CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

29.4 MARGIN REQUIREMENTS

The industry standard for determining minimum margin or collateral requirements is known as Standard Portfolio Analysis of Risk (SPAN). The system was originally designed by the Chicago Mercantile Exchange to integrate positions that included both futures and options on those futures by performing scenario or what-if analysis as a way of dealing with the nonlinear risks in options. It has since been expanded and extended to allow for the effects of diversification on risk in a futures portfolio. SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of 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. The basic objective of SPAN margins is to make sure that on most days the amount of margin on hand would be enough to cover the day's losses.

In fact, the minimum margin on a globally diversified portfolio would be more than enough to meet this objective, because allowances for diversification are made only within a given clearinghouse. In a typical CTA portfolio, several clearinghouses in various countries may be involved, with each assessing margins that cover the risks in the contracts that it clears without regard to positions held in other markets.

In practice, each clearinghouse requires that margins be posted in their local currency. One way for the trading ...