In the aftermath of the Global Financial Crisis (GFC), there has been an increased focus on the importance of systemic risk management. Regulatory and user expectations of central counterparty (CCP) capabilities have increased in response, particularly in relation to the strengthening of CCP risk controls. ASX introduced Cash Market Margining in June 2013 as a way of enhancing the risk management controls of ASX Clear, and thereby achieving a reduction in systemic risk in an increasingly complex Australian cash market environment.
Cash Market Margining is a “principal to principal” margin between the Clearing House and the Clearing Participant, to ensure that in the event of a default, the Clearing House can close out the defaulting Clearing Participant’s net novated settlement obligations with minimal impact to the broader market.
Overview of approach
ASX Clear’s approach to calculating cash market margins is in line with international best practice, and ensures that ASX Clear maintains a “user pays” infrastructure. When a cash market transaction is received by ASX Clear it is generally novated, with ASX Clear acting as the counterparty to both the buyer and the seller. Other transactions that are received and not novated to ASX Clear are not included in any margin calculations.
Margin is calculated using the Cash Market Margining Model. This model consists of two components:
- Risk Margin – Covers any forward looking losses and is calculated using either an Historical Value at Risk (HsVaR) or Flat Rate calculation,
- HsVaR is used as a calculation methodology where the securities meet the liquidity requirements set by ASX Clear
- Flat Rate calculations are used for warrant, interest rate securities and less liquid equities
- Mark-to-Market – Daily revaluation of cash market transactions to the current value as at close of business. Currently applied to the top 500 equities only.
Contacting the ASX
For more information or if have any questions, please feel free to contact the ASX via email on Cashmarket.Margining@asx.com.au
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 = max(Short Option Minimum Charge, Scanning Risk + Intracommodity Spread Charge + Delivery Risk – Intercommodity Concession).
By using a set of pre-determined parameters set by ASX Clear, 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 mirrors 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
- Margin Parameters
- 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.
- CME SPAN fequently asked questions
- Understanding margins booklet