This advisory describes two small but important updates for Scanning-Based Intercommodity Spreading in SPAN®, which together provide significant new flexibility in usage of scanning-based spreads.

The first update allows scanning-based spreads to be formed, and savings to be realized, if any two of the legs are present in the portfolio, which was previously not possible.  The second update provides more accurate results when the target leg of a scanning-based spread subsequently participates in a delta-based intercommodity spread, by correctly taking contract size differences into account when aggregating remaining delta values from the non-target legs to the target.

With the launch of the CBT-CME Common Clearing Link on November 24th, scanning-based spreads will be provided in the combined CBT-CME common clearing link SPAN files, and will be used for both CBT and CME products.  We also wish to remind SPAN users that the combined CBT-CME SPAN files will make extensive use of tiered ("method 20") delta-based intercommodity spreads.
 

Providing greater flexibility in whether spread legs are required or not

The first enhancement will allow a scanning-based intercommodity spread to be defined, such that it will be formed if any two of the legs are present in the portfolio.  Previously, this was not possible because all of the non-target legs were required to be present.  Generically, this enhancement will provide greater flexibility in the specification of whether individual legs and/or the target leg must be present in the portfolio in order for the spread to be formed.

To implement this new feature, the layout for the "type 6" record defining a scanning-based intercommodity spread has been enhanced so that individual "Leg Required" flags are provided for each regular leg, and for the target leg.   These fields are used as follows:

• For the non-target legs, a value of N in the "Leg Required" field means that leg is not required, and any other value means that it is required.
  
• The target leg is deemed to be required in order for the spread to be formed if either (a) a value of Y is provided in the special "Target Leg Required" field, and/or (b) the target leg is also provided as a normal leg.

For example, a typical scanning-based intercommodity spread in the Common Clearing Link SPAN file might have three non-target legs -- Treasury Bonds, Five-Year Notes, and Two-Year Notes -- with Ten-Year Notes specified as the target leg.  On the "type 6" record for this spread, we will specify that none of the legs are required, and therefore the spread will be formed if any two of the legs are present in the portfolio.  Previously, all of the non-target legs were automatically required, and the spread would not be formed unless Bonds, Five-Years, and Two-Years were all present in the portfolio.
 

Correctly scaling the remaining deltas on the non-target legs when aggregating them to the target

Previously, when a scanning-based intercommodity spread was formed, the remaining delta amounts on the non-target legs were aggregated to, and combined with, the remaining delta values on the target leg.  This process, however, did not take into account the relative contract size differences between the different legs.

To correct this limitation, we are introducing a new process that scales the remaining delta for each non-target leg before aggregating it to the target, as follows:

For each non-target leg, when taking a remaining delta value for a delta period for aggregation to the target leg:

Divide the delta per spread ratio for the target leg by the delta per spread ratio for this non-target leg.

Multiply the remaining delta value by this ratio, yielding the value to be aggregated.

After aggregation of these remaining delta values for each delta period to the target leg, and their combination with the original remaining delta value for the delta value on the target leg, round this result to the rounding precision being used.  (We strongly recommend using four-decimal-place rounding.)

The remaining delta values for the individual intra- and inter-commodity spread tiers for the target leg, are then calculated by summing the remaining delta values for the delta periods within each tier.

With this change, delta per spread ratios are now meaningful, and must be defined, for each leg of a scanning-based spread, exactly as they are required for each leg of a delta-based spread.
 

SPAN file format change details

Updated layouts for the "type 6" records can be found on the SPAN Pages of the CME's Special Clearing Website at http://www.cme-ch.com/span/.

The layout for the record in the unpacked and packed-format file is at http://www.cme-ch.com/span/spanl306.htm, and the layout for the record in the expanded-unpacked format is at http://www.cme-ch.com/span/spanl316.htm. 

In the unpacked and packed formats, the "Leg Required" flags for the non-target legs are provided in previously-unused bytes 55 through 58, and the "Target Leg Required" flag is provided in previously-unused byte 59.

In the expanded-unpacked format, the "Leg Required" flags for the non-target legs are provided in previously-unused bytes 20, 38, 56, and 74, and the "Target Leg Required" flag is provided in previously-unused byte 94.

In the XML format, an optional isRequired element has been added to the sLeg (scanning-leg) element.  The complete specification for the XML-based SPAN format is at:

             http://www.cme-ch.com/span/span4_xml_index.htm
 

Sample SPAN files

Sample combined SPAN files for the Common Clearing Link, containing data for both CBT and CME, are available at ftp.cme.com/pub/span/data/cme/test. 

The unpacked-format file for business date September 5th, for example, is named ccl.20030905.s.cust.par, with the corresponding packed, expanded-unpacked, and XML format files named as .pck, .pa2, and .spn, respectively.  For zipped versions of these files, add a .zip to the end of the filename.

The special Common Clearing Link version of the PC-SPAN Organization Master file is also available in this location, named as orgmast-ccl.zip.
 

Updated PC-SPAN

A new version of PC-SPAN which implements these new features will be made available shortly.
 

Updated SPAN Technical Specifications

The SPAN Technical Specifications document has been updated to reflect these enhancements to Scanning-Based Intercommodity Spreading.  To receive a copy, please contact either Dmitriy Glinberg (312-648-8680, dglinber@cme.com) or Ed Gogol (312-648-3674, egogol@cme.com.)