tiered margining overview - lch.clearnet group

Margining Overview for the London Metal Exchange

Department: Risk Management

Document Type: Guide

Issue no.: 2.0

Issue Date: March 2012

LME Margining Overview © LCH.Clearnet

Version 2.0 22/03/2012 2 of 32

Document History

Date Version Author Summary of Changes

3 May 2008 0.1 Stuart Tipton First Draft

13 May 2008 0.2 Stuart Tipton Second draft

15 May 2008 1.0 Stuart Tipton Final version issued

March 2012 2.0 Jenny Hodges Amendments


Version 2.0 22/03/2012 3 of 32

Contents

Document History _________________________________________________________ 2

1. Introduction ________________________________________________________ 4

1.1 Margining -------------------------------------------------------------------------------------------- 4

1.2 PC London SPAN ---------------------------------------------------------------------------------- 4

1.3 Initial Margin Calculation ------------------------------------------------------------------------- 4

2. Scanning Risk ______________________________________________________ 5

2.1 Scanning Risk Explained ------------------------------------------------------------------------- 5

2.2 Example 1 ------------------------------------------------------------------------------------------- 5

2.3 Example 2 ------------------------------------------------------------------------------------------- 6

2.4 Example Using PC London SPAN ------------------------------------------------------------- 7

3. Inter-month Spread Charge____________________________________________ 9

3.1 Intermonth-month Spread Charge Explained ----------------------------------------------- 9

3.2 Example ---------------------------------------------------------------------------------------------- 9

4. Inter Commodity Spread Credit _______________________________________ 13

4.1 Inter Commodity Spread Credits Explained ----------------------------------------------- 13

4.2 Example -------------------------------------------------------------------------------------------- 13

5. Calculating Initial Margin for Options __________________________________ 17

5.1 Example of Options Margining in PC London Span ------------------------------------- 17

5.2 Short Option Minimum Charge --------------------------------------------------------------- 18

5.3 Portfolio Example Using PC London SPAN ----------------------------------------------- 20

6. PC London SPAN Parameter File ______________________________________ 23

6.1 Accessing the Parameter file ------------------------------------------------------------------ 23

6.2 Navigating the Parameter File ---------------------------------------------------------------- 23

7. Variation Margin / Net Liquidation Value ________________________________ 26

7.1 Variation Margin ---------------------------------------------------------------------------------- 26

7.2 Realised Variation Margin---------------------------------------------------------------------- 26

7.3 Non Realised Variation Margin --------------------------------------------------------------- 26

7.4 Net Liquidating Value --------------------------------------------------------------------------- 27

8. Glossary of Terms __________________________________________________ 29


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1. Introduction The London Metal Exchange (LME) is margined differently to most exchange traded futures

and options cleared by LCH.Clearnet Ltd. This is because of what is known as Contingent

Variation Margin (CVM).

On the LME, profits and losses are not realised until the prompt date. The Scanning Risk

needs to be discounted, as it is the present value to cover possible losses in the future. This

discounting is applied to the net position before Scanning Risks, Inter-month Charges and

Inter Commodity Credits are calculated.

Variation Margin is calculated in a number of ways depending on the type of contract. LME

variation margin on most contracts is not realised on a day-to-day basis but only paid on

expiry. CVM is used on all LME base metal and plastic futures. Options on the LME are

margined using Net Liquidation Value (NLV), whilst LME mini and LME index contracts are

marked to market daily with variation margin being realised.

1.1 Margining

As central counterparty to its members' trades, LCH.Clearnet Limited (LCH.C) is at risk from

the default of a member. To limit and cover such potential loss in the event of a default,

LCH.C collects margin on all open positions and recalculates members' margin liabilities on

a daily basis. There are two major types: Initial Margin (IM) is the deposit required on all

net positions and is returned by LCH.C to members when positions are closed and

Variation Margin (VM) is the member’s profits or losses that are calculated daily from the

market-to-market close value of their open position.

1.2 PC London SPAN

PC London SPAN (Standard Portfolio Analysis of risk) is a portfolio based margining system

that incorporates both futures and options, and calculates the net Initial Margin requirement.

There are three major inputs to the PC London SPAN margin calculation - Positions, Prices

and Parameters (determined by LCH.C and reviewed on a continual basis). A change to any

one of these will result in a change to the margin requirement.

1.3 Initial Margin Calculation

PC London SPAN uses the following calculation to work out the initial margin requirements, it is the maximum of:

+ + -

OR

Each of these will be explained with examples and SPAN documentation.

Scanning

Risk

Inter-Month

Spread Charge

Spot Month

Charge

Inter-Commodity

Spread Credit

Short Option Minimum Charge


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2. Scanning Risk

2.1 Scanning Risk Explained

To calculate the scanning risk the following formula must be applied:

X X =

The net position is calculated by subtracting the number of short lots from the number of

long lots i.e. a portfolio of 50 long lots and 10 short lots will have a net position of 40 long

lots.

The discount factor is then applied. The reason for this is that LME profits and losses on a

majority of contracts are not realised until the prompt date. If a default occurred the Initial

Margin would not be needed to cover any potential losses on the contract until the prompt

date. The Scanning Risk is therefore discounted to get the present value of the Initial Margin

that would be required on the prompt date.

The discount factor is provided by the LME and there is a specific discount for every

expiry and price.

X =

NB:

The Scanning Range is set by LCH.C and is available on the website in the latest LME

Margin Rate Circular. The scanning range used is per lot not per tonne.

2.2 Example 1

1 Long Future Copper – Expiry 01/04/2008 – Discount Factor = 0.997

X X =

X X =

The total IM requirement for the above position is $12,463.

Scanning

Range

Net

Position

Discount

Factor

Scanning

Risk

Net

Position

Discount

Factor

Net

Delta

Scanning

Range

Net

Position

Discount

Factor

Scanning

Risk

1 0.997 $12,463 $12,500


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2.3 Example 2

Using a portfolio containing Aluminium Alloy (AAD) and Copper (CAD) Positions:

Long 20 AAD – Expiry 07/05/08 – Discount Factor 0.996412

Short 15 AAD – Expiry 07/05/08 – Discount Factor 0.996412

Long 10 CAD – Expiry 07/05/08 – Discount Factor 0.996412

Scanning ranges: AAD $1,820; CAD $12,500

Net Delta for AAD positions:

X =

X =

IM Requirement for AAD positions:

X =

X =

NB: Please note we have already worked out the net position for the AAD positions in the net delta calculation above.

IM Requirement for CAD positions:

X X =

X X =

The total Initial Margin Requirement for this portfolio is: $9,067 (scanning risk for the AAD

positions) and $124,551 (scanning risk for the CAD positions), which totals $133,618.

Net

Position

Discount

Factor

Net

Delta

5 0.996412 4.982

Scanning

Range

Discount

Factor

Scanning

Risk

$1,820 4.982 $9,067

Scanning

Range

Net

Position

Discount

Factor

£12,500 10 0.996412

Scanning

Risk

$124,551


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2.4 Example Using PC London SPAN

The following positions were entered:

These positions produce a Summary Value Losses report as shown below. The report contains information needed to calculate the Initial Margin requirement. Contained in this report are the scanning range per lot, the expiry with the corresponding discount factor, the net position and the delta.

NB. PC London Span has defined rounding rules, which can result in different scanning

ranges if calculated manually.


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The Summary Scanning Risk report shows the scanning risk for the two contracts:

The scanning risk for the position is the greatest possible loss (highest positive value) from

the various scenarios that make up the risk arrays. This simply means the greatest amount

a contracts price is expected to move under normal market conditions (the Summary Value

Losses report also shows these scenarios).

The two scanning ranges combined generate the IM requirement for the entire portfolio, as shown in the Summary by Combined Contract Report below:


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3. Inter-month Spread Charge

3.1 Intermonth-month Spread Charge Explained

An Inter-month Spread Charge (also known as Inter-prompt charge) is applied to a portfolio

that contains long and short positions in the same contract but with different expiries. Each

expiry is priced differently so long and short positions, in the same contract with different

expiries, cannot completely offset the other. The inter-month spread charge is used to cover

this differential in prices.

LME contracts are tiered to cover all possible spread positions, below is an example of the

inter-month spread charges placed on a contract. These charges can be found in the LME

Margin Rate Circular.

NB. The priority number is the order in which an inter-month spread charge will be applied. The tiers with the smallest charge will be applied first, so for example Tier 1 vs. Tier 1 spreads will be charged before Tier 1 vs. Tier 5 spreads. This will mean that the overall IM requirement will be minimised.

3.2 Example

A portfolio contains three positions:

A. Long 60 Lead Futures Expiry 09/03/2012 – Discount factor = 0.999947

B. Short 30 Lead Futures Expiry 03/04/2012 – Discount factor = 0.999761

C. Short 20 Lead Futures Expiry 20/8/12 – Discount factor = 0.998828

The net delta of each contract is:

X =

A. X =

Net

Position

Discount

Factor

Net

Delta

60 0.999947 59.9940


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B. X =

C. X =

Firstly, you will need to determine the priority of each spread. The lower priority will always

take president as it will offer the best saving on initial margin requirement. In our example

we will assume the date is 01/03/2012, therefore position A is located in tier 2, position B is

in tier 3, and position C is in tier 5. This can be seen in the above screenshot detailing the

Lead Intermonth Spread charges. You can see that the priorities of these spreads are as

follows:

2 vs 3 = Priority 11

2 vs 5 = Priority 26

The delta of each position can also be seen in the Summary Value Losses Report in the PC

London SPAN screenshot below:

Once the priorities have been worked out, the inter-month spread charge can be calculated.

The 2 vs 3 inter-month spread contains the lowest priority out of the two inter-month

spreads; therefore this will have its delta consumed first. Position A in tier 2 has a delta of

59.9940 which is eligible for an inter-month spread charge against Position B in Tier 3 which

has a delta of -29.9940. The inter-month spread charge for tier 2 vs. tier 3 on the previous

table is $11. This is the figure per tonne and so needs to be multiplied by 25 (number of

tonnes per lot) to get a charge per lot of $275. The intermonth spread charge for 2 vs 3 will

be:

-30 0.999761 -29.9940

-20 0.998828 -19.9760


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X =

X =

As the 2 vs 5 inter-month spread has a higher priority than 2 vs 3, this will have its delta

consumed next. Position A in Tier 2 has a remaining delta of 30 (29.9940 of the delta was

consumed in the previous inter-month spread) this is eligible for a second inter-month

spread charge against Position C in Tier 5 which has a delta of -19.9760. The inter-month

spread charge for 2 vs 5 is $19 per tonne and a charge of $475 per lot will be applied. The

inter-month spread charge for 2 vs 5 will be:

X =

The Inter-month Spread Charges Report illustrates how SPAN calculates the total Inter-

month Spread Charge. In this report, the priorities, the tier spreads, the delta, charge rate

and the inter-month spread charge can all be seen.

As there is still some delta remaining that cannot be used as part of an inter-month spread,

the remaining delta of 10.024 will need to be fully margined at the full scanning range for

lead, which is $7,250 per lot. The scanning risk will be:

X =

X =

475 19.976 $9,489

7,250 10.024 $72,674

Scanning

Range

Discount

Factor

Scanning

Risk

Scanning

Range

Discount

Factor

Intermonth

Charge

275 29.994 $8,248


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The total Initial Margin requirement for this portfolio is: $8,248 and $9,489 (both inter-month spread charges), and $72,674 (remaining delta margined at full scanning range) which

totals $90,411 for the whole portfolio.

This can be seen on the Summary by Margin Group Report which shows the total initial

margin requirement for the portfolio. A scanning range of $72,692 is added to the total

Inter-month Spread Charge of $17,737 to give $90,429.

NB. PC London SPAN has defined rounding rules, which can result in different scanning ranges if calculated manually


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4. Inter-Commodity Spread Credit

4.1 Inter-Commodity Spread Credits Explained

Inter-Commodity Spread Credits are credits offered for offsetting positions in different

contracts that are closely correlated in price movements, which would reduce overall

portfolio risk. A list of inter-commodity spread credits offered is available on the LME Margin

Rate Circular.

Inter-commodity spread credits are quoted as percentage credits due per leg. For example,

if two contracts are quoted as having a credit per leg offset of 80%, this means that for

every lot only 20% of the total scanning range would be paid.

They are calculated using the following formula:

X X X =

NB. A delta ratio is a way of adjusting the inter-commodity spread credit for contracts that

trade with different lot sizes. For example, Zinc is traded at 25 tonnes per lot while Mini Zinc

is traded at 5 tonnes per lot.

The delta ratio is therefore calculated as: Zinc 1 : 5 Mini Zinc. So for every 1 lot of Zinc, Mini

Zinc will get 5 times the amount of credit as it has a smaller lot size.

4.2 Example

A portfolio contains the positions:

A. Short 30, Aluminum High Grade (AHD), 22/5/2008

B. Long 40, Aluminum Alloy (AAD), 1/5/2008

C. Short 20, Aluminum Alloy Swap (OLD), 30/5/2008

Inter-commodity spread credits offered on these positions are 90% between positions B and C, and 55% between positions A and B. Both have a delta ratio of 1:1. In this example, Positions B and C have a spread credit of 90% so the delta from these positions will be consumed first.

First of all the respective scanning risk for each position needs to be calculated:

X X =

A. X X =

Scanning

Range

Spread

Credit

Rate

No. of

Spreads

Delta

Spread

Ratio

Inter-

Commodity

Spread Credit

Net

Position

Discount

Factor

Scanning

Range

Scanning

Risk

-30 0.9964 $4,700 $140,493


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B. X X =

C. X X =

Once the scanning risk has been calculated, the number of spread credits available needs to be worked out. Since there are two spreads available, the one with the highest spread credit will consume its delta first, which in this example is Position B vs. Position C. Position B has a delta of 39.928, part of this delta is eligible for an inter-commodity spread credit against Position C which has a delta of -19.916. Position A vs. Position B will be the next inter-commodity spread credit, Position B has a remaining delta of 20.012 which is eligible for an inter-commodity spread credit with most of Position A delta, which is 39.928.

This will mean that Position A will have a left over delta of 9.878 however this has already been included in the initial scanning risk calculations above. The inter-commodity spread credits are merely savings on the total scanning risk of the portfolio, which at present is $324,808 without any credits applied so far.

The Summary Value Losses report shows the various deltas using the discount rates. It also shows the worst-case losses (which are the same as the scanning risks calculated above) for each contract in respect of the calculated deltas.

40 0.9982 $3,080 $122,979

-20 0.9957 $3,080 $61,336


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The inter-commodity spread credits can now be calculated using the following formula:

X X X =

Spread 1 (Position B and C)

B. X X X =

C. X X X =

Spread 2 (Position A and B)

A. X X X =

B. X X X =

The inter commodity spread credits are then removed from the scanning risk of each position. (Please note: position B has two credits removed as it was part of two spreads):

A: $140,493 - $51,737 = $88,756

B: $122,979 - $55,202 - $33,904 = $33,873

C: $61,336 - $55,202 = $6,134

The Total Initial Margin Requirement for this portfolio is: $88,756 + $33,873 + $6,134 which

totals $128,763

These inter-commodity spread credits can be seen in the SPAN report below, we can see

the different inter-commodity spread credits ordered in terms of priority, this means that the

higher spread credit rate the higher the priority. The Delta Ratio of both credits is 1:1 as

shown. The report also shows number of spreads available per contract.

NB. PC London SPAN rounds to two decimal places therefore some contracts have very

small remaining deltas.

Finally, the report shows the spread credit rate and then the total spread credit offered which

it works out using the formula used previously.

Scanning

Range

Spread

Credit

Rate

No. of

Spreads

Delta

Spread

Ratio

Inter-

Commodity

Spread Credit

$3,080 0.9 (90%) 19.914 1 $55,202

$3,080 0.9 (90%) 19.914 1 $55,202

$4,700 0.55 (55%) 20.014 1 $51,737

$3,080 0.55 (55%)

20.014 1 $33,904


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The Summary by Margin Group shows the Total Initial Margin required, which it determines by subtracting the combined inter-commodity spread credits away from the total scanning risk of the positions. We can then see that total initial margin requirement of $128,763 on the far right of the report.


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5. Calculating Initial Margin for Options

Option Initial Margin requires complex calculations using an option-pricing model to find the

Net Delta. This is too complex to calculate manually but PC London SPAN is able to do this.

Options will have deltas of between 0 and 1 depending on whether the option is ‘in the

money’, ‘at the money’ or ‘out of the money’. The closer to 1 an options delta is the more ‘in

the money’ it is. If an option is ‘out of the money’ in most cases the buyer of that option will

not choose to exercise it. ‘Out of the money’ options, therefore, have lower IM requirements.

‘In the money’ options have a higher IM requirement as, in most cases, they will be

exercised.

5.1 Example of Options Margining in PC London Span

The following positions were entered into PC London Span:

The Option Value losses Report shows the deltas and the Scanning losses for the various scenarios.

From the deltas it can be deduced that the 4900-strike call is in the money (delta: 0.9838),

the 8600-strike call is at the money (delta: 0.5165) and the 9900-strike call is out of the

money (delta: 0.2749).


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The total delta and scenario losses have been added together at the bottom of the report.

The highest positive value from these scenarios is the IM requirement for these positions.

This is confirmed on the Summary Value Losses Report where it displays the delta and the

worst-case loss:

The Summary by Margin Group Report details the Initial Margin Requirement shown in the previous reports.

5.2 Short Option Minimum Charge

Certain option portfolios may show zero or minimal risk when assessed using SPAN. In

these cases, SPAN requires a minimum charge for each net short option. The charge sets

an absolute minimum margin for the portfolio. If the short option minimum charge is lower

than the total initial margin calculated, it is ignored

X =

Net Short

Position

Short Option

Minimum

Charge

Short Option

Minimum

Charge


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Below is an example as to how SPAN applies the short option minimum charge. The Summary Value Losses report shows the calculation of the delta and the worst loss predicted by the various scenarios:

The Summary by Margin Group report is where the short option minimum charge can be

found. Therefore, the short option minimum charge is $5 x the Number of Lots (50), which

provides a total charge of $250. Since the Scanning Risk is only $13, the Short Option

Minimum Charge will be used as the Initial Margin.


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5.3 Portfolio Example Using PC London SPAN

Below is an example of how PC London SPAN calculates the IM requirement for a portfolio

containing futures and options of various contracts.

A portfolio contains the following positions:

The Summary Value Losses report shows the various deltas calculated for each contract,

along with the worst-case loss for each position. The contracts with inter-month spread

charges available have already had the eligible delta removed i.e. Aluminium High Grade

and Copper.


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The Inter-month Spread Charges for the contracts are shown below:


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PC London SPAN will then use the remaining deltas to calculate the Inter-Commodity

Spreads on offer. There are two available:

Aluminium High Grade vs. Aluminium Alloy

Zinc vs. Mini Zinc.

Note: the delta ratio of the Zinc to Mini Zinc is 1:5 which brings the contracts into line.

The IM calculation is available on the Summary by Margin Group Report and is calculated

by adding the scanning risk to the inter-month spread charge and taking away the inter-

commodity spread credit.

Note: the short option minimum charge of 100 does not apply as the IM for the portfolio is

far in excess of it.


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6. PC London SPAN Parameter File

6.1 Accessing the Parameter file

This file contains all the prices for futures, and strike prices for options needed to enter

positions into PC London SPAN. It is available on the LCH.C website at

http://www.lchclearnet.com/data_downloads/ltd/span.asp

Then select the LME, change the date to the previous working day, change the drop down

from compressed to standard and click next. The following screen should then appear.

Clicking on the .DAT file link will display the parameter file.

6.2 Navigating the Parameter File

http://www.lchclearnet.com/data_downloads/ltd/span.asp


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Above is how the parameter file looks for futures. The contract code and name are

displayed at the top. The expiry, price and discount factor of each future are displayed below

this.

The future highlighted would be entered into PC London SPAN the following way:

Below is an example of how options are displayed in the parameter file:

The contract code and name are displayed at the top as on the futures example. The date of

the expiry of the option is also shown at the top. The list of strike prices for this expiry is


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shown below this. The P or C after the price simply refers to whether the option is a Put or a

Call.

The 1775 strike Call highlighted would be entered into PC London Span the following way:

All LME contracts entered into PC London SPAN have to be genuine futures prices or option strike prices otherwise PC London SPAN will not be able to calculate the initial margin.


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7. Variation Margin / Net Liquidation Value

Variation margining on the LME is dealt with in various ways depending on the contract and type of contract.

7.1 Variation Margin

Open contracts are marked to market daily using the official LME quotation as the market

price. Profits and losses are either credited or debited to member’s financial accounts

(realised margin) or they form non-realised contingent liabilities or credits.

7.2 Realised Variation Margin

This is the calculated profit or loss on a contract derived from the trade price and the closing

price of a contract. This variation margin is then paid to or received from members and is

realised in Members financial accounts. The contracts that use realised variation margin on

the LME are:

LME Index futures contracts (LMEX)

All LME mini contracts.

7.3 Non Realised Variation Margin

This is again calculated using the trade price and the relevant official quotation. This

variation margin is not realised in accounts and instead forms either contingent liabilities or

credits depending on whether the contract is in profit or loss. Credits on contracts can be

used to offset losses on other contracts or against the IM Requirement. The liabilities have

to be covered by cash or non-cash collateral or offset by credits. These offsets can only be

used against LME contracts. Non – realised variation margin is applied on:

All LME Metal futures and option contracts (with the exception of LMEX and LME minis)

The example below shows the initial margin requirement and the discounted variation

margin on the position. LME variation margin is discounted as profits and losses will not be

realised until expiry.


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(Above example uses a Short Aluminium Alloy Future)

The above example shows a net margin figure of $53,555,442. Since this is a positive figure

no IM is required to be paid (this is shown as the 0.00 below the Net Margin figure). Instead

the net margin can be used to offset other margin requirements on the LME.

7.4 Net Liquidating Value

This is used for LME options and is calculated by the value of the unexpired options with

reference to the official quotation.

Bought options = asset = Net Liquidating Value Credit

Sold options = liability = Net Liquidating Value Debit

Initial Margin = Debit

Net Liquidation Value is calculated as:

X X =

All credits can be used to offset all debits providing they are LME contracts.

An example of net margin is shown below. In this example the IM (debit) is offset by the NLV

(Credit). The net margin figure shows the remainder of the NLV as a credit that can be used

to offset all debits. The ‘0.00’ figure below this shows that there is no initial margin payment

required for this position.

Contract

Size

Number of

Lots

Price of

Option

Net

Liquidation

Value


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(Above example uses Copper 21/5/08 2575 Call Option)


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8. Glossary of Terms

At-the-money

An option or warrant where the exercise price is equal to the current market price of the asset subject to the option. For example, a call option with an exercise price of 100p on a share with a share price of 100p is at-the-money.

More generally, however, an at-the-money option is an option whose exercise price is nearest to that of the underlying asset. For example, where an option has strike prices at intervals of 10p, e.g. 90p, 100p, 110p etc, if the underlying asset has a price of 97p, the at-the-money option is the 100p strike, which is the nearest strike price to the underlying price. See also In-the-Money.

Back

Call Option

An option that gives the holder the right, but not the obligation, to buy an asset at a given price on or before a given date. See also Option.

Back

Contract Size

The amount of the underlying asset which one futures contract represents, e.g. the contract size for a Copper contract is 25 tonnes. This means that underlying one Copper future is 25 tonnes of Copper, which the investor has the obligation to buy (long future) or sell (short future).

Delta

Drawn from the theoretical options pricing model (see Black Scholes), the delta of an option shows the rate of change in an option premium with respect to a change in price of the underlying asset or security. For example, the premium on an option with a delta of 0.5 will move by 0.5p for every 1p move in the price of the underlying. Delta can also be defined as either (i) the probability that the option will expire in the money, or (ii) the theoretical number of futures contracts of which the holder is either long (with a call option) or short (put option). Back

Futures Contract

A legal agreement to buy or sell a standard quantity of a specified asset for delivery at a fixed future date at a price agreed today. Futures are traded on futures exchanges, such as NYSE Liffe (London market), ICE Futures, ICE, Turquoise or the London Metal Exchange. They are available in a range of assets, such as wheat and copper and also on indices, such as the FTSE 100.

Back


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In-the-Money

A call option or warrant where the exercise price is below the asset price is in the money.

Back

Initial Margin

The returnable deposit paid to the Clearing House by the clearing member when entering into transactions on the cleared markets. The purpose of initial margin allows the Clearing House to hold sufficient funds on behalf of each clearing member to offset any losses incurred between the last payment of margin and the close out of clearing member’s positions should the clearing member default. Initial margin is usually calculated by taking the worst probable loss that the position could sustain over a fixed amount of time, and can be paid in either cash or non-cash collateral. Back

Initial Margin Requirement

The size of deposit a member must lodge with the Clearing House to cover potential losses to the Clearing House in closing out the open positions in the event of a member defaulting.

Back

Intermonth Spread Charge

A charge to cover the basis risk that prices of contracts (with the same underlying asset) in different delivery (prompt) months will move independently of one another. Back

Inter Commodity Spread Saving

In certain cases, offsets or margin liabilities in respect of different contracts are allowed across "portfolios". The inter-commodity spread credits recognise cases where offsetting positions in price-related but discrete contracts reduce overall portfolio risk. The offset reduces the amount of margin required on the spread position.

Details of spreads allowed are available from the Clearing House Risk Management department or from frequently distributed Clearing House and exchange circulars. The Clearing House and the exchanges decide where it is justifiable, on risk assessment criteria, to allow intercontract margin offsets and set the corresponding spread credit rates. Delta spreads are calculated and then used with these parameters to calculate the inter-commodity spread credits. The calculation of inter-commodity spread credits is explained in detail in the PC London SPAN Technical Information Package (TIP). Back


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PC London SPAN

Standard Portfolio Analysis of Risk (SPAN), a margining system used by the Clearing House to calculate initial margins due from and to its clearing members for NYSE Liffe (London market), ICE Futures, LME, LCH. Clearnet Ltd EnClear and RepoClear positions. SPAN is a computerised system, which calculates the effect of a range of possible changes in price and volatility on portfolios of derivatives. The worst probable loss calculated by the system is then used as the initial margin requirement.

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Long Position

Any position that has been purchased. For example, a long futures position means that you have bought a future. Contrast with Short.

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Lot

Another term for a contract.

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Option

A contract which gives the holder the right, but not the obligation to buy or sell a specified asset at an agreed price on or before an agreed date in the future. The right to buy an asset is referred to as a call option. The right to sell is referred to as a put option.

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Out-of-the-Money

A call option or warrant where the exercise price exceeds the asset price is out-of-the-money. For example, a call option on a share with an exercise price of 100p when the share price is 90p is out-of-the-money. A put option is out-of-the-money when the asset price exceeds the exercise price. For example, a put option on a share with an exercise price of 100p when the share price is 110p is out-of-the-money. See also In-The-Money and At-The-Money.

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Portfolio

The current open positions held in any futures or options contracts. If all the contracts held are based on the same underlying asset then the portfolio is more correctly known as a contract family.

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Position

A long or short market commitment, an obligation, or right, to make or take delivery.

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Put Option

A contract which confers upon the holder the right, but not the obligation, to sell an asset at a given price on or before a given date.

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Short Position

A term used to describe an open sold futures or options position. Also used to describe someone who sells a cash asset not previously owned. Contrast with Long (Position).

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Volatility

A measure of the amount by which, an underlying asset has moved, or is likely to move.

tiered margining overview - lch.clearnet group

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