The world’s largest derivatives exchange, the CME Group, has announced big plans to its margin calculator, Span. Developed in the 1980s, the margin calculator is believed no longer fit for the modern market. The new calculator will incorporate futures, options and swaps under a single framework.
In an article for Risk.net, our CEO Peter Rippon, has shared his thoughts on how the overhaul will impact margin requirements:
“When you look at the Cpmi-Iosco requirements for CCP margin models, it is clear that significant changes to most if the current models are needed. Standing still is not an option. And if you are going to have to change your model, then you would go naturally to the one that becoming an industry standard for CCP risk management … The whole industry is going to move to VaR, I don’t think that is a question. It is just a matter of timing. It is ‘when’ rather than ‘if’.”
He continued: “When more CCPs move to VaR, some hedge funds with sizeable positions will see their margin double as they are suddenly hit by new liquidity margin charges (as we saw for EUREX) – one of those additional types of risk that a regulatory-compliant margin methodology now needs to cover.”