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Foreign Exchange

FX news: CME increases Span

One of our contacts wanted to draw theweeklyFiX’s attention to a document he had seen from the CME that reads: ‘As per the normal review of market volatility to ensure adequate collateral coverage, the Chicago Mercantile Exchange Inc., Clearing House Risk Management staff approved the performance bond requirements for the following products listed below.’

The ‘performance bond’ bit is more commonly known as margin.

But there is nothing sinister about this.

‘Span’, the method by which the CME determines margins, is rigorous, transparent and regularly reviewed. It is also long established; I remember having to sit through a lecture about it more than 20 years ago.

Span stands for Standard portfolio analysis of risk and is now pretty much the industry standard, used, according to the CME, not only by themselves but “50 registered exchanges, clearing organizations, service bureaus and regulatory agencies throughout the world”.

Obviously there are many parameters to the methodology, including likely daily range, volatility and intra- and inter-commodity spreads. It is entirely predictable that most of the agricultural margins have been raised but so too have a few of the margins for currency futures. Initial margins for AUD and EUR futures are up a little under 10%, CHF a little more and EUR/GBP by more than 20% (from £1,890 per contract to £2,295 for speculator accounts and from £1,400 to £1,700 for hedge accounts).

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