Margining Overview for NYSE Liffe Financials

Transcription

1 Margining Overview for NYSE Liffe Financials Department: Risk Management Document Type: Guide Issue no.: 2.0 Issue Date: March 2012

2 Document History Date Version Author Summary of Changes 15 Jan Jamie Birdsey First draft 3 Mar Jamie Birdsey Second draft 20 Mar Jamie Birdsey Final Draft Mar Jenny Hodges Amendments Version of 32

3 Contents Document History 2 1. Introduction 4 Margining PC London SPAN Initial Margin Calculation Scanning Risk 6 Scanning Risk Explained Scanning Range Example 1: Simple Futures Position Scanning Range Example 2: Multiple Futures Positions in the Same Currency Scanning Range Example 3: Multiple Futures Positions in Different Currencies Scanning Range Example 4: Options Positions Scanning Range Example 5: Offsetting Options Positions Strategy Spread Charge 13 Strategy Spread Charge Example 1: Simple Butterfly Strategy Strategy Spread Charge Example 2: Condor Strategy Intermonth Spread Charge 16 Intermonth Spread Charge Example 1: Positions In The Same Tier Intermonth Spread Charge Example 2: Positions In Different Tiers Intermonth Spread Charge Example 3: Intermonth and Strategy Charges Intercommodity Spread Credit 23 Intercommodity Spread Credit Example 1: Two Offsetting Positions Intercommodity Spread Credit Example 2: Multiple Positions Short Option Minimum Charge 26 Short Option Minimum Charge Example Glossary of Terms 28 Version of 32

4 1. Introduction Financial futures and options contracts are one of the major set of products traded on the NYSE Liffe exchange, and as such, are cleared by LCH.Clearnet Limited (LCH.C). In order to protect itself against the risks assumed as a central counterparty, the clearing house establishes margin requirements for each contract. One of the main components in calculating the level of initial margin required by the clearing house is PC London SPAN. SPAN looks at a member s portfolio and takes into account any inter-month, inter-commodity or strategy spreads held by the member. This document will use several examples to explain how LCH.Clearnet margins on NYSE Liffe Financial products. Margining As central counterparty to its members' trades, LCH.C is at risk from the default of a member. To limit and cover a potential loss in the event of a default, LCH.C collects margin on all open positions and recalculates members' margin liabilities on a daily basis. There are two major types, Initial Margin (IM) is the deposit required on all net positions and is returned by LCH.C to members when positions are closed, and Variation Margin (VM) is members' profits or losses that are calculated daily from the market-to-market close value of their open position. PC London SPAN PC London SPAN is a portfolio based margining system that incorporates both futures and options, and calculates the net initial margin requirement. There are three major inputs to the London SPAN margin calculation - Positions, Prices and Parameters (determined by LCH.C and reviewed on a continual basis). A change to any one of these will result in a change to the margin requirement. Initial Margin Calculation London SPAN uses the following calculation to work out the initial margin requirements, it is the maximum of: Scanning Risk Inter-Month (& Strategy) Spread Charge Spot Month Charge Inter- Commodity Spread Credit OR Short Option Minimum Charge Version of 32

5 This can be seen on the following SPAN screen: This document will provide more detail about the various sections of the initial margin calculation, with examples to help explain how SPAN evaluates portfolios to establish the required margin amount. Version of 32

6 2. Scanning Risk Scanning Risk Explained SPAN divides contracts into groups of futures and options relating to a single underlying asset (e.g. Euribor futures and options). At the first stage of calculation, PC London SPAN simulates how the value of a Portfolio would react to the changing market conditions defined in the initial margin parameters. This is done by adopting a series of market scenarios and evaluating the Portfolio under these conditions. By valuing each net position (future or option) with the appropriate array (sixteen scenarios consisting of implied volatilities increasing or decreasing by 2.5% (i.e. 10% of 25%), and futures prices increasing or decreasing by proportions of the futures scanning range) and then combining the arrays, PC London SPAN determines which is the worst loss scenario for the Portfolio. This is referred to as the scanning risk. Scanning Range Example 1: Simple Futures Position For this example a Long 10 Q1 Euribor Future (I) Position will be used. The following parameters for this position need to be entered into SPAN. Calculating the initial margin for a single futures position is relatively straightforward as the scanning risk (set by the clearing house) multiplied by the number of lots: Scanning Risk (Parameter) No. Of Lots (Position) Scanning Risk for Position 575 (Example Scanning Risk for Euibor) 10 5,750 These figures can be found on the Summary Value Losses report (below), where the scanning risk for the position (5,750) is the worst possible scenario from the risk array. This means that in the worst possible scenario, this is the furthest the contract price is expected to move under normal market conditions. As this example uses only one simple future position, the initial margin required is the scanning risk for the position, in this case 5,750. Version of 32

7 Scanning Range Example 2: Multiple Futures Positions in the Same Currency In this example two positions are now held and these can be seen on the SPAN screen below: 10 Long Q1 Short Sterling (L) Futures 10 Long Q1 Long Gilt (R) Futures Version of 32

8 As the two contracts trade in the same currency, GBP, SPAN calculates the total scanning risk, from the combination of the two scanning risk calculations: Scanning Risk Short Sterling (313 due to rounding) No. Of Lots 10 Scanning Risk for Position (L) 3,125 Scanning Risk Long Gilt 1,610 No. Of Lots 10 Scanning Risk for Position (R) 16,100 Scanning Risk for Portfolio 19,225 The scanning risk for the two positions combined can be found on the Summary by Margin Group report. Scanning Range Example 3: Multiple Futures Positions in Different Currencies In this example two positions in different currencies are now held: 10 long Q1 Short Sterling (L) Futures 10 long Q1 Euribor (I) Futures However, as the contracts trade in different currencies, SPAN is unable to produce the scanning risk for the entire portfolio, instead two figures are produced, the scanning risk for contracts traded in EUR, and the scanning risk for the contracts traded in GBP. The user Version of 32

9 should convert one of the figures into the other currency to produce the total initial margin requirement. The calculations for this example are as follows: Scanning Risk Euribor EUR 575 No. Of Lots 10 Scanning Risk for Position (I) EUR 5,750 Scanning Risk Short Sterling GBP No. Of Lots 10 Scanning Risk for Position (L) GBP 3,125 These resultant figures can be seen on the Summary by Value Losses SPAN report, and the initial margin requirements in their specific currencies, can be found on the Summary by Margin Group report, both below. Version of 32

10 Scanning Range Example 4: Options Positions Options margining involves more calculations. In this example we will hold three long Q2 Euribor positions: One in-the-money (ITM) call One at-the-money (ATM) call One out-of-the-money (OTM) call The total delta for these option positions is seen in the calculation below: Delta for ITM Position Delta for ATM Position Delta for OTM Position Total Delta for Positions The initial margin for each position will then vary depending on how in or out of the money it is. Initial margin for ITM Position 700 Initial margin for ATM Position 301 Initial margin for OTM Position 13 Total initial margin for Positions 1,014 In this example the in the money position will behave almost the same as a future and this is reflected in the delta being almost 1, with the initial margin requirement being the same as that for a future position, 700. The out of the money position has a delta of , and a very small initial margin requirement of 13. NB. The Delta is drawn from the theoretical options pricing model and it shows the rate of change in an option premium, with respect to a change in the underlying asset or security. As the example above, the premium on an option with a delta of 0.5 will move by 0.5p for every 1p move in the price of the underlying. Version of 32

11 The initial margin requirement then is the sum of initial margins for each position. This can be seen on the Option Value Losses report, where the initial margin for each position is the worst-case scenario indicated, and the sum of these is the total initial margin ,014 1,014 Scanning Range Example 5: Offsetting Options Positions When two offsetting options are held, SPAN calculates the overall delta and the total initial margin requirement. If 10 Euribor Q2 long Calls and 5 Euribor Q2 long Puts are held, the delta is : for the call, and for the put (which can be seen in the green box on the diagram below). Delta for ATM Call Delta for ATM Put Total Delta Positions Initial margin for Total Position 2,642 Version of 32

12 ,642 2,642. The initial margin required for holding the two positions is the worst-case loss when the two risk arrays are combined, which in this case is 2,642. This can be seen below on the Option Value Losses report. Version of 32

13 3. Strategy Spread Charge As a first step towards calculating inter-month spread charges, for specific contracts, SPAN will look for particular strategy positions (condors and butterflies) and apply an appropriate charge to these. The strategy spread charges are set by LCH.C and are continually checked as part of the margin review process. A list of the different strategy spread charges for NYSE Liffe Financials contracts can be found on the NYSE Liffe margin rate circular sent out by LCH.C, and held on the LCH.C website (LCH.Clearnet Group). Strategy Spread Charge Example 1: Simple Butterfly Strategy This example shows how SPAN identifies and calculates a butterfly strategy, which can be seen on the SPAN report below. A futures butterfly spread involves a ratio of 1:2:1, one lot long/short, two lots short/long, and one lot long/short. For this example the butterfly consists of: 10 Long Q2 Euribor Futures 20 Short Q3 Euribor Futures 10 Long Q4 Euribor Futures SPAN recognises that the positions are completely offsetting (20 long and 20 short) and as such the scanning risk is 0. However, SPAN recognises that the positions are in fact a butterfly strategy and so applies the relevant charge, as can be seen below: Scanning Risk for Position 0 Strategy Spread Charge 155 No. Of Spreads 10 Initial Margin for Portfolio EUR 1,550 The charge for this type of butterfly is 155, therefore the strategy charge for all butterflies is 1,550. This can also be seen on the reports below. Version of 32

14 It should be noted that SPAN will apply the lowest priority charge if there are multiple strategies. (The priorities are explained in more detail in the Intermonth Example 2.) Version of 32

15 Strategy Spread Charge Example 2: Condor Strategy A Condor strategy is similar to a Butterfly, but with the middle leg split over two months instead of one. So where a Butterfly has a ratio of 1:2:1, a Condor has one Short (long), one Long/short, one Long/short and one Short/long. In the example below the Condor consists of: 10 Short Q1 Short Sterling Futures 10 Long Q2 Short Sterling Futures 10 Long Q3 Short Sterling Futures 10 Short Q4 Short Sterling Futures The Strategy Spread Charges report shows that SPAN has identified the Condor strategy and displays the four legs of the condor. The report also shows that the charge for the Condor is 115, and as there are 10 Condors, the overall charge is 1,150 (10 X 115). This is also summarised on the Summary by Margin Group report. Version of 32

16 4. Intermonth Spread Charge When calculating the scanning risk, PC London SPAN initially assumes that futures prices move by exactly the same amount across all contracts months; therefore, a long position in one month exactly offsets a short position in another month. Since futures prices do not correlate exactly across contract months, gains in one month may not exactly offset losses in another and vice versa. Therefore, portfolios face intermonth price risk. PC London SPAN calculates an inter-month spread charge to cover this risk. SPAN uses a multi-tier inter-month spread method for selected contracts that allows different spread rates to be set within and between specified groups of expiries. Each tier has its own charge rate, which is set by LCH.C. Intermonth Spread Charge Example 1: Positions In The Same Tier The example below uses two offsetting positions in consecutive months: 10 long Month 1 Euribor Futures 10 short Month 2 Euribor Futures The Summary Value Losses report shows the positions as being offsetting. However, by selecting the Summary by Margin Group report, this shows that SPAN is levying an initial margin charge of 2,150. Version of 32

17 The Intermonth Spread Charges report should be viewed in order to find the source of the initial margin figure. The Intermonth Spread Charges report shows that the two positions are both in Tier 1. This subsequently carries a charge of 215 as a 10 lot spread position. The intermonth spread charge for the two positions is 2,150 (215 X 10). Intermonth Spread Charge Example 2: Positions In Different Tiers The following example illustrates how SPAN prioritises one intermonth charge over another. For this example four positions are held in four different tiers which can be seen in the diagram below: 10 Long Q1 Euribor Futures (Tier 1) 20 Short Q2 Euribor Futures (Tier 2) Version of 32

18 Priority Priority Priority Priority Priority Priority NYSE Liffe Financials Margining Overview 40 Long Q5 Euribor Futures (Tier 3) 30 Short Q8 Euribor Futures (Tier 4) Inter-Month Spread Charges Tier Number Start End Tiers As there are positions in four different tiers a number of different charges can be levied by SPAN. As shown, each charge has a priority or rank from lowest to highest; this is because SPAN will always try to levy the lowest charge possible for a set of positions. In these example options, the lowest charge is Tier 3 to Tier 4 (priority 8), which carries a charge of 150. This is the charge for holding a spread position in Tier 3 and Tier 4. First stage Using these example positions, SPAN will start with the spread in tiers 3 and 4, as it has the lowest priority. As there are only 30 lots in Tier 4, it can only be offset by 30 lots from Tier 3. As such the resultant charge is 150 (the intermonth spread charge for Tiers 3-4) multiplied by 30 spreads. Tier Tier Tier 2-20 Tier 4-30 Tier 3 4 Intermonth Charge 150 No of Spreads 30 Charge for Spread Position 1 4,500 Second stage There are now three outstanding positions, 10 lots long in both Tiers 1 and 3, and 20 lots short in Tier 2. SPAN then assesses these spreads to find the lowest charge. From the table above, the spread with the lowest priority is Tier 2 to Tier 3, 275 (priority 12). As there are only 10 lots in Tier 3, this can only be offset by 10 lots in Tier 2, so the resultant charge is 275, multiplied by the number of spreads, 10, which is 2,750. Tier Tier Tier 2-20 Tier 2 3 Intermonth Charge 275 No of Spreads 10 Charge for Spread Position 2 2,750 Version of 32

19 Final calculation Finally there are two positions left, 10 long lots in Tier 1, and 10 short lots in Tier 2. The charge for this spread is 380 (priority 17) and as there are 10 spreads, the resultant charge is 3,800. Tier Tier 2-10 Tier 2 3 Intermonth Charge 380 No of Spreads 10 Charge for Spread Position 3 3,800 As the spreads completely offset one another, the initial margin required for these positions is the sum of all the intermonth charges. Charge for Spread Position 1 4,500 Charge for Spread Position 2 2,750 Charge for Spread Position 3 3,800 Intermonth charge for all spreads 11,050 The delta locations for the positions can be seen in the Combined Contract Tier Details report: Version of 32

20 The Intermonth Spread Charges report shows how SPAN breaks down the positions, the priorities of the spreads and the charges rates that are applied. NB. Any positions that are left with no corresponding offsetting positions will be charged the outright scanning range fee. Intermonth Spread Charge Example 3: Intermonth and Strategy Charges The next example will illustrate how SPAN breaks down more complicated 'portfolios' in order to apply the lowest charge. For this example three positions are held: First Stage 30 Long Q1 Short Sterling Futures 30 Short Q3 Short Sterling Futures 10 Long Q5 Short Sterling Futures SPAN first analyses the portfolio to calculate the net position, which in this case is +10 (as 30 short lots are being held, and 40 long lots). The relevant charge is then applied to this position, which here is 3,500. Net Position +10 (+40 30) Scanning Risk 350 No of Spreads 10 Charge for Spread Position 1 3,500 Second Stage Next SPAN analyses the remaining positions, and identifies any strategies being utilised. In the above example, a butterfly position is being held (1:2:1), so SPAN separates the 10 butterflies, and applies the relevant charge, which in this case is 2,550 (10 butterflies multiplied by the charge of 225). Version of 32

21 Tier Tier 2-30 Strategy Spread Charge 255 No of Spreads 10 Charge for Spread Position 1 2,550 Tier Final Calculation Once the butterfly has been removed from the portfolio, the positions left are 10 Long Q1 and 10 Short Q3. SPAN recognises that the short position will offset the long position and identifies the relevant intermonth charge to apply, which in this case is 2,000 (10 positions multiplied by the intermonth charge, which is 200). Tier Tier 2-10 Intermonth Spread Charge 200 No of Spreads 10 Charge for Spread Position 1 2,000 Looking at the reports below, you can see how SPAN breaks the three original positions down and is left with the final initial margin charge. Summary Value Losses Report: Version of 32

22 Strategy Spread Charge Report: Intermonth Spread Charge Report: The final Initial margin required for holding the three positions can be seen on the Summary by Margin Group report, and is the combination of the Strategy Spread Charge, the Intermonth Charge, and the Scanning Range, which in this case is 8,050. Version of 32

23 5. Intercommodity Spread Credit In certain cases, offsets in respect of different contracts are allowed across portfolios. The inter-commodity spread credits recognize cases where offsetting positions in price-related but discrete contracts reduce overall portfolio risk. The offset reduces the amount of margin required on the spread position. The inter-commodity spread credit is merely a saving, or reduction, made on the scanning range charge. The intercommodity spread credit calculation can be seen below. Inter-Commodity Spread Credit = Weighted Futures Price Risk (Scanning Risk) No. of Spreads Delta Spread Ratio Spread Credit Rate Intercommodity Spread Credit Example 1: Two Offsetting Positions For this example two offsetting positions are held in different contracts, these are 10 Long Q1 Short Sterling futures, and 10 Short Q1 Euribor futures. SPAN recognises that these positions offset one another, and calculating the inter-commodity spread credit would be as follows: Euribor X 2.5 X 3 X 0.5 = Short Sterling X 2.5 X 4 X 0.5 = 2,625 1,750 Scanning Range No. Of Spreads Delta Spread Ratio Spread Credit Rate No. Of Spreads Number of spreads that can be applied to long and short 10 lots in Sterling and Euribor. As the delta ratio is 3:4, this is 2.5 (10/4 = 2.5) Version of 32

24 This saving is then subtracted from the Scanning Risk for the outright position, as can be seen on the Summary by Margin Group report below, to produce the required initial margin for holding both of the positions. Intercommodity Spread Credit Example 2: Multiple Positions Much like an intermonth charge, SPAN will always attempt to levy the lowest charge, or in the case of intercommodity positions, the highest spread credit saving. This is illustrated in the example below in which three positions are held: 10 Long Mar 08 Euribor Futures 10 Short Mar 08 Short Sterling Futures 10 Short Mar 08 Long Gilt Futures SPAN will always apply the highest saving, which in this case is when Euribor offsets Long Gilt, a 65% credit saving (the saving between Euribor and Short Sterling is only 50%). This can be seen below. Version of 32

25 In this example, SPAN will reduce the initial margins charged on Euribor and Long Gilt by 4,208 and 1,834 respectively, as they are considered highly collated. SPAN will charge the normal scanning risk on Short Sterling. This can be seen below in the Summary by Combined Contract report: Version of 32

26 6. Short Option Minimum Charge Certain option portfolios may show zero or minimal risk when assessed using SPAN. In these cases, SPAN requires a minimum charge for each net short option. The charge sets an absolute minimum margin for the portfolio. If the short option minimum charge is lower than the total initial margin calculated, it is ignored. Short option minimum charge = net short position x short option minimum charge. Short Option Minimum Charge Example In this example 20 deep out of the money Short Puts are held. The delta value for the position is 0: When looking at the Summary Value losses report, the total delta is 0, with the worst-case loss also being 0. So, no initial margin is required on this position, as there appears to be no risk. However, no position is risk free, and as such, SPAN levies the short option minimum charge of 10 (1 X 20 short options held) to cover any potential losses. This can be seen below in the Summary by Margin Group report. Version of 32

27 As can be seen, the Scanning Risk for the position is 0, so, SPAN has charged 20 for the 20 short options held. Version of 32

28 7. Glossary of Terms At-the-money An option or warrant where the exercise price is equal to the current market price of the asset subject to the option. For example, a call option with an exercise price of 100p on a share with a share price of 100p is at-the-money. More generally, however, an at-the-money option is an option whose exercise price is nearest to that of the underlying asset. For example, where an option has strike prices at intervals of 10p, e.g. 90p, 100p, 110p etc, if the underlying asset has a price of 97p, the atthe-money option is the 100p strike, which is the nearest strike price to the underlying price. See also In-the-Money. Butterfly This is where a clearing member takes a long (or short) position in one futures delivery month, a short (or long) position in a corresponding delivery month of twice the size and then a long (or short) position in a further delivery month. The available strategies are detailed in the NYSE Liffe (London market) Margin Rate Circular. Call Option An option that gives the holder the right, but not the obligation, to buy an asset at a given price on or before a given date. See also Option. Condor This is where a member takes a long (or short) position in one futures delivery month, a short (or long) position in a corresponding delivery month, a short (or long) position in another delivery month and then a long (or short) position in a further delivery month. The available strategies are detailed in the NYSE Liffe (London market) Margin Rate Circular. Contract Size The amount of the underlying asset which one futures contract represents, e.g. the contract size for a Copper contract is 25 tonnes. This means that underlying one Copper future is 25 tonnes of Copper which the investor has the obligation to buy (long future) or sell (short future). Delta Drawn from the theoretical options pricing model (see Black Scholes), the delta of an option shows the rate of change in an option premium with respect to a change in price of the Version of 32

29 underlying asset or security. For example, the premium on an option with a delta of 0.5 will move by 0.5p for every 1p move in the price of the underlying. Delta can also be defined as either (i) the probability that the option will expire in-the-money, or (ii) the theoretical number of futures contracts of which the holder is either long (with a call option) or short (put option). Futures Contract A legal agreement to buy or sell a standard quantity of a specified asset for delivery at a fixed future date at a price agreed today. Futures are traded on futures exchanges, such as NYSE Liffe (London market), Turquoise Derivatives or the London Metal Exchange. They are available in a range of assets, such as wheat and copper, and also on indices, such as the FTSE 100. In-the-Money A call option where the exercise price is below the asset price is in-the-money. For example, a call option on a share with an exercise price of 100p when the share price is 110p is in-themoney. A put option is in-the-money when the asset price is below the exercise price. For example, a put option on a share with an exercise price of 100p when the share price is 90p is in-the-money. See also out-of-the-money and at-the-money. Initial Margin The returnable deposit paid to LCH.Clearnet by the clearing member when entering into transactions on the cleared markets. The purpose of initial margin allows the LCH.Clearnet to hold sufficient funds on behalf of each clearing member to offset any losses incurred between the last payment of margin and the close out of clearing member s positions should the clearing member default. Initial margin is usually calculated by taking the worst probable loss that the position could sustain over a fixed amount of time, and can be paid in either cash or non-cash collateral. Initial Margin Requirement The size of deposit a member must lodge with LCH.Clearnet to cover potential losses LCH.Clearnet in closing out the open positions in the event of a member defaulting. Intermonth Spread Charge A charge to cover the basis risk that prices of contracts (with the same underlying asset) in different delivery (prompt) months will move independently of one another. Version of 32

30 Inter Commodity Spread Saving In certain cases, offsets or margin liabilities in respect of different contracts are allowed across "portfolios". The inter-commodity spread credits recognise cases where offsetting positions in price-related but discrete contracts reduce overall portfolio risk. The offset reduces the amount of margin required on the spread position. Details of spreads allowed are available from the LCH.Clearnet Risk Management department or from frequently distributed LCH.Clearnet and exchange circulars. LCH.Clearnet and the exchanges decide where it is justifiable, on risk assessment criteria, to allow intercontract margin offsets and set the corresponding spread credit rates. Delta spreads are calculated and then used with these parameters to calculate the intercommodity spread credits. The calculation of inter-commodity spread credits is explained in detail in the London SPAN Technical Information Package (TIP). PC London SPAN Standard Portfolio Analysis of Risk, a margining system used by LCH.Clearnet to calculate initial margins due from and to its clearing members for NYSE Liffe (London market), LME, LCH EnClear and RepoClear positions. SPAN is a computerised system which calculates the effect of a range of possible changes in price and volatility on portfolios of derivatives. The worst probable loss calculated by the system is then used as the initial margin requirement. Long Position Any position which has been purchased. For example, a long futures position means that you have bought a future. Contrast with Short. Lot Another term for a contract. Option A contract which gives the holder the right, but not the obligation to buy or sell a specified asset at an agreed price on or before an agreed date in the future. The right to buy an asset is referred to as a call option. The right to sell is referred to as a put option. Out-of-the-Money A call option or warrant where the exercise price exceeds the asset price is out-of-themoney. For example, a call option on a share with an exercise price of 100p when the share price is 90p is out-of-the-money. A put option is out-of-the-money when the asset price Version of 32

31 exceeds the exercise price. For example, a put option on a share with an exercise price of 100p when the share price is 110p is out-of-the-money. See also In-The-Money and At-The- Money. Portfolio The current open positions held in any futures or options contracts. If all the contracts held are based on the same underlying asset then the portfolio is more correctly known as a contract family. Position A long or short market commitment, an obligation, or right, to make or take delivery. Put Option A contract which confers upon the holder the right, but not the obligation, to sell an asset at a given price on or before a given date. Short Position A term used to describe an open sold futures or options position. Also used to describe someone who sells a cash asset not previously owned. Contrast with Long (Position). Spot Month Charge Volatility can increase when a contract approaches the last day of trading or the day of delivery of the underlying instrument. LCH.Clearnet covers this risk by building an additional spot month charge into PC London SPAN. Strategy Spread PC London SPAN identifies pre-defined strategies and Initial Margins reflect the lower risk of these strategies. As a first step towards calculating inter-month spread charges for specific futures contracts, SPAN will look for particular strategy positions (e.g. condors and butterflies) and apply an appropriate charge to these. Underlying Futures Contract The specific futures contract that is bought or sold by exercising an option. Version of 32

32 Volatility A measure of the amount by which an underlying asset has moved or is likely to move. Version of 32