CME SPAN
Encyclopedia
The Standard Portfolio Analysis of Risk, or SPAN, is a system for calculating margin requirements for futures
and options
on futures. It was developed and implemented by the Chicago Mercantile Exchange
in 1988.
It calculates the likely loss in a set of derivative positions (also called a portfolio) and sets this value as the initial margin payable by the firm holding the portfolio. In this manner, SPAN provides for offsets between correlated positions and enhances margining efficiency.
SPAN was the first system to calculate performance bond requirements exclusively on the basis of overall portfolio risk at both clearing and customer level. In the years since its inception, SPAN has become the industry standard for portfolio risk assessment. It is the official performance bond (margin) mechanism of 50 registered exchanges, clearing organizations, service bureaus and regulatory agencies throughout the world. SPAN software is utilized by a wide range of end-users, including futures commission merchants (FCMs), investment banks, hedge funds, research organizations, risk managers, brokerage firms and individual investors worldwide.
Now in its fourth generation of functionality, SPAN has evolved into a suite of three software products designed to meet the needs of a wide range of customers: PC-SPAN, SPAN Risk Manager, and SPAN Risk Manager Clearing.
The SPAN Product Suite
1. PC-SPAN– A single-user desktop application that offers margin calculation across multiple exchanges.
2. SPAN Risk Manager–PC-SPAN plus risk analytics
SPAN Risk Manager integrates risk management features with core margin calculation abilities, to deliver a flexible and intuitive system for full portfolio risk management. Specifically, it: a) enables users to gauge the effects, on a total portfolio or a single option, of changes in price; b) calculates implied volatility, time to expiration, dividend yields, and interest rates; c) calculates hypothetical P&L's, option prices, and option Greeks; d) calculates option implied volatilities, allows determination of appropriate volatilities for call/put pairs, and determines volatilities applicable to entire series of options; e) allows for stress testing across portfolios of multiple products; f) allows users to define, compare, save and reload "what-if" scenarios for stress testing; g) enables shifting of volatility skews; h) supports a variety of pricing models applicable to different types of options, including Black-Scholes, Merton, Adesi-Whaley, Cox-Ross-Rubinstein, and Bachelier
3. SPAN Risk Manager Clearing–SPAN Risk Manager plus real-time margining, plus risk array calculations and production of SPAN risk parameter files
SPAN Risk Manager is an institutional-level program used by exchanges, clearing organizations, service bureaus and regulatory agencies. It provides all capabilities of PC-SPAN and SPAN Risk Manager, and adds features enabling exchanges and clearing organizations to implement SPAN in a rapid manner.
How SPAN Works
SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the portfolio would incur under different market conditions.
At the core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration.
Adaptations of CME SPAN
CME SPAN has been adapted for margin calculations for LCH.Clearnet. The adaptation, named "London SPAN" covers futures on Liffe, the London Metal Exchange
and LCH EnClear.
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
and options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
on futures. It was developed and implemented by the Chicago Mercantile Exchange
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
in 1988.
It calculates the likely loss in a set of derivative positions (also called a portfolio) and sets this value as the initial margin payable by the firm holding the portfolio. In this manner, SPAN provides for offsets between correlated positions and enhances margining efficiency.
SPAN was the first system to calculate performance bond requirements exclusively on the basis of overall portfolio risk at both clearing and customer level. In the years since its inception, SPAN has become the industry standard for portfolio risk assessment. It is the official performance bond (margin) mechanism of 50 registered exchanges, clearing organizations, service bureaus and regulatory agencies throughout the world. SPAN software is utilized by a wide range of end-users, including futures commission merchants (FCMs), investment banks, hedge funds, research organizations, risk managers, brokerage firms and individual investors worldwide.
Now in its fourth generation of functionality, SPAN has evolved into a suite of three software products designed to meet the needs of a wide range of customers: PC-SPAN, SPAN Risk Manager, and SPAN Risk Manager Clearing.
The SPAN Product Suite
1. PC-SPAN– A single-user desktop application that offers margin calculation across multiple exchanges.
2. SPAN Risk Manager–PC-SPAN plus risk analytics
SPAN Risk Manager integrates risk management features with core margin calculation abilities, to deliver a flexible and intuitive system for full portfolio risk management. Specifically, it: a) enables users to gauge the effects, on a total portfolio or a single option, of changes in price; b) calculates implied volatility, time to expiration, dividend yields, and interest rates; c) calculates hypothetical P&L's, option prices, and option Greeks; d) calculates option implied volatilities, allows determination of appropriate volatilities for call/put pairs, and determines volatilities applicable to entire series of options; e) allows for stress testing across portfolios of multiple products; f) allows users to define, compare, save and reload "what-if" scenarios for stress testing; g) enables shifting of volatility skews; h) supports a variety of pricing models applicable to different types of options, including Black-Scholes, Merton, Adesi-Whaley, Cox-Ross-Rubinstein, and Bachelier
3. SPAN Risk Manager Clearing–SPAN Risk Manager plus real-time margining, plus risk array calculations and production of SPAN risk parameter files
SPAN Risk Manager is an institutional-level program used by exchanges, clearing organizations, service bureaus and regulatory agencies. It provides all capabilities of PC-SPAN and SPAN Risk Manager, and adds features enabling exchanges and clearing organizations to implement SPAN in a rapid manner.
How SPAN Works
SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the portfolio would incur under different market conditions.
At the core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration.
Adaptations of CME SPAN
CME SPAN has been adapted for margin calculations for LCH.Clearnet. The adaptation, named "London SPAN" covers futures on Liffe, the London Metal Exchange
London Metal Exchange
The London Metal Exchange is the futures exchange with the world's largest market in options, and futures contracts on base and other metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, along with longer-dated contracts up to 123 months, it also...
and LCH EnClear.