Risk Management Overview

Risk Management

Performance Bonds/Margins

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:

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

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:

  • 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

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:

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

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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.

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SPAN Parameters

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

  • Price scan ranges – in effect, 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
  • Intracommodity spreading parameters – rates and rules for evaluating risk among portfolios of closely related products, for example products with particular patterns of calendar spreads
  • Intercommodity spreading parameters – rates and rules for evaluating risk offsets between related products
  • Delivery (spot) risk parameters – 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 to provide coverage for the the special situations associated with portfolios of deep out-of-the-money short option positions
  • At least once every business day, each SPAN-using exchange or clearing organization calculates risk arrays for all of its products, and prepares a SPAN risk parameter file (also called a 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 PC-SPAN, calculating performance bond requirements for particular portfolios is quick and easy.

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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:

  • The scan risk – the basic evaluation of risk reflecting how these positions gain or lose value under particular combinations of price and volatility movement
  • The intracommodity spread charge – risk levels associated with particular patterns of calendar spreading
  • Delivery risk – risk associated with positions in physically-deliverable products as they approach or enter their delivery period
  • The intercommodity spread credit – reductions to risk associated with risk offsets between related products
  • Short option minimum -- an evaluation of the irreducible minimum risk associated with portfolios of deep out-of-the-money short option positions
  • For each combined commodity in the portfolio, SPAN takes the sum of the scan risk, intracommodity spread charge and delivery risk, subtracts the intercommodity spread credit, and takes the larger of this result and the short option minimum. The resulting values, called SPAN risk requirements, are then converted to a common currency and summed to yield the total risk for the portfolio.

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