SPAN is used both by clearing organizations, to calculate performance bond requirements for their clearing member firms, and by those member firms for calculating margin requirements for customer accounts.

In the years since its inception, SPAN has become the global industry standard for portfolio risk assessment. More than fifty exchanges, clearing organizations, and regulatory agencies throughout the world have adopted it as the official performance bond (margin) calculation mechanism. Continually enhanced and elaborated, the SPAN methodology can be used to evaluate risk for the broadest possible range of derivative and physical instruments.

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.

Exchanges and clearing organizations using SPAN will determine for themselves the following SPAN parameters, reflecting their desired degree of risk coverage:

• Price scan ranges – in effect, the maximum price movement reasonably likely to occur, for each instrument or, for options, their underlying instrument
• Volatility scan ranges – the maximum change reasonably likely to occur for the volatility of each option's underlying price
• Intracommodity spreading parameters – rates and rules for evaluating risk among portfolios of closely related products, for example products with particular patterns of calendar spreads
• Intercommodity spreading parameters – rates and rules for evaluating risk offsets between related products
• Delivery (spot) risk parameters – for evaluating the increased risk of positions in physically-deliverable products as they approach or enter their delivery period
• Short option minimum parameters – rates and rules to provide coverage for the the special situations associated with portfolios of deep out-of-the-money short option positions

At least once every business day, each SPAN-using exchange or clearing organization calculates risk arrays for all of its products, and prepares a SPAN risk parameter file (also called a SPAN array file), containing all of the above data. These files are then published to clearing firms and other market participants. Using these freely-available files, and inexpensive software such as PC-SPAN, calculating performance bond requirements for particular portfolios is quick and easy.

SPAN divides the instruments in each portfolio into groupings called combined commodities. Each combined commodity represents all instruments on the same ultimate underlying – for example, all futures and all options ultimately related to the S&P 500 index. For each combined commodity, SPAN evaluates:

• The scan risk – the basic evaluation of risk reflecting how these positions gain or lose value under particular combinations of price and volatility movement
• The intracommodity spread charge – risk levels associated with particular patterns of calendar spreading
• Delivery risk – risk associated with positions in physically-deliverable products as they approach or enter their delivery period
• The intercommodity spread credit – reductions to risk associated with risk offsets between related products
• Short option minimum -- an evaluation of the irreducible minimum risk associated with portfolios of deep out-of-the-money short option positions

For each combined commodity in the portfolio, SPAN takes the sum of the scan risk, intracommodity spread charge and delivery risk, subtracts the intercommodity spread credit, and takes the larger of this result and the short option minimum. The resulting values, called SPAN risk requirements, are then converted to a common currency and summed to yield the total risk for the portfolio.

CME Group has made it easy to use SPAN through a family of reasonably-priced software products for Microsoft-platform machines. Common features of all of these programs include:

• Instant loading of SPAN risk parameter files from SPAN-using exchanges and clearing organizations worldwide
• Support of multiple currencies and a wide variety of derivative and physical instruments
• Easy-to-use point-and-click graphical user interface
• Automated execution for repetitive batch processing via a simple and elegant scripting language
• Extensive and detailed reports, with simple data export
• Support fromCME Clearing's risk management experts

The family of software products consists of:

• PC-SPAN – calculates performance bond requirements for portfolios across all SPAN-using exchanges and clearing organizations
• SPAN Risk Manager – offers powerful risk analytic tools in addition to margin calculations
• SPAN Risk Manager Clearing – used by exchanges and clearing organizations to implement the SPAN methodology in a rapid and cost-effective manner

As thousands of users worldwide can attest, PC-SPAN provides a quick, inexpensive and simple way to calculate SPAN margin requirements across multiple exchanges. PC-SPAN makes calculating SPAN margins a snap. All users need to do is:

• Download SPAN files for the exchanges or clearing organizations of interest from CME's FTP site on the Internet (at ftp.cmegroup.com/pub/span/data).
• Load the data from these SPAN files into PC-SPAN
• Define portfolios, either via PC-SPAN's graphical user interface, or by loading them from a file
• Click to calculate performance bond requirements
• View results online, or export margin results to a file for importing into your other applications.

SPAN Risk Manager integrates risk management features with core margin calculation abilities, to deliver a flexible and intuitive system for full portfolio risk management. SPAN Risk Manager's powerful features and intuitive design allow for true portfolio analytics through multi-variant stress testing and option exposures.

Specifically, SPAN Risk Manager:

• Enables users to gauge the effects, on a total portfolio or a single option, of changes in price, implied volatility, time to expiration, dividend yields, and interest rates
• Calculates hypothetical P&L's, option prices, and option greeks
• Calculates option implied volatilities, allows determination of appropriate volatilities for call/put pairs, and determines volatilities applicable to entire series of options
• Allows for stress testing across portfolios of multiple products
• Allows users to define, compare, save and reload "what-if" scenarios for stress testing
• Enables shifting of volatility skews
• Supports a variety of pricing models applicable to different types of options, including Black-Scholes, Merton, Adesi-Whaley, Cox-Ross-Rubinstein, and Bachelier

SPAN Risk Manager Clearing, our most powerful product, provides all capabilities of PC-SPAN and SPAN Risk Manager, and adds features enabling exchanges and clearing organizations to implement SPAN in a rapid and cost-effective manner.

The core of SPAN Risk Manager Clearing's advanced functions provide the ability to define SPAN rates and rules, calculate SPAN risk arrays, and prepare and publish SPAN risk parameter files.

In addition, SPAN Risk Manager Clearing adds a real-time component interface. By integrating this component into your application, it's easy to provide true high-speed real-time pre- or post-execution risk-based credit controls.