CME SPAN®
Standard Portfolio Analysis of Risk®
© 2010 CME Group. All rights reserved 2
• Developed in 1988 by Chicago Mercantile Exchange Inc. to effectively
assess risk on an overall portfolio basis.
• SPAN is a market simulation based Value At Risk system which has
been reviewed and approved by market regulators and participants
world wide.
• SPAN is the official Performance Bond mechanism of 54 exchanges and
clearing organizations world-wide, making it the global standard for
portfolio margining.
• SPAN’s risk based margin requirements allows for effective margin
coverage while preserving efficient use of capital.
• SPAN assesses risk for a wide variety of financial instruments including:
futures, options, physicals, equities, or any combination.
CME SPAN® - Standard Portfolio Analysis
of Risk
© 2010 CME Group. All rights reserved 3
• SPAN assesses the risk of a portfolio, by calculating the maximum likely
loss that could be suffered by the portfolio based on parameters set by
the margin-setting authority, usually an exchange or clearing
organization.
• The core of SPAN risk analysis is to simulate potential market moves
and calculate the profit or loss on individual contracts given the market
moves.
• Exchanges may determine any number of market scenarios to be
included in the SPAN analysis.
• Most SPAN exchanges and clearing organizations use 16 scenarios.
CME SPAN® - Objectives
© 2010 CME Group. All rights reserved 4
• SPAN groups together financial instruments with the same underlying for
analysis.
• For example, Futures on an Equity Index and Options on the Equity
Index would be grouped together for analysis.
• Each product is referred to as a Combined Commodity.
• SPAN uses parameters set by the exchange or clearing organization to
evaluate a portfolio with the following two step analysis:
Step 1: SPAN first analyzes the risk of each Combined Commodity
in isolation from other Combined Commodities.
Step 2: SPAN then seeks risk reducing offsets between Combined
Commodities.
CME SPAN® - Methodology
Scan Risk Arrays
© 2010 CME Group. All rights reserved 6
• The core of SPAN risk analysis to simulate potential market
moves and calculate the profit or loss on individual contracts.
• Exchanges or clearing organizations may determine any number
of market scenarios to be included in SPAN analysis.
• Most SPAN exchanges or clearing organizations use 16
scenarios.
• The 16 scenarios are referred to as SPAN Risk Arrays.
CME SPAN® - Scan Risk
© 2010 CME Group. All rights reserved 7
• SPAN Risk Arrays represent a contract's hypothetical gain/loss under a
specific set of market conditions from a set point in time to a specific
point in time in the future.
• Risk Arrays typically consist of 16 profit/loss scenarios for each contract.
• Each Risk Array scenario is comprised of a different market simulation,
moving the underlying price up or down and/or moving volatility up or
down.
• The risk array representing the maximum likely loss becomes the Scan
Risk for the portfolio.
CME SPAN® - Scan Risk Arrays
© 2010 CME Group. All rights reserved 8
• The next slide demonstrates the Scanning Risk calculation for an
S&P500 portfolio:
Long 1 Sep 2010 SP Futures (price is 1100)
Short 1 Sep 2010 SP 1000 Call Option (implied volatility is 28%)
• The Price Scan Range is $22,500 or 90 points (CVF for SP500 is $250,
$22,500/$250 = 90points)
• The Volatility Scan Range for SP500 is 7%
CME SPAN® - Scan Risk Example
© 2010 CME Group. All rights reserved 9
CME SPAN® - Scan Risk Example
Scenario
SP Underlying Price
Move Volatility Move
SP Future
Gain/Loss
SP Option
Gain/Loss
Portfolio
Gain/Loss
1 UNCHANGED UP 0 1,807 1807
2 UNCHANGED DOWN 0 -1,838 -1,838
3 UP 33% UP -7,499 7,899 400
4 UP 33% DOWN -7,499 5,061 -2,438
5 DOWN 33% UP 7,499 -3,836 3,663
6 DOWN 33% DOWN 7,499 -8,260 -761
7 UP 67% UP -15,001 14,360 -641
8 UP 67% DOWN -15,001 12,253 -2,748
9 DOWN 67% UP 15,001 -8,949 6,052
10 DOWN 67% DOWN 15,001 -13,980 1,021
11 UP 100% UP -22,500 21,107 -1,393
12 UP 100% DOWN -22,500 19,604 -2,896
13 DOWN 100% UP 22,500 -13,455 9,045
14 DOWN 100% DOWN 22,500 -18,768 3,732
15 UP 300% UNCHANGED -22,275 21,288 -987
16 DOWN 300% UNCHANGED 22,275 -9,160 13,115
Largest Potential Loss = SPAN Risk 13,115
© 2010 CME Group. All rights reserved 10
• Deep out-of-the-money short options may pose significant risk, as
unusually large price changes may result in unexpectedly large losses,
particularly as expiration nears.
• SPAN accounts for this risk by including Extreme Scenarios in the Risk
Arrays.
• Extreme Scenarios may be used to simulate a significant market move
designed to shock deep out-of-the-money options.
• Extreme Scenarios are determined by the Exchange or Clearing
Organization.
• CME uses a market move equal to 3 times the Price Scan Range for a
given product. The resulting gain or loss is then multiplied by a
percentage of 33% to determine the potential exposure.
CME SPAN® - Scan Risk Extreme Scenarios
© 2010 CME Group. All rights reserved 11
CME SPAN® - Composite Delta Scenarios
Scenario
Underlying Price Change as % of Price
Scan Range Probability Weight
1 UNCHANGED 0.27
3 UP 33% 0.217
5 DOWN 33% 0.217
7 UP 67% 0.11
9 DOWN 67% 0.11
11 UP 100% 0.037
13 DOWN 100% 0.037
• Composite Delta is derived as the weighted average of the deltas, where
the weights are associated with each underlying price scan point.
• Below is an example of the 7 Delta Points used by CME:
SPAN® Analysis
Spread Types & Formations
Short Option Minimum & Delivery Add-On Charge
Net Option Value
© 2010 CME Group. All rights reserved 13
• Intra-Commodity Spread : Evaluate the basis risk between contract periods with
different expirations within the same product. Spreads are prioritized by lowest
charge.
• Inter-Commodity Spread : Evaluate credit available for offsetting positions in
related instruments. Spreads are prioritized by greatest total savings.
• SPAN forms Intra-Commodity Spreads before Inter-Commodity Spreads.
• Super Inter-Commodity Spread : Allows Inter-Commodity Spreads to be
evaluated before Intra-Commodity Spreads.
• Inter-Exchange Spread Credit: Allows spreads to be formed for portfolios
containing products listed on multiple Exchanges, as defined by the Exchange.
The formation of Inter-Exchange Spreads is similar to process of forming
Inter-Commodity Spreads, however each Exchange can only provide a credit
for its own products.
CME SPAN® - Spread Types & Formation
© 2010 CME Group. All rights reserved 14
• Since futures prices do not correlate exactly across contract months, a gain in
one month may not exactly offset losses in another month.
• An Intra-Commodity Spread Charge can be set in SPAN to cover the risk of
calendar spread positions.
• The Intra-Commodity Spread Charge can be tailored for contract pairs or
specified groups of contracts.
• There is no limit to the number of contract legs that can be specified in an Intra-
Commodity Spread, also known as tiered intra-commodity spreading.
• The Intra-Commodity Spread Charge can also be tailored to specific calendar
months.
• For example, a March versus September calendar spread can have a different
charge rate than a March versus December calendar spread. This is also known
as series specific intra-commodity spreading.
• The next slide shows an example of an Intra-commodity Spread for a portfolio
with 1 long September 2010 and 1 short September 2010 Eurodollar.
CME SPAN® - Intra-Commodity Spread Risk
© 2010 CME Group. All rights reserved 15
• The Intra-Commodity Spread Charge for Nov 2010 vs. Dec 2010 is $200.
• Since the gains on Nov ED exactly offset the losses on Dec ED, the Scan Risk is $0.
• Therefore, the Intra-Commodity Spread Charge of $200 becomes SPAN Risk.
CME SPAN® - Intra-Commodity Spread Example
Scenario
SP Underlying Price
Move Volatility Move
Nov ED
Gain/Loss
Dec ED
Gain/Loss
Portfolio
Gain/Loss
1 UNCHANGED UP 0 0 0
2 UNCHANGED DOWN 0 0 0
3 UP 33% UP -250 250 0
4 UP 33% DOWN -250 250 0
5 DOWN 33% UP 250 -250 0
6 DOWN 33% DOWN 250 -250 0
7 UP 67% UP -500 500 0
8 UP 67% DOWN -500 500 0
9 DOWN 67% UP 500 -500 0
10 DOWN 67% DOWN 500 -500 0
11 UP 100% UP -750 750 0
12 UP 100% DOWN -750 750 0
13 DOWN 100% UP 750 -750 0
14 DOWN 100% DOWN 750 -750 0
15 UP 300% UNCHANGED -743 743 0
16 DOWN 300% UNCHANGED 743 -743 0
© 2010 CME Group. All rights reserved 16
CME SPAN® - Inter-Commodity Spread Risk
Combined
Commodity Position
Outright PB
Requirement
Recognize Spread
Credit SPAN Requirement
SP Long 1 $22,500
NP Short 2 $14,000 x 2 = $28,000
Total $50,500 X 85% = $42,925 $7,575
• To recognize the risk reducing aspects of portfolios containing off-setting
positions in highly correlated instruments, SPAN forms Inter-Commodity
Spreads.
• Inter-Commodity Spreads produce credits which reduce the overall
performance bond or margin requirement.
• The universe of recognized spreads, rates, and priority are determined
by the Exchange.
• Below is an example of 1 Long SP future and 2 Short Nasdaq futures.
The recognized spread ratio is 1 SP vs. 2 ND and the spread credit is
85%.
© 2010 CME Group. All rights reserved 17
• Delta Based Spreading is performed after the Scan Risk or Scanning
process.
• One result of the Scanning process for each Combined Commodity is a
Net Delta position, which is an estimate of market exposure that has not
been offset within the Combined Commodity which is available to be
offset between Combined Commodities.
• Each exchange defines a table of recognized Inter-Commodity Spread
formations and the margin credit to apply for such formations.
• SPAN takes the Inter-commodity spread table and seeks out the defined
spread formations, giving margin credit for each spread formed.
• A Delta based spread may contain any number of spread legs.
CME SPAN® - Inter-Commodity Delta Based
Spreading
© 2010 CME Group. All rights reserved 18
• Another method of recognizing offsetting positions between Combined
Commodities is Scanning Based Spreading.
• Scanning Based Spreading recognizes risk offsets among Combined
Commodities by scanning them together.
• Scanning Based Spreading allows for the recognition of risk reduction
due to correlated underlying price moves and also the risk reduction due
to offsetting option positions.
• In recognizing that the correlations between Combined Commodities
may not be perfect, the gains in the Scanning process may be limited by
a gain allowance factor set by the exchange.
• The next two slides show an example of the potential benefits achieved
through Scanning Based Spreading as opposed to Delta Based
Spreading. Both slides use the same position of:
Long 90 Bond futures
Short 90 10yr futures
CME SPAN® - Inter-Commodity Scanning
Based Spreading
© 2010 CME Group. All rights reserved 19
CME SPAN® - Delta Based Spread Example
Spread Positions
Product Position
Outright PB
Requirement Spread Ratio Spread Credit
Bond 90 $2,500 2
70%
10 yr -90 $1,400 3
• Long 90 Bond futures & Short 90 10yr futures
Spread Credit
Product Position
Outright PB
Requirement
Position x Outright
PB Spread Credit
Bond 60 $2,500 $150,000 $276,000 x .7
=$193,200 10 yr 90 $1,400 $126,000
Remaining Delta
Product Position
Outright PB
Requirement
Position x Outright
PB
Bond 30 $2,500 $75,000
10 yr 0 $0 $0
Delta-Based Total
Requirement
Remaining Delta
PB Requirement
Spread Req.
(30%)
Total PB
Requirement
$75,000 $82,800 $157,800
© 2010 CME Group. All rights reserved 20
CME SPAN® - Scanning Based Spread Example
Scenario Underlying Price Move Volatility Change Gain/Loss
1 UNCHANGED UP $0
2 UNCHANGED DOWN $0
3 UP 33% UP -$10,449
4 UP 33% DOWN -$10,449
5 DOWN 33% UP $45,549
6 DOWN 33% DOWN $45,549
7 UP 67% UP -$21,051
8 UP 67% DOWN -$21,051
9 DOWN 67% UP $91,251
10 DOWN 67% DOWN $91,251
11 UP 100% UP -$31,500
12 UP 100% DOWN -$31,500
13 DOWN 100% UP $136,800
14 DOWN 100% DOWN $136,800
15 UP 300% UNCHANGED -$31,185
16 DOWN 300% UNCHANGED $135,432
Scanning Based PB Requirement $136,800
• Long 90 Bond futures & Short 90 10yr futures
© 2010 CME Group. All rights reserved 21
• Deep out-of-the-money short options may show zero or minimal Scan
Risk given the price & volatility moves in the 16 market scenarios.
• However, in extreme events these options may move closer to-the-
money or in-the-money, thereby generating potentially large losses.
• To account for this potential exposure, a Short Option Minimum can be
set for each product.
• If the Scan Risk is lower than the Short Option Minimum, then the Short
Option Minimum is charged.
• The next slide shows an example of the Short Option Minimum using a
deep out-of-the-money short put.
Short 1 SP500 Sep 2010 Put @500 (underlying price is 1100)
Short Option Minimum on 1 SP500 is $225
CME SPAN® - Short Option Minimum
© 2010 CME Group. All rights reserved 22
CME SPAN® - Short Option Minimum Example
Scenario Underlying Price Move Volatility Change Gain/Loss
1 UNCHANGED UP $16
2 UNCHANGED DOWN -$10
3 UP 33% UP $8
4 UP 33% DOWN -$10
5 DOWN 33% UP $27
6 DOWN 33% DOWN -$9
7 UP 67% UP $3
8 UP 67% DOWN -$11
9 DOWN 67% UP $41
10 DOWN 67% DOWN -$7
11 UP 100% UP -$1
12 UP 100% DOWN -$11
13 DOWN 100% UP $62
14 DOWN 100% DOWN -$4
15 UP 300% UNCHANGED -$4
16 DOWN 300% UNCHANGED $88
Scan Risk $88
• Scan Risk is $88, however SOM is $225, so the requirement is $225.
© 2010 CME Group. All rights reserved 23
• Scan Risk: Evaluate the directional market risk.
• Intra-Commodity Spread Charge: Evaluate the basis risk between contract
periods with different expirations within the same product.
• Inter-Commodity Spread Credit: Evaluate credit available for offsetting
positions in related instruments.
• Delivery Add-On Charge: Evaluate contract periods for increasing volatility
during delivery.
• Short Option Minimum: Evaluate short option positions for potential increased
risk, using the greater of the Scan Risk or Short Option Minimum.
• SPAN Requirement for a Combined Commodity is the greater of:
(Scan Risk + Intra Commodity Spread Charge + Delivery Charge – Inter
Commodity Spread Credit)
Short Option Minimum
• The Total SPAN Requirement for a portfolio is the sum of the SPAN Requirement
for all Combined Commodities.
CME SPAN® - Summary of SPAN Analysis
© 2010 CME Group. All rights reserved 24
• Mark-to-market of options is reflected in the Net Option Value
component of SPAN.
• The Total Performance Bond Requirement for a portfolio reflects the
Total SPAN Requirement and the Net Option Value of the portfolio.
• The Net Option Value (NOV) of a portfolio is equal to the Long Option
Value minus the Short Option Value.
• Long Option Value (LOV): The total value of all the long options in the
portfolio.
• Short Option Value (SOV): The total value of all the short options in the
portfolio.
• LOV reduces the overall Total Performance Bond Requirement.
• SOV increases the overall Total Performance Bond Requirement.
CME SPAN® - Net Option Value
© 2010 CME Group. All rights reserved 25
• The portfolio below includes:
Long 1 Sep 2010 SP Futures (price is 1100)
Short 1 Sep 2010 SP 1000 Call Option (price is $119.10, value is $28,150)
Long 1 Sep 2010 SP 900 Put Option (price is $3.20, option value is $162.50)
CME SPAN® - Net Short Option Value
SPAN Risk = $7,132
LOV = $162.50
SOV = $28,150
NOV = ($27,987.50)
Total Requirement =
SPAN Risk + NOV
$7,132 - ($27,987.50) = $35,119.50
© 2010 CME Group. All rights reserved 26
• The portfolio below includes:
Short 1 Sep 2010 SP Futures (price is 1100)
Long 1 Sep 2010 SP 1000 Call Option (price is $119.50, value is $28,150)
Short 1 Sep 2010 SP 900 Put Option (price is $3.20, option value is $162.50)
CME SPAN® - Net Long Option Value
SPAN Risk = $585
LOV = $28,150
SOV = $162.50
NOV = $27,987.50
Total Requirement =
SPAN Risk + NOV
$585 - $27,987.50 = ($27,402.50)
CME SPAN®
Slide Number 2
Slide Number 3
Slide Number 4
Scan Risk Arrays
Slide Number 6
Slide Number 7
Slide Number 8
Slide Number 9
Slide Number 10
Slide Number 11
SPAN® Analysis
Slide Number 13
Slide Number 14
Slide Number 15
Slide Number 16
Slide Number 17
Slide Number 18
Slide Number 19
Slide Number 20
Slide Number 21
Slide Number 22
Slide Number 23
Slide Number 24
Slide Number 25
Slide Number 26
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