NSCCL-SPAN: The objective of NSCCL-SPAN is to identify overall risk in a portfolio of all futures and options contracts for each member. The system treats futures and options contracts uniformly, while at the same time recognizing the unique exposures associated with options portfolios, like extremely deep out-of-the-money short positions and inter-month risk. Its over-riding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day based on 99% VaR methodology.
Risk arrays: The SPAN risk array represents how a specific derivative instrument (for example, an option on NIFTY index at a specific strike price) will gain or lose value, from the current point in time to a specific point in time in the near future, for a specific set of market conditions which may occur over this time duration.
In the risk array, losses are represented as positive values, and gains as negative values. Risk array values are represented in Indian Rupees, the currency in which the futures or options contract is denominated.
Risk scenarios: The specific set of market conditions evaluated by SPAN, are called the risk scenarios, and these are defined in terms of:
SPAN further uses a standardized definition of the risk scenarios, defined in terms of:
1. The underlying price scan range or probable price change over a one day period, and
2. The underlying price volatility scan range or probable volatility change of the underlying over a one day period.
Scanning risk charge: As shown in the table giving the sixteen standard risk scenarios, SPAN starts at the last underlying market settlement price and scans up and down three even intervals of price changes (price scan range). At each price scan point, the program also scans up and down a range of probable volatility from the underlying market‘s current volatility (volatility scan range). SPAN calculates the probable premium value at each price scan point for volatility up and volatility down scenario. It then compares this probable premium value to the theoretical premium value (based on last closing value of the underlying) to determine profit or loss.
Calendar spread margin: A calendar spread is a position in an underlying with one maturity which is hedged by an offsetting position in the same underlying with a different maturity: for example, a short position in a July futures contract on Reliance and a long position in the August futures contract on Reliance is a calendar spread. Calendar spreads attract lower margins because they are not exposed to market risk of the underlying. If the underlying rises, the July contract would make a loss while the August contract would make a profit.
Short option minimum margin: Short options positions in extremely deep-out-of-the-money strikes may appear to have little or no risk across the entire scanning range. However, in the event that underlying market conditions change sufficiently, these options may move into-the-money, thereby generating large losses for the short positions in these options. To cover the risks associated with dee pout-of-the-money short options positions, SPAN assesses a minimum margin for each short option position in the portfolio called the short option minimum charge, which is set by the NSCCL. The short option minimum charge serves as a minimum charge towards margin requirements for each short position in an option contract.
Net option value: The net option value is calculated as the current market value of the option times the number of option units (positive for long options and negative for short options) in the portfolio.
Net option value is added to the liquid net worth of the clearing member. This means that the current market values of short options are deducted from the liquid net worth and the market values of long options are added thereto. Thus mark to market gains and losses on option positions get adjusted against the available liquid net worth.
Net buy premium: To cover the one day risk on long option positions (for which premium shall be payable on T+1 day), net buy premium to the extent of the net long options position value is deducted from the Liquid Net worth of the member on a real time basis. This would be applicable only for trades done on a given day. The net buy premium margin shall be released towards the Liquid Net worth of the member on T+1 day after the completion of pay-in towards premium settlement.
Overall portfolio margin requirement:
The total margin requirements for a member for a portfolio of futures and options contract would be computed by SPAN as follows:
1. Adds up the scanning risk charges and the calendar spread charges.
2. Compares this figure to the short option minimum charge and selects the larger of the two. This is the SPAN risk requirement.
3. Total SPAN margin requirement is equal to SPAN risk requirement less the net option value, which is mark to market value of difference in long option positions and short option positions.
4. Initial margin requirement = Total SPAN margin requirement + Net Buy Premium.
