CME SPAN Methodology Overview

Exchanges and clearing organizations using the CME SPAN methodology will determine for themselves the following CME SPAN parameters, reflecting their desired degree of risk coverage:

• Price scan ranges (Scan risk) – the maximum price movement reasonably likely to occur for each instrument or, for options, their underlying instrument
• Volatility scan ranges – the maximum change reasonably likely to occur 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, for example products with particular patterns of calendar spreads
• Inter-commodity spreading parameters – rates and rules for evaluating risk offsets between related products
• Delivery (spot) risk parameters – rates and rules 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 evaluating the irreducible minimum risk associated with portfolios of deep out-of-the-money short option positions.

At least once every business day, each exchange or clearing organization using the CME SPAN methodology calculates risk arrays for all of its products and prepares a CME SPAN risk parameter file (also called a CME SPAN array file) containing all of the above data. These files are then published to clearing firms and other market participants. Using these freely-available files and inexpensive software such as the CME PC-SPAN software, calculating performance bond requirements for portfolios is quick and easy.

The CME SPAN methodology divides the instruments in each portfolio into groupings called combined commodities. Each combined commodity represents all instruments on the same ultimate underlying – for example, all futures and all options ultimately related to the S&P 500 index.

For each combined commodity in the portfolio, the CME SPAN methodology evaluates the risk factors described above, and then takes the sum of the scan risk, the intra-commodity spread charge, and the delivery risk, before subtracting the inter-commodity spread credit. The CME SPAN methodology next compares the resulting value with the short option minimum; whichever value is larger is called the CME SPAN methodology risk requirement. The resulting values across the portfolio are then converted to a common currency and summed to yield the total risk for the portfolio.

The CME PC-SPAN software, a single-user desktop application that offers margin calculation across multiple exchanges, provides a quick, inexpensive, and simple way to calculate CME SPAN margin requirements.

1. Download the CME SPAN risk parameter files for the exchanges or clearing organizations of interest from CME's FTP site on the Internet
2. Load the data from these CME SPAN risk parameter files into the CME PC-SPAN software
3. Define portfolios, either via the CME PC-SPAN's graphical user interface, or by loading them from a file
4. Click to calculate performance bond requirements
5. View results online or export margin results to a file for importing into your other applications.

CME SPAN Risk Manager integrates risk management features with core margin calculation abilities to deliver a flexible and intuitive system for full portfolio risk management. Its powerful features and intuitive design allow for true portfolio analytics through multi-variant stress testing and option exposures.

• Enables users to gauge the effects, on a total portfolio or a single option, of changes in price, implied volatility, time to expiration, dividend yields, and interest rates
• Calculates hypothetical P&Ls, option prices, and option greeks
• Calculates option implied volatilities, allows determination of appropriate volatilities for call/put pairs, and determines volatilities applicable to entire series of options
• Allows for stress testing across portfolios of multiple products
• Allows users to define, compare, save and reload "what-if" scenarios for stress testing
• Enables shifting of volatility skews
• Supports a variety of pricing models applicable to different types of options, including Black-Scholes, Merton, Adesi-Whaley, Cox-Ross-Rubinstein, and Bachelier

CME SPAN Real-Time Component Interface (RTCI) is a software module containing a Com API which interacts with the CME PC-SPAN software to deliver near real-time margin calculations.

• Allows users to develop programs which interface to the CME PC-SPAN software PC-SPAN in real-time
• Enables users to post a single trade/position feed to the CME PC-SPAN software PC-SPAN and recalculate requirements throughout the day

Our most powerful product, CME SPAN Risk Manager Clearing is an institutional-level program used by exchanges, clearing organizations, service bureaus, and regulatory agencies. It provides all capabilities of the CME PC-SPAN software and CME SPAN Risk Manager, and adds features enabling exchanges and clearing organizations to implement the CME SPAN methodology in a rapid and cost-effective manner.

Advanced functions provide the ability to:

• Define the CME SPAN methodology rates and rules
• Calculate CME SPAN risk arrays
• Prepare and publish CME SPAN risk parameter files
• Provide a real-time component interface, enabling true high-speed real-time pre- or post-execution risk-based credit controls