The SPAN (Standard Portfolio Analysis of Risk) Model is a portfolio-based margin system developed by the Chicago Mercantile Exchange (CME) that calculates risk-based margin requirements for futures and options portfolios. In institutional crypto options trading, it provides a comprehensive methodology for assessing the overall risk of a derivatives portfolio, considering various market scenarios and offsets.
Mechanism
SPAN operates by calculating the potential loss a portfolio could incur over a specific liquidation period under a range of predefined market movements, including changes in price, volatility, and time decay. It employs a grid of risk arrays, representing different scenarios, and identifies the largest loss among these scenarios to determine the margin required to cover that potential exposure, allowing for netting of offsetting positions.
Methodology
For institutional participants in regulated crypto derivatives markets, leveraging the SPAN Model is critical for capital efficiency and accurate risk management. It enables clearing houses and brokers to calculate margin requirements that reflect the true risk of a portfolio rather than summing individual instrument risks, allowing traders to optimize capital deployment while ensuring sufficient collateral to cover potential losses across complex options and futures strategies.
Portfolio margining in a CCP environment optimizes capital for crypto options strategies by recognizing portfolio-level risk offsets, enhancing efficiency and control.
A redesigned margin model with anti-procyclical components can reduce systemic risk by smoothing liquidity demands, preventing the fire-sale spirals that define a crisis.
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