I am trying to model margin requirements on various commodity futures, however it doesn't seem that the CME has released the formula they use to set these performance bonds. I am sure that they use some measure of volatility to determine a value that prevents daily changes greater than the requirement. Does anyone have any experience in this endeavor, or can point me to some resources?


Keyword SPAN and the summarized answer is that it sets margin requirements as a function of risk/volatility. CME and other exchanges also function as clearers and thus they have an interest that market participants who clear with CME remain solvent. The exchange runs stress tests and determines a reasonable amount of performance bond that has to be deposited as margin in order to minimize the risk of insolvency under current stress tested market environments and certain constraints, among others a margin level reasonable enough to optimize turnover in their offered products.

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  • $\begingroup$ The SPAN algorithm is not public, but it seems they are modeling for the worst case drawdown in a day. From what I read they take a range of scenarios and the max of the drawdowns plus some other risk premiums is the initial margin. I want to write some code so I can have an approximate margin calculation based on historical volatility and pricing. I havent had a chance to do a deep dive on this yet, but I wanted to clarify my aim and initial findings. $\endgroup$ – Brandon Ogle May 10 '13 at 15:54
  • $\begingroup$ Well you asked how CME sets margins. And the answer is they use SPAN. By the way span is available to clients there are three separate products that are based on span. The information is available on their website. $\endgroup$ – Matthias Wolf May 10 '13 at 16:00
  • $\begingroup$ I hope I didn't come off as hostile, that was by no means my intention. You did in fact provide the correct answer. I just wanted to clarify that I was trying to replicate the results. $\endgroup$ – Brandon Ogle May 10 '13 at 16:12
  • $\begingroup$ Not at all. Most exchanges set their margins according to their risk models but please keep in mind those can be overridden at their own discretion at any time. If exchange X decides to hike the margin on a contract Y then they are at total liberty to do so and you may not be able to capture that in your models. $\endgroup$ – Matthias Wolf May 10 '13 at 16:20
  • $\begingroup$ Yeah the discretionary changes wont show up in my model, however I think having something that adapts to market conditions is better than assuming static margin requirements over large observations. $\endgroup$ – Brandon Ogle May 10 '13 at 20:32

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