | Sitemap | Glossary

Terms of use | Privacy Statement | Accessibility Statement

© ASX Limited ABN 98 008 624 691

The Australian Securities Exchange operates the Australian Stock Exchange and the Sydney Futures Exchange and facilitates trading in securities and derivatives such as shares, futures, options and warrants. ASX also provides market data, for example share prices, and related information including stock market announcements and market education.