The Margin Requirement is made up of two elements: Base Collateral and the Daily Margin Requirement.
The Base Collateral should cover any overnight risk associated with intraday position changes not covered by the previous margin calculation. The level of Base Collateral depends on trading pattern(s) as well as the credit rating of the counterparty. The Base Collateral must be covered before trading can commence.
Daily Margin Requirement
The Daily Margin Requirement is calculated on an intra-day and end-of-day basis and should cover the clearinghouse's market risk in the case of a member default and the subsequent close-out of its portfolio. The Daily Margin Requirement consists of a Variation Margin and an Initial Margin.
- The Variation Margin is the mark-to-market value (unrealised profit/loss) of the portfolio’s deferred settlement futures. The profit/loss of the future contracts is settled every day. For deferred settlement futures the profit/loss is calculated during the trading period and settled during the contract’s delivery period. For electricity and allowances deferred settlement futures in the trading period, the variation margin is equal to that of the accumulated unrealised profit/loss and is the difference between the initial trade price and the closing price. When a deferred settlement futures contract enters its delivery period, the accumulated profit/loss is settled on its settlement day. The variation margin of an electricity option contract is equal to its current market price. The variation margin of held options is positive, while the variation margin of written options is negative.
- The Initial Margin reflects a portfolio’s market risk during a close-out period. The SPAN®(1) risk model is used for the Initial Margin calculation, comparing up to 16 price and volatility scenarios in order to simulate worst case losses for future, deferred settlement future and option contracts. The model chooses all worst-case losses for all open positions in the different contract series, but allows netting (based on correlation) of margin between contracts with opposite positions both within and across markets.
Other Key Rules
The collateral call for the previous trading day must be covered by the clearing member no later than 11:00 CET the next trading day. If this deadline is not met, the clearinghouse may declare a default according to the Clearing Rules and take all necessary steps to reduce any counterparty risk.
According to the Clearing Rules, the clearinghouse may change the risk parameters in SPAN® with one hour’s notice or call for margin intraday which has to be met within 90 minutes.
(1) Note: SPAN® is a registered trademark of Chicago Mercantile Exchange Inc. and used herein under license. Chicago Mercantile Exchange Inc. assumes no liability in connection with the use of SPAN® by any person or entity.