CME SPAN®

Standard Portfolio Analysis of Risk®

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CME SPAN® - Standard Portfolio Analysis of Risk

• Developed in 1988 by Chicago Mercantile Exchange Inc. to effectively assess

risk on an overall portfolio basis.
• SPAN is a market simulation based Value At Risk system which has been
reviewed and approved by market regulators and participants world wide.
• SPAN is the official Performance Bond mechanism of 54 exchanges and
clearing organizations world-wide, making it the global standard for portfolio
margining.
• SPAN’s risk based margin requirements allows for effective margin coverage
while preserving efficient use of capital.
• SPAN assesses risk for a wide variety of financial instruments including:
futures, options, physicals, equities, or any combination.

© 2019 CME Group. All rights reserved.

CME SPAN® - Objectives

• SPAN assesses the risk of a portfolio by calculating the maximum likely loss
that could be suffered by the portfolio based on parameters set by the margin-
setting authority, usually an exchange or clearing organization.
• The core of SPAN risk analysis is to simulate potential market moves and
calculate the profit or loss on individual contracts given the market moves.
• Exchanges may determine any number of market scenarios to be included in
the SPAN analysis.
• Most SPAN exchanges and clearing organizations use 16 scenarios.

© 2019 CME Group. All rights reserved.

CME SPAN® - Methodology

• SPAN groups together financial instruments with the same underlying for
analysis.
• For example, Futures on an Equity Index and Options on the Equity Index
would be grouped together for analysis.
• Each product is referred to as a Combined Commodity.
• SPAN uses parameters set by the exchange or clearing organization to
evaluate a portfolio with the following two step analysis:
➢Step 1: SPAN first analyzes the risk of each Combined Commodity in isolation from
other Combined Commodities.
➢Step 2: SPAN then seeks risk reducing offsets between Combined Commodities.

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Scan Risk Arrays

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CME SPAN® - Scan Risk

• The core of SPAN risk analysis to simulate potential market moves and
calculate the profit or loss on individual contracts.
• Exchanges or clearing organizations may determine any number of market
scenarios to be included in SPAN analysis.
• Most SPAN exchanges or clearing organizations use 16 scenarios.
• The 16 scenarios are referred to as SPAN Risk Arrays.

© 2019 CME Group. All rights reserved.

CME SPAN® - Scan Risk Arrays

• SPAN Risk Arrays represent a contract's hypothetical gain/loss under a specific

set of market conditions from a set point in time to a specific point in time in the
future.
• Risk Arrays typically consist of 16 profit/loss scenarios for each contract.
• Each Risk Array scenario is comprised of a different market simulation, moving
the underlying price up or down and/or moving volatility up or down.
• The risk array representing the maximum likely loss becomes the Scan Risk for
the portfolio.

© 2019 CME Group. All rights reserved.

CME SPAN® - Scan Risk Arrays
• Below is an example of the 16 Scan Risk Arrays used by CME
.
Underlying Price Change as %
Scenario Volatility Move
of Price Scan Range
1 UNCHANGED UP
2 UNCHANGED DOWN
3 UP 33% UP
4 UP 33% DOWN
5 DOWN 33% UP
6 DOWN 33% DOWN
7 UP 67% UP
8 UP 67% DOWN
9 DOWN 67% UP
10 DOWN 67% DOWN
11 UP 100% UP
12 UP 100% DOWN
13 DOWN 100% UP
14 DOWN 100% DOWN
15 UP 300% UP
16 Down 300% UP

© 2019 CME Group. All rights reserved.

CME SPAN® - Scan Risk Example

• The next slide demonstrates the Scanning Risk calculation for an S&P 500
portfolio:
➢Long 1 MAR 2019 SP Future (price is 2,790)
➢Short 1 MAR 2019 SP 2825 Call Option (implied volatility is 16%)
• The Price Scan Range is $30,000 or 120 points (CVF for SP 500 is $250,
$30,000/$250 = 120 points)
• The Volatility Scan Range for SP 500 is 35%

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CME SPAN® - Scan Risk Example
SP Underlying SP Future SP Option Portfolio
Scenario Volatility Move
Price Move Gain/Loss Gain/Loss Gain/Loss
1 UNCHANGED UP $0 $1,994 $1,994
2 UNCHANGED DOWN $0 -$1,517 -$1,517
3 UP 33% UP -$9,999 $6,291 -$3,708
4 UP 33% DOWN -$9,999 $2,178 -$7,821
5 DOWN 33% UP $9,999 -$714 $9,285
6 DOWN 33% DOWN $9,999 -$2,876 $7,123
7 UP 67% UP -$20,001 $12,281 -$7,720
8 UP 67% DOWN -$20,001 $8,818 -$11,183
9 DOWN 67% UP $20,001 -$2,183 $17,818
10 DOWN 67% DOWN $20,001 -$3,179 $16,822
11 UP 100% UP -$30,000 $19,772 -$10,228
12 UP 100% DOWN -$30,000 $17,607 -$12,393
13 DOWN 100% UP $30,000 -$2,857 $27,143
14 DOWN 100% DOWN $30,000 -$3,218 $26,782
15 UP 300% UP -$29,700 $25,503 -$4,197
16 Down 300% UP $29,700 -$1,063 $28,637

Largest Potential Loss = SPAN Risk $28,637

© 2019 CME Group. All rights reserved.

CME SPAN® - Scan Risk Extreme Scenarios

• Deep out-of-the-money short options may pose significant risk, as unusually

large price changes may result in unexpectedly large losses, particularly as
expiration nears.
• SPAN accounts for this risk by including Extreme Scenarios in the Risk Arrays.
• Extreme Scenarios may be used to simulate a significant market move
designed to shock deep out-of-the-money options.
• Extreme Scenarios are determined by the Exchange or Clearing Organization.
• CME uses a market move equal to 3x Price Scan Range and 1x Vol Scan for a
given product. The resulting gain or loss is then multiplied by 33% to determine
the potential exposure.

© 2019 CME Group. All rights reserved.

CME SPAN® - Composite Delta Scenarios

• Composite Delta is derived as the weighted average of the deltas, where the
weights are associated with each underlying price scan point.
• Below is an example of the 7 Delta Points used by CME:
Underlying Price Change as % of
Probability Weight
Scenario Price Scan Range

1 UNCHANGED 0.27

3 UP 33% 0.217

5 DOWN 33% 0.217

7 UP 67% 0.11

9 DOWN 67% 0.11

11 UP 100% 0.037

13 DOWN 100% 0.037

© 2019 CME Group. All rights reserved.

SPAN® Analysis
Spread Types & Formations
Short Option Minimum & Delivery Add-On Charge
Net Option Value

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CME SPAN® - Spread Types & Formation

• Intra-Commodity Spread: Evaluate the basis risk between contract periods with different
expirations within the same product. Spreads are prioritized by lowest charge.
• Inter-Commodity Spread: Evaluate credit available for offsetting positions in related
instruments. Spreads are prioritized by greatest total savings.
• SPAN forms Intra-Commodity Spreads before Inter-Commodity Spreads.
• Super Inter-Commodity Spread: Allows Inter-Commodity Spreads to be evaluated
before Intra-Commodity Spreads.
• Inter-Exchange Spread Credit: Allows spreads to be formed for portfolios containing
products listed on multiple Exchanges, as defined by the Exchange.
➢The formation of Inter-Exchange Spreads is similar to process of forming Inter-Commodity Spreads,
however each Exchange can only provide a credit for its own products.

© 2019 CME Group. All rights reserved.

CME SPAN® - Intra-Commodity Spread Risk
• Since futures prices do not correlate exactly across contract months, a gain in one month may
not exactly offset losses in another month.
• An Intra-Commodity Spread Charge can be set in SPAN to cover the risk of calendar spread
positions.
• The Intra-Commodity Spread Charge can be tailored for contract pairs or specified groups of
contracts.
• There is no limit to the number of contract legs that can be specified in an Intra-Commodity
Spread, also known as tiered intra-commodity spreading.
• The Intra-Commodity Spread Charge can also be tailored to specific calendar months.
• For example, a March versus April calendar spread can have a different charge rate than a
March versus September calendar spread. This is also known as series specific intra-
commodity spreading.
• The next slide shows an example of an Intra-commodity Spread for a portfolio with 1 long Mar
2019 Eurodollar and 1 short April 2019 Eurodollar.

© 2019 CME Group. All rights reserved.

CME SPAN® - Intra-Commodity Spread Example
• The Intra-Commodity Spread Charge for Mar 2019 vs. Apr 2019 is $70.
• Since the gains on Mar ED exactly offset the losses on Apr ED, the Scan Risk is $0.
• Therefore, the Intra-Commodity Spread Scenario
ED Underlying Price
Volatility Move
Mar ED Apr ED Portfolio
Move Gain/Loss Gain/Loss Gain/Loss
charge of $70 becomes SPAN Risk. 1 UNCHANGED UP $0 $0 $0
2 UNCHANGED DOWN $0 $0 $0
3 UP 33% UP -$60 $60 $0
4 UP 33% DOWN -$60 $60 $0
5 DOWN 33% UP $60 -$60 $0
6 DOWN 33% DOWN $60 -$60 $0
7 UP 67% UP -$120 $120 $0
8 UP 67% DOWN -$120 $120 $0
9 DOWN 67% UP $120 -$120 $0
10 DOWN 67% DOWN $120 -$120 $0
11 UP 100% UP -$180 $180 $0
12 UP 100% DOWN -$180 $180 $0
13 DOWN 100% UP $180 -$180 $0
14 DOWN 100% DOWN $180 -$180 $0
15 UP 300% UP -$178 $178 $0
16 Down 300% UP $178 -$178 $0

© 2019 CME Group. All rights reserved.

CME SPAN® - Inter-Commodity Spread Risk
• To recognize the risk reducing aspects of portfolios containing off-setting positions in
highly correlated instruments, SPAN forms Inter-Commodity Spreads.
• Inter-Commodity Spreads produce credits which reduce the overall performance bond or
margin requirement.
• The universe of recognized spreads, rates, and priority are determined by the Exchange.
• Below is an example of 1 Long SP future and 5 Short Nasdaq futures. The recognized
spread ratio is 1 SP vs. 5 NQ and the spread credit is 75%
Combined Recognized SPAN
Position Outright PB Requirement
Commodity Spread Credit Requirement

SP Long 1 $30,000

NQ Short 5 $7,600 x 5 = $38,000

Total $68,000 X 75% = $51,000 $17,000

© 2019 CME Group. All rights reserved.

CME SPAN® - Inter-Commodity Delta Based Spreading

• Delta Based Spreading is performed after the Scan Risk or Scanning process.
• One result of the Scanning process for each Combined Commodity is a Net Delta
position, which is an estimate of market exposure that has not been offset within the
Combined Commodity, which is available to be offset between Combined
Commodities.
• Each exchange defines a table of recognized Inter-Commodity Spread formations
and the margin credit to apply for such formations.
• SPAN takes the Inter-commodity spread table and seeks out the defined spread
formations, giving margin credit for each spread formed.
• A Delta based spread may contain any number of spread legs. Any remaining deltas
are margined at the outright rate.

© 2019 CME Group. All rights reserved.

CME SPAN® - Delta Based Spread Example
• Long 50 Soybean (S) futures & Short 50 Corn (C) futures
Outright PB Spread Credit
Product Position Spread Ratio
Requirement
Spread Position
S 50 $1,750 1
60%
C -50 $700 2

Outright PB Position x Outright Spread Credit

Product Position PB
Requirement
Spread Credit
S 25 $1,750 $43,750 $78,750 x .60 =
C 50 $700 $35,000 $47,250

Outright PB Position x Outright

Product Position
Requirement PB
Remaining Delta
S 25 $1,750 $43,750

C 0 $700 $0

Remaining Delta Total PB

Delta-Based Total Spread Req (40%)
PB Requirement Requirement
Requirement
$43,750 $31,500 $75,250

© 2019 CME Group. All rights reserved.

CME SPAN® - Inter-Commodity Scanning Based
Spreading
• Another method of recognizing offsetting positions between Combined
Commodities is Scanning Based Spreading.
• Scanning Based Spreading allows Combined Commodities which are part of
the spread to go through SPAN’s 16 scenarios simultaneously, ensuring they
are subject to the same worst case loss scenario and that offsetting futures and
options delta positions between them automatically offset.
• In recognizing that the correlations between Combined Commodities may not
be perfect, the gains in the Scanning process may be limited by a gain
allowance factor set by the exchange.

© 2019 CME Group. All rights reserved.

CME SPAN® - Scanning Based Spread Example
• Long 90 Bond futures & Short 90 10yr futures
. Underlying Price Portfolio
Scenario Volatility Move
Move Gain/Loss
1 UNCHANGED UP $0
2 UNCHANGED DOWN $0
3 UP 33% UP -$15,255
4 UP 33% DOWN -$15,255
5 DOWN 33% UP $54,095
6 DOWN 33% DOWN $54,095
7 UP 67% UP -$30,420
8 UP 67% DOWN -$30,420
9 DOWN 67% UP $108,131
10 DOWN 67% DOWN $108,131
11 UP 100% UP -$45,675
12 UP 100% DOWN -$45,675
13 DOWN 100% UP $162,225
14 DOWN 100% DOWN $162,225
15 UP 300% UP -$45,202
16 Down 300% UP $160,619
Scanning Based PB Requirement $162,225

© 2019 CME Group. All rights reserved.

CME SPAN® - Short Option Minimum
• Deep out-of-the-money short options may show zero or minimal Scan Risk given the
price & volatility moves in the 16 market scenarios.
• However, in extreme events these options may move closer to-the money or in-the-
money, thereby generating potentially large losses.
• To account for this potential exposure, a Short Option Minimum can be set for each
product.
• If the Scan Risk is lower than the Short Option Minimum, then the Short Option Minimum
is charged.
• The next slide shows an example of the Short Option Minimum using a deep out-of-the-
money short put.
➢Short 1 SP 500 Mar 2019 1750 Put (underlying price is 2790)
➢Short Option Minimum on 1 SP 500 is $240

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CME SPAN® - Short Option Minimum Example
• Scan Risk is $228, however SOM is $240, so the requirement is $240.
. Underlying Price Portfolio
Scenario Volatility Move
Move Gain/Loss
1 UNCHANGED UP $52
2 UNCHANGED DOWN -$1
3 UP 33% UP $38
4 UP 33% DOWN -$1
5 DOWN 33% UP $70
6 DOWN 33% DOWN -$1
7 UP 67% UP $28
8 UP 67% DOWN -$1
9 DOWN 67% UP $95
10 DOWN 67% DOWN -$1
11 UP 100% UP $20
12 UP 100% DOWN -$1
13 DOWN 100% UP $127
14 DOWN 100% DOWN -$1
15 UP 300% UP $1
16 Down 300% UP $228
Scanning Based PB Requirement $228

© 2019 CME Group. All rights reserved.

CME SPAN® - Summary of SPAN Analysis
• Scan Risk: Evaluate the directional market risk.
• Intra-Commodity Spread Charge: Evaluate the basis risk between contract periods with
different expirations within the same product.
• Inter-Commodity Spread Credit: Evaluate credit available for offsetting positions in related
instruments.
• Delivery Add-On Charge: Evaluate contract periods for increasing volatility during delivery.
• Short Option Minimum: Evaluate short option positions for potential increased risk, using the
greater of the Scan Risk or Short Option Minimum.
• SPAN Requirement for a Combined Commodity is the greater of:
➢(Scan Risk + Intra Commodity Spread Charge + Delivery Charge – Inter Commodity Spread Credit)
➢Short Option Minimum
• The Total SPAN Requirement for a portfolio is the sum of the SPAN Requirement for all
Combined Commodities.

© 2019 CME Group. All rights reserved.

CME SPAN® - Net Option Value

• Mark-to-market of options is reflected in the Net Option Value component of SPAN.

• The Total Performance Bond Requirement for a portfolio reflects the Total SPAN
Requirement and the Net Option Value of the portfolio.
• The Net Option Value (NOV) of a portfolio is equal to the Long Option Value minus the
Short Option Value.
• Long Option Value (LOV): The total value of all the long options in the portfolio.
• Short Option Value (SOV): The total value of all the short options in the portfolio.
• LOV reduces the overall Total Performance Bond Requirement.
• SOV increases the overall Total Performance Bond Requirement.

© 2019 CME Group. All rights reserved.

CME SPAN® - Net Short Option Value
• The portfolio below includes:
➢Long 1 Mar 2019 SP Futures (price is 2,790)
➢Short 1 Mar 2019 SP 2750 Call Option (price is $51.36, option value is $11,975)
➢Long 1 Mar 2019 SP 2650 Put Option (price is $5.94, option value is $1,825)

SPAN Risk = $13,037

LOV = $1,825
SOV = $11,975
ANOV = ($10,150)
SPAN Risk - ANOV = Total Requirement
$13,037 - ($10,150) = $23,187

© 2019 CME Group. All rights reserved.

CME SPAN® - Net Long Option Value
• The portfolio below includes:
➢Short 1 Mar 2019 SP Futures (price is 2790)
➢Long 1 Mar 2019 SP 2750 Call Option (price is $51.36, option value is $11,975)
➢Short 1 Mar 2019 SP 2650 Put Option (price is $5.94, option value is $1,825)

SPAN Risk = $3,992

LOV = $11,975
SOV = $1,825
ANOV = $10,150
SPAN Risk - ANOV = Total Requirement
$3,992 - $10,150 = ($6,158)

© 2019 CME Group. All rights reserved.

Disclaimer

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken
by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and
swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than
the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without
affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every
trade.

CME Group, the Globe Logo, CME, Globex, E-Mini, CME Direct, CME DataMine and Chicago Mercantile Exchange are trademarks of Chicago
Mercantile Exchange Inc. CBOT is a trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is a trademark of New York Mercantile
Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other trademarks are the property of their respective owners.

The information within this communication has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for
any errors or omissions. Additionally, all examples in this communication are hypothetical situations, used for explanation purposes only, and
should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are
made subject to and superseded by official CME, CBOT, NYMEX and COMEX rules. Current rules should be consulted in all cases concerning
contract specifications.

Copyright © 2019 CME Group Inc. All rights reserved.

© 2019 CME Group. All rights reserved.