SPAN (Standard Portfolio Analysis of Risk)
SPAN (Standard Portfolio Analysis of Risk) is a sophisticated risk-based methodology for calculating margin requirements in derivatives markets. Developed by CME Group, SPAN has become the global standard for determining appropriate collateral levels by simulating potential portfolio value changes across various market scenarios.
How SPAN works
SPAN calculates margin requirements by analyzing the potential losses a portfolio might face under different market conditions. The system evaluates 16 distinct scenarios that combine:
- Price movements (up and down)
- Volatility changes (up and down)
- Time decay impacts
- Correlation effects between related products
Each scenario generates a risk array that represents potential losses, with the largest reasonable loss determining the initial margin requirement.
Key components of SPAN calculation
Risk scenarios
SPAN evaluates portfolios across standardized price and volatility scenarios:
Risk arrays
Each contract's risk is represented through a standardized array containing:
- Price scan risk
- Volatility scan risk
- Physical delivery risk
- Inter-month spread charge
- Short option minimum
Integration with trading systems
SPAN interfaces with order management systems and risk management systems to provide:
- Real-time margin calculations
- Pre-trade risk checks
- End-of-day margin calls
- What-if analysis capabilities
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Market applications
Clearing house usage
Central counterparty clearing organizations use SPAN to:
- Set initial margin requirements
- Calculate variation margin
- Evaluate clearing member risk
- Determine collateral adequacy
Risk management benefits
- Portfolio-level risk assessment
- Recognition of correlations between products
- Standardized risk measurement across markets
- Efficient capital allocation
Modern implementations
Contemporary SPAN systems leverage advanced technologies for:
- Real-time calculation capabilities
- Integration with real-time risk assessment systems
- Cloud-based deployment options
- API-driven architecture
The methodology continues to evolve with market needs while maintaining its core principle of portfolio-level risk evaluation.
Performance considerations
SPAN calculations require significant computational resources, especially for:
- Large portfolios
- Complex option positions
- Real-time margin updates
- Multiple currency calculations
Modern implementations often utilize parallel processing and optimization techniques to meet performance requirements.