As part of the plan to provide a combined SPAN risk parameter file for CME/CBOT/NYMEX/COMEX and DME exchanges, CME Group intends to make changes to the way closely related physically-delivered and financially settled products are margined. To margin such products CME Group plans to use a feature of SPAN® called super-intercommodity spreading.
There are number of such products currently trading at NYMEX exchange. An example for scanning-based super-intercommodity spread would be NG (Henry Hub Natural Gas) contracts which are physically-delivered and HP (Henry Hub Natural Gas Penultimate) contracts which are financially settled. An example for delta-based super-intercommodity spreading would be RM (RBOB Crack Spread) vs. RB (RBOB Gasoline Futures) and CL (Light-Sweet Crude Oil Futures).
Both scanning-based and delta-based super-intercommodity spreading will be utilized by CME Group files. This feature has been part of SPAN for some time and has been supported in PC-SPAN®, however while delta-based super-intercommodity spreads have been in use before (since 2004 by NYBOT, now IntercontinentalExchange Inc.), this will be the first time scanning-based super-intercommodity spreads will be used for any listed product (For details please see SPAN advisory #04-12 from November 5, 2004, SUBJECT: NYBOT and Margining Options on Futures Calendar Spreads in SPAN® http://www.cmegroup.com/tools-information/lookups/cmearchive/clearing/10536.html).
In addition to introducing these spread types in the SPAN file, a small change to the algorithm for processing of delta-based super-intercommodity spreads will be made: for this type of spreads weighted futures price risk (WFPR) used in calculating credits will be capped at Scan Risk for Combined Commodity divided by initial delta for the spread leg.
This advisory outlines how these spreads will be defined in CME Group's daily combined SPAN files and how processing for them will work.