ASX has adopted the widely used Standard Portfolio Analysis of Risk (SPAN) margining system developed and implemented by the Chicago Mercantile Exchange (CME) in 1988.
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 combined commodity - which is a portfolio of derivatives grouped by product and matches the level of initial margin to cover this risk. In calculating the amount of margin required, SPAN recognises the unique characteristics of each position while also taking into account other factors such as intra-commodity (inter-month) and inter-commodity spread relationships.
“’SPAN’ is a registered trademark of Chicago Mercantile Exchange Inc., used herein under license. Chicago Mercantile Exchange Inc. assumes no liability in connection with the use of SPAN by any person or entity.”
Overview of approach
In its simplest form, SPAN can be considered as a system that uses a risk based portfolio approach to calculate initial margin requirements.
Total Initial Margin = Scanning Risk + Intracommodity Spread Charge + Delivery Risk – Intercommodity Concession.
By using a set of pre-determined parameters set by ASX Clear (Futures), SPAN assesses what the maximum potential loss will be for a portfolio of derivative and physical instruments over typically a one-day period. The gains and losses that the portfolio would incur under different market conditions are computed.
SPAN uses risk arrays, which is a set of numeric values that specify if a particular contract will gain or lose value under different conditions (risk scenarios). The value for every risk scenario symbolises the gain or loss for that contract for a certain combination of volatility change, price (or underlying price) change, and decrease in time to expiration.
As mentioned, ASX has determined the following SPAN parameters, which mirror ASX’s, preferred degree of risk coverage:
- Price scan ranges – the maximum price movement realistically likely to take place, for each instrument or, for options, their underlying instrument
- Volatility scan ranges – the maximum change realistically likely to take place for the volatility of each option's underlying price
- Intracommodity spreading parameters – rates and rules for evaluating risk among portfolios of closely related products
- Intercommodity spreading parameters – rates and rules for evaluating risk offsets between related products
- Delivery (spot) risk parameters – for evaluating the increased risk of positions in physically-deliverable products as they approach or enter their delivery period
- Short option minimum parameters – rates and rules to provide coverage for the special situations associated with portfolios of deep out-of-the-money short option positions
SPAN Combined Commodity Evaluations
SPAN assesses what the maximum potential loss will be for a given combined commodity which is a portfolio of instruments over the same underlying instrument. For each combined commodity, SPAN evaluates:
- The scan risk – the basic evaluation of risk replicating how positions will gain or lose value under particular combinations of price and volatility movement
- The intracommodity spread charge – risk levels related to particular patterns of calendar spreading
- Delivery risk – risk related to positions in physically-deliverable products as they approach or enter their delivery period
- The intercommodity spread credit – reductions to risk associated with risk offsets between associated products
- Short option minimum - an evaluation of the irreducible minimum risk related to portfolios of deep out-of-the-money short option positions
- For each combined commodity in the portfolio, SPAN takes the sum of the scan risk, intracommodity spread charge and delivery risk, deducts the intercommodity spread credit, and takes the greater of this result and the short option minimum. The resulting value is the SPAN risk requirement (also known as initial margin).
- Margin Example
- ASX 24 initial margin rates
- NZ ASX 24 initial margin rates
- ASX electricity initial margin rates
- SPAN Files
To assist Clearing Participants 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.