Margining and mark to market under SPAN

SPAN stands for Standard Portfolio Analysis of Risk. It is a risk‑based margining system originally developed by the Chicago Mercantile Exchange and adopted by the NSE for all equity‑derivative contracts.

The core idea is to calculate the worst‑case loss a portfolio could suffer over a one‑day horizon, considering price moves, volatility shifts and the correlation between positions. This loss is called the SPAN risk and forms the base of the initial margin requirement.

For the NISM exam, remember that SPAN replaces older methods such as gross or net margin. Questions often ask you to identify which component (risk array, SOM, or additional margin) is responsible for a particular margin figure.

• SPAN is used by NSE Clearing Corporation for all listed equity derivatives.
• It is a forward‑looking, scenario‑based approach rather than a simple percentage of contract value.

The SPAN margin is built from three distinct parts:

1. Risk Arrays – These are pre‑calculated loss values for each contract under a set of price‑move and volatility‑change scenarios. The array captures intra‑day, inter‑day and spread risks.

2. Short Option Minimum (SOM) – A floor amount that ensures a minimum margin for short option positions, regardless of the risk‑array outcome. SOM protects the clearing house against sudden large losses from uncovered options.

3. Additional Margin – Applied at the discretion of the clearing corporation when a portfolio exhibits unusual risk characteristics, such as extreme concentration or low liquidity.

• Risk arrays are multiplied by the number of contracts (position size) to obtain the portfolio risk.
• SOM is a fixed rupee amount per short option contract, set by the exchange.

Mark‑to‑Market is the daily process of re‑valuing all open derivative positions at the settlement price of that day. The resulting profit or loss is settled in cash, either credited or debited to the trader’s margin account.

MTM ensures that the clearing house never carries a cumulative loss exceeding the margin posted. If a position moves against the trader, the margin account is reduced; if it moves in favour, the account is increased.

For the NISM exam, you may be asked to calculate the MTM amount for a single contract or to explain why a trader receives a cash flow on a particular day.

• MTM is performed at the end of each trading session using the official settlement price.
• It is independent of the SPAN margin; MTM reflects realised P&L, while SPAN determines the amount that must be posted as margin.

Step‑1: Identify the settlement price of the contract at the start of the day (previous day’s close) and at the end of the day (current close).

Step‑2: Compute the price difference: ΔP = Close_{today} - Close_{yesterday}. For a long position, MTM = ΔP × Multiplier × Number of contracts. For a short position, MTM = -ΔP × Multiplier × Number of contracts.

Step‑3: Add the MTM amount to the trader’s margin account. A positive MTM increases available margin; a negative MTM reduces it, potentially triggering a margin call.

• Contract multiplier for NIFTY futures is 75 ₹ per index point.
• Always keep the sign of the position (long/short) in mind when applying the formula.

Higher implied volatility expands the risk arrays, leading to a larger SPAN margin. The NSE publishes volatility‑based multipliers that feed directly into the risk‑array values.

Similarly, the margin scales linearly with the number of contracts because the risk contribution is multiplied by the position size (Q_i). Doubling the contract count roughly doubles the SPAN margin, assuming the risk per contract remains unchanged.

Exam questions may present two portfolios with different volatilities or contract quantities and ask you to identify which one will have the higher margin. Remember: higher volatility → higher risk array → higher margin; larger position size → higher margin.

• Do not forget to apply the contract multiplier when converting index‑point moves to rupee values.
• Volatility shocks are reflected in the SPAN’s “volatility shift” scenarios.

SEBI mandates that the clearing corporation maintain sufficient margin to cover potential losses. The NSE Clearing Corporation publishes daily SPAN parameters, and any deviation from the prescribed margin triggers a margin call as per SEBI regulations.

For equity derivatives, the minimum initial margin is typically 5‑7 % of the contract value, but the SPAN calculation may result in a higher amount due to risk considerations. The exchange also imposes a maximum daily exposure limit for a single participant to prevent systemic risk.

In the exam, you may be asked about the role of SEBI versus the exchange. SEBI sets the regulatory framework, while the NSE defines the specific SPAN parameters and enforces daily margin calls.

• Margin calls must be met within the stipulated time (usually by the next trading session).
• Failure to meet a margin call results in position liquidation by the clearing house.

Memorise the SPAN formula structure – risk array contribution plus SOM. When a question provides risk values, always multiply by the contract quantity before adding SOM.

Watch out for sign errors: a short position reverses the effect of the price change in MTM calculations. Use the phrase “long gains on price rise, short gains on price fall” as a quick reminder.

Read the question carefully to see whether it asks for *initial* margin (SPAN calculation) or *daily* cash flow (MTM). Mixing the two leads to loss of marks.

• Check if SOM applies – it only does for short option contracts.
• Verify that the contract multiplier is correctly applied for index‑based derivatives.