Span margin

Span margin
See also
Implementation Shortfall Fee structure Margin level Fiduciary Call Gamma hedging Selling Into Strength Capped Index Forced sale value Total capitalization

SPAN margin is a margin calculated by Standardized Portfolio Analysis of risk system. The system is used in futures and options exchanges in many countries. SPAN uses advanced algorithms that determine risk and based on this present margin requirements.

Chicago Mercantile Exchange formed system for calculating margin. “As excerpted directly from the CME Group web site: SPAN uses the risk arrays to scan underlying market price changes and volatility changes for all contracts in a portfolio, in order to determine value gains and losses at the portfolio level. This is the single most important calculation executed by the program.” Future, options and OTC (Over-The-Counter) markets were invented to insure the cash market. “Through the SPAN system, traders are rewarded for being aware of this. Although the CME invented the SPAN margin calculation system, various exchanges around the world have adopted it.”

There are many margin calculators available in the internet that enable investors to calculate margin. This helps to make decisions faster as well as reduce risk of bad decisions.

The margin is an amount of money that investor gets for the risk he takes buying options or futures. It doesn't mean that investor won't loss he's money. SPAN margin is only a reward for taking the risk. Thanks to SPAN system investors know whether price is high enough to cover the risk.

Futures margin

“Futures margins are typically determined by the SPAN margining system, which takes into account all positions in a customer’s account and, in general, usually produces a lower margin requirement than the 20 percent standard margin methodology. Portfolio margining may bring equity margin rules more in line with futures margin requirements under various circumstances.”

Options margin

“For options, the margin is essentially a bookkeeping entry and does not represent the actual use of money. As a result, interest can be earned in an account for the full amount; for example, if you have $100,000 in a brokerage account and you have a margin requirement of $60,000 from option sales, you still earn interest on the entire $100,000 plus the additional premium collected.”

Portfolio margining

“In contrast, portfolio margining is a method for computing margin option positions based on the risk profile of the account, rather than on fixed percentages, for qualified customers. The portfolio margining method uses a risk-based scheme, instead of a strategy-based scheme, by using theoretical pricing models to calculate the loss of a position at different price points above and below the current stock or index price.”

Examples of Span margin

• In the United States, the Commodity Futures Trading Commission (CFTC) requires that all futures and options traders must meet the SPAN margin requirements. SPAN stands for Standardized Portfolio Analysis of Risk and is a system that is used to determine the amount of margin required to hold a particular position in the market. This margin can range from a few hundred dollars to hundreds of thousands of dollars, depending upon the size and nature of the position.
• In the United Kingdom, the Financial Conduct Authority (FCA) requires that all futures and options traders must meet the SPAN margin requirements. SPAN stands for Standardized Portfolio Analysis of Risk and is a system that is used to determine the amount of margin required to hold a particular position in the market. This margin can range from a few hundred pounds to hundreds of thousands of pounds, depending upon the size and nature of the position.
• In the Indian National Stock Exchange (NSE), the National Securities Depository (NSDL) requires that all stock and options traders must meet the SPAN margin requirements. SPAN stands for Standardized Portfolio Analysis of Risk and is a system that is used to determine the amount of margin required to hold a particular position in the market. This margin can range from a few hundred rupees to hundreds of thousands of rupees, depending upon the size and nature of the position.

Advantages of Span margin

SPAN margin offers a variety of advantages for futures and options exchanges, including:

• Enhanced risk management: SPAN margin offers advanced risk management capabilities that help exchanges to better analyze and respond to market volatility. It is designed to help exchanges identify and manage risk by providing margin requirements for various trading positions.
• Reduced capital requirements: SPAN margin helps exchanges to reduce their capital requirements as it allows them to set a lower margin requirement for specific trades or portfolios. This reduces the amount of capital that exchanges need to cover potential losses.
• Improved customer service: SPAN margin helps exchanges to provide better customer service by providing the ability to quickly analyze and respond to customer trades. This helps exchanges to better manage customer portfolios and helps exchanges to respond to customer needs more quickly.
• Increased liquidity: SPAN margin helps exchanges to increase liquidity by allowing them to set lower margin requirements. This means that more traders are able to engage in trading activities, leading to improved liquidity.
• Increased transparency: SPAN margin also helps exchanges to increase transparency by providing a standardized, automated system for setting margin requirements. This helps ensure that exchanges are consistently setting margin requirements that are fair and consistent.

Limitations of Span margin

Span margin has some limitations that should be taken into consideration when using it. These include:

• It only considers market risk, meaning it does not account for operational or credit risks.
• It only takes into account the most liquid contracts, leaving out other contracts that could be more beneficial.
• It may not accurately reflect the risk of a portfolio as it is based on a static model, meaning the margin requirements may not change as the market conditions change.
• It is not able to fully capture the risk of an individual trader or portfolio.
• It does not account for the differences in liquidity and volatility between different markets, meaning the margin requirements may be too large or too small depending on the market.

Other approaches related to Span margin

SPAN margin is not the only approach used in futures and options exchanges for determining risk and margin requirements. Other approaches include:

• Value at Risk (VaR) – a risk assessment technique which calculates the maximum potential loss over a specific time period. It is based on historical market data and has been widely used in the financial industry.
• Volatility-based Margin (VBM) – a method which uses the volatility of the underlying asset to assess risk. It is based on the assumption that higher volatility implies greater risk.
• Stress Testing – a risk management technique which focuses on understanding how a portfolio would react to extreme market conditions. It is used to evaluate the robustness of a trading strategy under various market scenarios.

In summary, SPAN margin is one approach used to assess risk and margin requirements in futures and options exchanges. Other approaches include Value at Risk, Volatility-based Margin, and Stress Testing.

References

• Artzner P. (1999). Application of coherent risk measures to capital requirements in insurance North American Actuarial Journal, Vol. 3, Iss. 2
• Artzner, P., Delbaen, F., Eber, J. M., & Heath, D. (1999). Coherent measures of risk. Mathematical finance, 9(3), 203-228.
• Friedentag H. C. (2009). The Stock Option Income Generator: How to Make Steady Profits by Renting Your Stocks

Author: Natalia Pęgiel