Spread Margining Rules

Spread margining recognizes that offsetting futures positions have lower risk than outright positions. When you hold both long and short positions in related contracts, clearinghouses reduce margin requirements to reflect the actual portfolio risk rather than the sum of individual position margins.

Definition and Key Concepts

What Is Spread Margining?

Spread margining calculates margin based on net portfolio risk rather than gross position size. The principle: offsetting positions reduce potential loss, so they should require less margin.

Example:

• Long 10 March crude oil futures: $60,000 margin
• Short 10 June crude oil futures: $60,000 margin
• Gross margin: $120,000
• Spread margin (recognized offset): ~$15,000

The spread position risks much less than two outright positions.

Types of Recognized Spreads

SPAN Margining System

SPAN (Standard Portfolio Analysis of Risk) is the industry-standard methodology used by CME and most clearinghouses:

• Scans 16 price/volatility scenarios
• Calculates worst-case loss across scenarios
• Credits offsetting positions
• Produces a single margin requirement for the portfolio

SPAN recognizes that diversified portfolios require less margin than the sum of parts.

How It Works in Practice

Calendar Spread Margin Calculation

Position: Long 10 June gold (GC), Short 10 August gold (GC)

Outright margins:

• June gold: $6,000 per contract
• August gold: $6,000 per contract

Gross margin (no spread credit): 10 × $6,000 + 10 × $6,000 = $120,000

Spread margin: Gold calendar spread margin: ~$800 per spread 10 spreads × $800 = $8,000

Margin savings: $120,000 - $8,000 = $112,000 (93% reduction)

Inter-Commodity Spread Example

Position: Long 10 WTI crude (CL), Short 10 Brent crude (BZ)

Rationale: WTI and Brent are highly correlated. Long one and short the other creates a spread trade on the differential, not directional oil exposure.

Outright margins:

• WTI: $6,000 per contract
• Brent: $5,500 per contract
• Gross: 10 × ($6,000 + $5,500) = $115,000

Inter-commodity spread credit: WTI-Brent spread recognized at ~$2,000 per spread 10 spreads × $2,000 = $20,000

Margin savings: $115,000 - $20,000 = $95,000 (83% reduction)

Portfolio Margin Benefits

Consider a diversified futures portfolio:

SPAN analysis:

• ES and NQ are correlated → spread credit
• Stocks and bonds may be negatively correlated → portfolio benefit
• FX adds diversification

Portfolio margin after SPAN: ~$650,000 (42% reduction)

Worked Example

Arbitrage Trade with Spread Margin

A trader executes a calendar roll arbitrage in Treasury futures:

Trade:

• Buy 100 ZN September futures (10-year)
• Sell 100 ZN December futures

Objective: Capture mispriing in the Sept-Dec spread.

Without spread margining:

• September: 100 × $2,000 = $200,000
• December: 100 × $2,000 = $200,000
• Gross margin: $400,000

With spread margining:

• ZN calendar spread margin: ~$300 per spread
• 100 spreads × $300 = $30,000

Capital efficiency: The trader controls $400,000 gross notional exposure with $30,000 margin.

P/L scenario:

Entry spread: September at 110-08, December at 110-16 Spread value: -8/32 ($250 per spread)

Exit spread: September at 110-12, December at 110-18 Spread value: -6/32 ($187.50 per spread)

Profit: ($250 - $187.50) × 100 = $6,250 Return on margin: $6,250 / $30,000 = 20.8%

If the same positions required gross margin ($400,000): Return on margin: $6,250 / $400,000 = 1.6%

Spread margining makes this strategy viable.

Margin Calculation Under SPAN

SPAN scanning ranges for Gold (example):

Worst-case loss: -$15,000 SPAN margin requirement: $15,000 + safety buffer

For a calendar spread, up and down moves largely offset, reducing worst-case loss significantly.

Risks, Limitations, and Tradeoffs

Spread Correlation Assumptions

Spread margining assumes historical correlations persist. During market stress, correlations can break down:

• Normally correlated products diverge
• Spread losses exceed margin posted
• Additional margin calls may follow

2020 oil example: WTI-Brent spread exploded during COVID as WTI went negative. Calendar spreads in WTI experienced unprecedented moves.

Intraday Margin

SPAN calculates overnight margin. Brokers may impose stricter intraday requirements, reducing some spread benefits during trading hours.

Leg Execution Risk

To achieve spread margin benefits, both legs must be on the books simultaneously. If one leg fails to execute, you have an outright position with full margin requirements.

Recognized vs. Actual Offset

Exchanges recognize specific spread relationships. Your particular spread may not receive credit if it's not in the approved list.

Common Pitfalls

1. Assuming all spreads receive credit: Only recognized inter-commodity relationships qualify. Arbitrary combinations don't.

2. Ignoring margin call timing: Margin requirements are calculated daily. A spread that widened intraday may trigger a call before overnight SPAN runs.

3. Misunderstanding execution order: Entering outright positions expecting spread credit requires both legs to exist. Partial fills leave you exposed.

4. Over-relying on spread margin: Low margin enables large positions, but spread risk is not zero. Size appropriately.

5. Forgetting about concentration limits: Some spread margin benefits cap out at certain position sizes.

Checklist for Spread Margining

• Verify your spread type is recognized by the clearinghouse
• Calculate both gross and spread margin requirements
• Confirm spread credit rate from CME or broker
• Assess correlation stability for inter-commodity spreads
• Plan execution to establish both legs simultaneously
• Monitor spread for unusual widening that could trigger margin calls
• Understand broker's intraday margin policy
• Size positions appropriately for spread risk, not just margin
• Track exchange margin requirement changes
• Review SPAN parameters during volatile periods

Next Steps

For special trade execution methods that may require margin consideration, see Block Trades and Exchange for Physical.

To understand the roll mechanics that create calendar spreads, review Calendar Spreads and Roll Strategies.