LME Clear uses Standard Portfolio Analysis of Risk (SPAN) to calculate Initial Margin. (SPAN is a registered trademark of Chicago Mercantile Exchange Inc., used herein under license. Chicago Mercantile Exchange Inc. assumes no liability in connection with the use of SPAN by any person or entity).
SPAN considers how the value of an entire portfolio of options and futures will respond to changes in futures (or underlying) prices and volatilities. SPAN simulates potential market moves and calculates the profit or loss on individual contracts.LME Clear uses OIS rather than LIBOR interest rates when calculating discounting forward cash-flows.
Margin rates will be calculated using a 2 day liquidation period (EMIR minimum) for both Exchange and OTC products.
Margin rates and volatility shifts are currently being calculated at 99% and 99.5% single tailed confidence intervals utilising the worst case of a two year and ten year price history.
Parameters will be calculated daily, but usually updated monthly, and set in SPAN as an absolute figure.
Initial Margin Calculation
SPAN utilises the margin parameters to calculate the Initial Margin. SPAN splits the Initial Margin calculation into four components;
In its role as a risk manager, LME Clear may have cause to call additional margin on occasion where certain characteristics of the portfolio or Clearing Member dictate that the Initial Margin is deemed insufficient to protect LME Clear from the risk posed.
Additional Margin can be taken in four main forms which are;
In addition to a full range of risk factor backtesting, LME Clear preforms portfolio backtesting on historical, hypotetical and representative member portfolios.