CME Market Protections
Risk Management Tools
Performance Bonds, also known as margins, are deposits held at CME Clearing to ensure that clearing members can meet their obligations to their customers and to CME Clearing. Performance bond requirements vary by product and market volatility.
Risk management and financial surveillance are principal functions of CME Clearing's financial safeguards and customer protections system.
CME Clearing offers multiple risk management tools designed to protect and inform CME customers and clearing firms.
The Standard Portfolio Analysis of Risk (SPAN) system is a sophisticated methodology that calculates performance bond requirements by analyzing the "what-ifs" of virtually any market scenario.
Developed and implemented in 1988 by Chicago Mercantile Exchange (CME), SPAN was the first system ever 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 over 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.
Continually enhanced and elaborated, the SPAN methodology can be used to evaluate risk for the broadest possible range of derivative and physical instruments. Although originally designed for use with derivatives, its extraordinary capabilities have led to its extensive use in assessing risk for many different types of financial instruments.
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.
PC-SPAN provides a quick, inexpensive and simple way to calculate SPAN margin requirements across multiple exchanges. PC-SPAN makes calculating SPAN margins a snap. All users need to do is:
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. Its powerful features and intuitive design allow for true portfolio analytics through multi-variant stress testing and option exposures. Specifically, it:
3. SPAN Risk Manager Clearing–SPAN Risk Manager plus real-time margining, plus risk array calculations and production of SPAN risk parameter files
Our most powerful product, 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 and cost-effective manner. Its advanced functions provide the ability to:
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.
Exchanges and clearing organizations using SPAN will determine for themselves the following SPAN parameters, reflecting their desired degree of risk coverage:
SPAN Combined Commodity Evaluations
SPAN 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, SPAN evaluates: