Overview of the SPAN margining system
The Standard Portfolio Analysis of Risk (SPAN) is a methodology developed by the CME and used by many clearinghouses and exchanges around the world to calculate the Performance Bond (i.e., margin requirement) on futures and options on futures which the clearinghouse collects from the carrying FCM and the FCM, in turn, from the customer.
SPAN establishes margin by determining what the potential worst case loss a portfolio will sustain over a given time frame (typically set to one day), using a set of 16 hypothetical market scenarios which reflect changes to the underlying price of the future or option contract and, in the case of options, time decay and a change in implied volatility.
The first step in calculating the SPAN requirement is to organize all positions which share the same ultimate underlying into grouping referred to as a Combined Commodity group. Next, SPAN calculates and aggregates, by like scenario, the risk of each position within a Combined Commodity, with that scenario generating the maximum theoretical loss being the Scan Risk. The 16 scenarios are determined based upon that Combined Commodity’s Price Scan Range (the maximum underlying price movement likely to occur for the given timeframe) and Volatility Scan Range (the maximum implied volatility change likely to occur for options).
Assume a hypothetical portfolio having one long future and a one long put on stock index ABC having an underlying price of $1,000, a multiplier of 100 and a Price Scan Range of 6%. For this given portfolio, the Scan Risk would be $1,125 scenario 14.
|
# |
1 Long Future |
1 Long Put |
Sum |
Scenario Description |
|
1 |
$0 |
$20 |
$20 |
Price unchanged; Volatility up the Scan Range |
|
2 |
$0 |
($18) |
($18) |
Price unchanged; Volatility down the Scan Range |
|
3 |
$2,000 |
($1,290) |
$710 |
Price up 1/3 Price Scan Range; Volatility up the Scan Range |
|
4 |
$2,000 |
($1,155) |
$845 |
Price up 1/3 Price Scan Range; Volatility down the Scan Range |
|
5 |
($2,000) |
$1,600 |
($400) |
Price down 1/3 Price Scan Range; Volatility up the Scan Range |
|
6 |
($2,000) |
$1,375 |
($625) |
Price down 1/3 Price Scan Range; Volatility down the Scan Range |
|
7 |
$4,000 |
($2,100) |
$1,900 |
Price up 2/3 Price Scan Range; Volatility up the Scan Range |
|
8 |
$4,000 |
($2,330) |
$1,670 |
Price up 2/3 Price Scan Range; Volatility down the Scan Range |
|
9 |
($4,000) |
$3,350 |
($650) |
Price down 2/3 Price Scan Range; Volatility up the Scan Range |
|
10 |
($4,000) |
$3,100 |
($900) |
Price down 2/3 Price Scan Range; Volatility down the Scan Range |
|
11 |
$6,000 |
($3,100) |
$2,900 |
Price up 3/3 Price Scan Range; Volatility up the Scan Range |
|
12 |
$6,000 |
($3,375) |
$2,625 |
Price up 3/3 Price Scan Range; Volatility down the Scan Range |
|
13 |
($6,000) |
$5,150 |
($850) |
Price down 3/3 Price Scan Range; Volatility up the Scan Range |
|
14 |
($6,000) |
$4,875 |
($1,125) |
Price down 3/3 Price Scan Range; Volatility down the Scan Range |
|
15 |
$5,760 |
($3,680) |
$2,080 |
Price up extreme (3 times the Price Scan Range) * 32% |
|
16 |
($5,760) |
$5,400 |
($360) |
Price down extreme (3 times the Price Scan Range) * 32% |
.
The Scan Risk charge is then added to any Intra-Commodity Spread Charges (an amount that accounts for the basis risk of futures calendar spreads) and Spot Charges (A charge that covers the increased risk of positions in deliverable instruments near expiration) and is reduced by any offset from an Inter-Commodity Spread Credit (a margin credit for offsetting positions between correlated products). This sum is then compared to the Short Option Minimum Requirement (ensures that a minimum margin is collected for portfolios containing deep-out-of-the-money options) with the greater of the two being the risk of the Combined Commodity. .These calculations are performed for all Combined Commodities with the Total Margin Requirement for a portfolio equal to the sum of the risk of all Combined Commodities less any credit for risk offsets provided between the different Combined Commodities.
The software for computing SPAN margin requirements, known as PC-SPAN is made available by the CME via its website.
How do you calculate margin requirements on futures and futures options?
Overview:
Futures options, as well as futures margins, are governed by the exchange through a calculation algorithm known as SPAN margining. For information on SPAN and how it works, please research the exchange web site for the CME Group, www.cmegroup.com. From their web site you can run a search for SPAN, which will take you to a wealth of information on the subject and how it works. The Standard Portfolio Analysis of Risk system is a highly sophisticated methodology that calculates performance bond requirements by analyzing the “what-ifs” of virtually any market scenario.
Background:
In general, this is how SPAN works:
SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the portfolio would incur under different market conditions. At the core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration.
The SPAN margin files are sent to IB at specific intervals throughout the day by the exchange, and are plugged into a SPAN margin calculator. All futures options will continue to be calculated as having risk until they are expired out of the account, or are closed. The fact that they might be out-of-the-money does not matter. All scenarios must take into account what could happen in extreme market volatility, and as such the margin impact of these futures options will be considered until the option position ceases to exist. The SPAN margin requirements are compared against IB's pre-defined extreme market move scenarios and the greater of the two are utilized as margin requirement.
Roth IRA Conversions
Overview:
Interactive Brokers customers may process a full conversion of cash or securities into a Roth IRA that has identical trading capabilities. While I.B. is unable to redesignate a Traditional or SEP IRA as a Roth IRA (e.g. change the same Traditional IRA into a Roth IRA), customers may still complete an IRS allowed transaction without sending funds to another brokerage firm.
Background:
Definition
Converting amounts from any Traditional or SEP IRA into a Roth IRA.
Qualifications
Customers may contact a qualified tax adviser or see the IRS Publication 590 to determine eligibility.
Conversion Methods
The IRS permits eligible IRA owners to contribute funds to a Roth IRA from a Traditional or SEP IRA. Regardless of the conversion method used, the entire transaction is treated as a conversion. There are three (3) conversion methods available into the IB. Roth IRA account:
(1) Internal Conversion (Cash & Securities)
(2) Rollover (Cash only)
(3) Trustee-to-Trustee Transfer (Cash only)
- Internal Conversion: You may open a Roth IRA at IB and request through Account Management the full (all assets) conversion of the Traditional or SEP IRA. All assets will be internally transferred to the Roth IRA.
[In Funds Management of the Traditional or SEP, choose: IRA Conversion to Roth Account. Or, click Position Transfers, then select IRA Conversion - Transfer Assets to Roth Account.]
Please note: Roth conversions submitted by 8:00 PM EST are processed the next business day.
*See the Account Management User's Guide for complete instructions.
- Rollover: You can receive a distribution from a Traditional or SEP IRA and roll the funds over (contribute it) to a Roth IRA within 60 days after the distribution.
[In Funds Management of the Roth IRA, choose the following deposit method: Cash Transfers. In the Transaction List, select Deposit Cash. In the Method List, select Check, Wire, Automated Clearing House (A.C.H.), or Direct Rollover. Choose Rollover as the IRA Deposit Type.]
Choose Rollover as the IRA Deposit Type for cash transfers by Check, Wire, or ACH. This selection properly designates the deposit as a "conversion contribution" with the IRS, provided funds originate from a Traditional or SEP IRA. Knowledge Base Videos provide step-by-step Cash Deposit instructions.
- Trustee-to-Trustee Transfers: You can direct the trustee of the Traditional or SEP IRA to transfer a cash amount into the Roth IRA account at IB.
[In Funds Management of the Roth IRA, choose the following deposit method: Cash Transfers. In the Transaction List, select Deposit Cash. In the Method List, select Trustee-to-Trustee.]
Important Note: IB is not responsible for the tax reporting of any funds distributed from the Traditional or SEP IRA held at another firm. Customers must contact the other firm to ensure that the IRA distribution is appropriately designated.
Tax Reporting
The deposit of funds into the Roth IRA is treated by the IRS as a rollover, regardless of the conversion method. The Internal Conversion & Direct Rollover options are automatically designated by IB as a Roth Conversion. The Rollover option by check, wire transfer, or ACH further requires the customer to select Rollover as the IRA Deposit Type.
IRA owners will receive the IRS Form 5498 (report of the rollover) and/or Form 1099-R (report of the distribution) by US mail from the IRA's plan administrator, Principal Trust Company. See the tab Reports and Dates for tax form publication dates.
Disclaimer: IB does not provide tax advice. These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any international, federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. We recommend that you consult a qualified tax advisor or refer to the U.S. Internal Revenue Service.
Glossary terms:
