After years of development and testing, discussions with industry participants, and delays due to pandemic lockdowns, CME has announced a multi-year, phased schedule for the rollout of its long-anticipated SPAN 2 margin methodology. CME (and over 30 CCPs around the world to which CME has licensed it) relies on the Standard Portfolio Analysis of Risk system to generate margin requirements for all futures and options on futures listed on its exchanges. (CME cleared swaps are margined using an historical Value at Risk (VaR) system; likewise ICE’s margin risk model is VaR-based.) CME clearing members in turn are required to use SPAN to generate margin requirements for their customers’ futures portfolios (as well as for their proprietary futures accounts).
Initially developed in the 1980s, the signal virtues of SPAN are its flexibility and adaptability; risk managers at CCPs and clearing members alike have broad discretion in implementing SPAN to set product-specific risk tolerances, which are then run through 16 market risk scenarios. The down-side of that adaptability, however, is lack of transparency; to risk managers on the other side of a SPAN-generated margin call the SPAN requirement can seem like it’s coming out of a black box.
SPAN 2 aims to combine adaptability and transparency. Allowing for margin calculations to be tailored to risk factors specific to products or portfolios, it will also allow clearing members and their customers to produce risk reports that match portfolio-level risks to specific margin components. Unlike SPAN, which was developed at a time when computing power limited the ability of CCPs to analyze portfolio risk, SPAN 2 is a VaR model that can assess a portfolio’s potential losses across a range of historical and hypothetical scenarios, in real time.
CME rules actually permit any clearing member to use a margin system other than SPAN, if the clearing member can demonstrate that its system “will always produce” a margin requirement equal to or greater than the SPAN requirements. The CME clearing house, however, is not similarly constrained in its power to adopt a new system. Many industry observers expect that a VaR-based methodology like SPAN 2 will generally result in lower margin requirements than SPAN, for most portfolios; at any rate, SPAN 2 will likely not “always produce” higher requirements.
CME’s rollout of SPAN 2 calls for go-live for NYMEX oil, gas, and natural gas futures and options on futures in Q3 2023. Equity products will follow in the first half of 2024, interest rate and FX products (including cleared swaps), in the second half. Agricultural and any remaining products will transition last, in the second half of 2025. Clearing members (and customers looking to optimize capital usage) will want to use the phase-in timelines to prepare for the cutover, working with their service providers or with CME margin services, depending on how they use SPAN today.