The Clearing House Division of the Chicago Mercantile Exchange proposed to adopt a new framework to calculate initial margin requirements for CME-cleared products – a filtered historical value at risk methodology termed “HVaR.”
HVaR will calculate the maximum potential loss that could be incurred by a portfolio (and thus, determine initial margin requirements) by (1) reviewing the actual losses that would have been incurred by the portfolio during a given period of time; and (2) adjusting the historical data to adjust for the conditions existing during the given period (e.g., high volatility) and the market conditions currently in effect.
In a submission to the Commodity Futures Trading Commission, CME Group said that HVaR will be a “single, unified framework capable of supporting all CME futures and options (as well as swaps and cash products, if desired)”, and will be able to capture liquidity and concentration risks “beyond the risks posed by changes in the market value of positions.”
Ultimately, HVaR will replace the Standard Portfolio Analysis of Rate framework (“SPAN”) that has been used to calculated initial margin requirements since 1988.
CME Group proposes to apply its new framework to all CME-cleared products other than interest rate swaps and over-the-counter foreign exchange swaps. Initially, CME Group will apply its new framework to 150 major energy futures and options products and extend its new framework to other products over time. When rolling out HVaR, CME plans to run both SPAN and HVaR in a parallel production for at least six months.
