Margining

In its simplest form, SPAN can be considered as a system that uses a risk-based portfolio approach to calculate initial margin requirements. By applying pre-determined parameters set by the clearing house, SPAN assesses the maximum potential loss will be for a combined commodity – a portfolio of derivatives grouped by product. Then it calculates an initial margin to cover this risk.

In calculating the initial 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 also uses multiple risk arrays (sets of numeric values) to calculate the gains and losses the portfolio would incur under different market conditions (risk scenarios) – including changes in volatility change, price (or underlying price) and time to expiration.

Initial margin calculation

Total Initial Margin = max(Delivery Risk + Intracommodity Spread Charge + Short Option Minimum Charge, Scanning Risk – Intercommodity Concession).

We have set these SPAN parameters to reflect 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.
• Intra-commodity spreading parameters: rates and rules for evaluating risk among portfolios of closely related products.
• Inter-commodity 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 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 intra-commodity 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 inter-commodity 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, intra-commodity spread charge and delivery risk, deducts the inter-commodity 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).

Understanding Margins

Margin Example

Margin Parameters

SPAN Files

Chicago Mercantile Exchange SPAN Calculator

Chicago Mercantile Exchange SPAN FAQs