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q1:
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How can SPAN requirements be calculated?
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a1:
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To calculate SPAN requirements for your portfolio(s) for a particular point in
time, you need to obtain the SPAN risk parameter file(s) (a) for the desired business date, and (b)
for each SPAN-using exchange or clearing organization for which your portfolio contains positions.
SPAN risk parameter files may be obtained from a variety of sources.
Computer programs that combine your portfolio(s) with the SPAN risk parameter
files, the so-called SPAN back-end, are available from a wide variety of service bureaus and
software vendors. In addition, CME® makes available an inexpensive PC program called
PC-SPAN® that makes calculating SPAN requirements easy and quick.
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q2:
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Why does SPAN assess a requirement on long options positions, that by definition cannot
lose more than their current market value?
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a2:
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SPAN is a portfolio-based system which comprehensively evaluates the impact of
specified market events on futures and options portfolios. A key element of this process is
granting credit for net long option value, and assessing additional charges for net short option
value. These long option value credits and short option value charges comprise the premium
component of the overall, or "total" performance bond calculation.
The requirement assessed upon long options positions is designed to reflect the
fact that the holder of these long options may not be able to liquidate them at their current
market value. The difference between the current value of a given long option position and its
liquidation value under a "worst-case scenario" of market movement is derived as part of the
scanning risk calculation, and serves as a haircut against the option's full value to reflect
potential liquidation losses.
In no event will SPAN generate a requirement for a portfolio comprised exclusively
of long options that is greater than the current market value of these long options. As a result,
although SPAN will calculate a risk requirement for long option-only portfolios, the overall
requirement (i.e., the sum of the risk and premium requirements) will always be less than zero;
portfolios containing nothing but long options (assuming they are paid for, and no conditions over
and above the SPAN requirement are imposed) should never be subject to a performance bond call.
At CME, the difference between the net option premium value for a given
combined commodity (assuming that the portfolio has net long option value) and the SPAN risk
requirement can be used to offset requirements for other products in the portfolio, as calculated
by SPAN. Note that some exchanges and clearing organizations using SPAN put limitations on allowing
excess long option value from one part of the portfolio, to offset risk from other parts of the
portfolio.
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q3:
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Is it possible to accurately anticipate my SPAN performance bond requirement prior to
establishing my position?
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a3:
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As indicated above, a key feature of the SPAN system is the fact that the
subscribing exchanges execute all complex options pricing, and transmit this information to users
of the system. Without current results from these calculations, it is impossible to precisely
anticipate the value of a given performance bond requirement. SPAN exchanges typically recalculate
risk parameters twice or three times each day, based upon settlement price information and perhaps
one snapshot of current prices in the middle of a trading session. SPAN users wishing to anticipate
requirements based upon market movements other than those specifically contained in an
exchange-transmitted risk parameter file run the risk of inaccuracies in the calculation.
It is important, however, to bear in mind that this problem does not pertain to
portfolios consisting exclusively of futures contracts, the requirements for which are not directly
dependent on market movement. If a portfolio contains nothing but futures, SPAN users can input the
positions into the system and be reasonably assured that the system will calculate the correct
requirement.
In addition, CME offers a special version of PC-SPAN that allows users to
calculate their own risk arrays, based upon inputs of their own choosing. This allows for the
estimation of performance bond requirements on an intra-day basis, and can be particularly valuable
during situations when underlying markets have experienced significant intra-day volatility, or
when a subscribing exchange has changed the requirements for one or more of its products. However,
the SPAN requirements produced by the user-calculated risk arrays are only an estimate of
exchange-minimum requirements. In order to ensure compliance with performance bond policies of
exchanges and clearing organizations that have adopted SPAN, users must access the risk parameter
file created by the exchanges in question to calculate official performance bond requirements.
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q4:
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Often, SPAN will appear to produce results that are significantly different than those
generated by my options risk program. Why is this?
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a4:
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SPAN is a performance bond system, not a risk system. It identifies only the
worst-case scenario among its various alternative market scenarios. Unless the user looks in great
detail at the intermediate steps in the calculation, he or she will not be able to replicate the
outcomes of the system. Moreover, users of options risk systems typically set their market movement
parameters at levels other than those specified by SPAN and this also can lead to output
discrepancies. Finally, users may notice some difference in output (profit and loss values, deltas,
etc.) that result from using different models and slightly different assumptions. For example, SPAN
utilizes a composite delta statistic for the purposes of forming spreads. In most cases, this
composite delta will differ from the deltas produced by standard options pricing models.
For all of these reasons, the results of the SPAN calculation may bear striking
differences to the output of various risk analysis programs. Users are advised against relying
upon their own internal risk systems as an absolute indicator of SPAN requirements even when
the parameters that drive each calculation are extremely similar.
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q5:
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How does SPAN come up with its scan ranges and other parameters?
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a5:
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The SPAN performance bond calculation should not be confused with the
parameter-setting process which drives it. In reality, the two processes are independent. Scan
ranges, spread rates and other inputs to the SPAN program are derived independently by the
exchanges and clearing organizations that use the system. SPAN itself is neither designed for nor
capable of determining the appropriate parameter values, but rather is intended to assess the
impact on complex portfolios associated with these inputs.
Generally, the governing body of each exchange or clearing organization using SPAN
sets these parameters. At CME, these parameters, often called performance bond rates, are
determined by the Performance Bond Sub Committee and the Board of Directorstb based upon recent
patterns of market volatility. However, it should be noted that the rates and parameters set
by CME reflect exchange minimums. Clearing members of CME and other FCMs are free to set
requirements above these values.
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q6:
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Are SPAN requirements higher or lower than those obtained using other systems?
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a6:
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This is not a meaningful question. Since the exchanges and clearing organizations
using SPAN set the parameters that drive SPAN, it's impossible to say. SPAN does not determine the
degree of risk coverage that a particular exchange or clearing organization wants to achieve.
Obviously, the higher the degree of risk coverage desired, the higher the performance bond
requirement will be.
What we can say is that, for a given level of risk coverage, SPAN will match the
requirement for a particular portfolio to the risk of that portfolio, more accurately than other
systems do. This is what we mean when we say that SPAN is a risk-based approach to calculating
performance bond requirements.
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q7:
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Is it possible to license SPAN, and to implement SPAN in software that I build?
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a7:
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Yes. Interested parties should contact the CME Clearing House at (312)
930-3170, fax (312) 930-3187 or send an e-mail to
info@cme.com. |
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