CME Clearing designed our futures and options margin model to cover at least 99% of anticipated price changes for all products over a given liquidation period.
CME Clearing considers a vast array of inputs, including historical data, annual or seasonal patterns, recent or anticipated events and changes in market dynamics when calibrating our margin model. This approach is grounded in data-driven calibration over different time periods, and is supplemented by expert analysis of current market conditions. CME Clearing employs a tailored approach for each asset classes we clear, which reflects the price movements, trading practices and patterns specific to these products.
We determine prudent and appropriate margin rates using a combination of quantitative and qualitative metrics. Quantitatively, CME Clearing evaluates potential futures contract exposures using historic and forward looking volatility measures, product liquidity, seasonality and historically observed correlations. Qualitatively, CME Clearing considers macroeconomic conditions, event-driven risk, geopolitical risk and the impact of certain product-specific features. For example, ahead of events such as the U.S. election or UK referendum, CME Clearing considers potential risks and takes proactive steps to adjust margin levels in advance of the event to reduce the need for large step changes on a post-hoc basis.
Historical Volatility
Historical volatility is incorporated through the use of multiple lookback periods. CME Clearing uses a variety of Value-at-Risk (VaR)-based models to determine our benchmark margin levels, which are then incorporated into SPAN.
Lookback periods can vary across product groups and are weighted individually based on the unique characteristics of a given group to ensure that 99% coverage is achieved for all products. Lookbacks are driven by product-specific characteristics and may differ for a variety of reasons, including to ensure consideration of procyclicality and seasonality associated with certain products. Details on these lookback periods can be found in the table below.
Implied Volatility
In addition to historical volatility, a critical piece of CME Clearing’s margin model is the infusion of options implied volatilities. Implied volatility is a forward-looking metric derived from CME market prices on options contracts and is incorporated into margin models to help better forecast the future volatility level of a given contract. The Implied volatility is imbedded into CME Clearing’s margin model by assigning it a weighting per product group, in the same manner as weightings are assigned to historical volatility lookbacks. The combination of both historical and forward looking data allows CME Clearing to better calibrate and forecast future volatility while providing more countercyclical margin requirements, particularly ahead of known market events such as political elections or Federal Reserve Board meetings.
Volatility Floors
CME Clearing determines margin floors for our model input parameters for products where appropriate. The floors are designed to retain historically observed volatility patterns during periods that may be subject to below-average volatility. Floors are typically benchmarked at a level equivalent to a 10-year lookback plus a percentage-based add-on, as appropriate per product.
Benchmark Margin Buffer
As margin levels are not reset on a daily basis, CME Clearing employs a benchmark margin buffer to reduce the impact of increased volatility, which may occur during periods of stress. This buffer decreases the likelihood of frequent, procyclical margin calls.
Product Group Parameters
| PRODUCT GROUP | MINIMUM COVERAGE LEVEL | PRIMARY LOOKBACK PERIOD | IMPLIED VOLATILITY | SEASONAL VOLATILITY | VOLATILITY FLOORS | BENCHMARK MARGIN BUFFER |
|---|---|---|---|---|---|---|
| Equity Indices | 99% | 3 months–10 years | Yes | No | Yes | Yes |
| FX Majors | 99% | 3 months–10 years | Yes | No | Yes | Yes |
| FX Emerging | 99% | 3 months–10 years | Yes | No | Yes | Yes |
| Interest Rates: Short-Term | 99% | 3 months–10 years | Yes | No | Yes | Yes |
| Interest Rates: Long-Term | 99% | 3 months–10 years | Yes | No | Yes | Yes |
| Agricultural | 99% | 3–12 months | Yes | 1–3 year lookback | Yes | Yes |
| Metals | 99% | 3 months–10 years | Yes | No | Yes | Yes |
| Energy: Crude Oil | 99% | 3–12 months | Yes | No | Yes | Yes |
| Energy: Natural Gas | 99% | 3–12 months | Yes | 1–3 year lookback | Yes | Yes |
| Energy: Refined Products | 99% | 3–12 months | Yes | 1–3 year lookback | Yes | Yes |
| Energy: Electricity | 99% | 3–12 months | Yes | 1–3 year lookback | Yes | Yes |
Where to see futures and options margins
Margin for both futures and options can be calculated using SPAN, the Standard Portfolio Analysis of Risk (SPAN) system.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
