SPAN

CME SPAN is a risk management tool that helps exchanges, clearinghouses, and brokers determine the appropriate margin (performance bond) requirements for a portfolio of futures and options contracts. Margin is collateral that ensures market participants can fulfill their financial obligations, protecting both traders and markets if a participant is unable to cover potential losses.

The SPAN methodology evaluates risk by calculating the worst possible loss over a specified time period (typically one trading day) under various market conditions. It uses a set of risk scenarios to estimate potential gains or losses based on factors like price changes, volatility shifts, and time decay.

At the core is the CME SPAN risk array, a set of numeric values that show how a contract’s value changes under different scenarios. The methodology includes adjustable parameters like:

• Price scan ranges: Expected maximum price movements for each instrument.
• Volatility scan ranges: Anticipated volatility changes in an instrument’s underlying price.
• Intra- and inter-commodity spreading: Risk evaluation for related products and spreads.
• Delivery risk: Risk of positions in deliverable products.
• Short option minimum: Minimum risk for deep out-of-the-money short options.

Exchanges or clearing organizations calculate the SPAN risk array and publish the CME SPAN risk parameter file for market participants. Using software like CME's PC-SPAN, traders can quickly calculate margin requirements, which are updated daily based on the latest risk data.