SPAN 2 refers to the advanced methodology for calculating initial margin requirements for derivatives portfolios, developed by CME Group as a successor to the original Standard Portfolio Analysis of Risk (SPAN) system. It offers enhanced precision and greater risk sensitivity in assessing collateral needs.
Mechanism
SPAN 2 operates by simulating a comprehensive array of predefined market scenarios, which include projected changes in underlying asset prices, volatilities, and correlations, to determine the maximum potential loss for a given portfolio over a specified liquidation period. It incorporates more granular risk factors and a sophisticated model for capturing inter-asset correlations and convexity risks. This allows for a more accurate and capital-efficient allocation of collateral against portfolio risk across various derivatives.
Methodology
The methodology behind SPAN 2 aims to provide a robust, consistent, and transparent framework for margining across diverse asset classes, including those relevant to institutional crypto derivatives. It assists clearing organizations and market participants in managing counterparty credit risk by setting appropriate collateral levels based on a holistic portfolio view. Its implementation in crypto options trading platforms facilitates standardized risk measurement, promotes capital efficiency, and contributes to the overall stability of the derivatives market by reducing potential cascading defaults.
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