Methodology

Margin level

The intended margin coverage is 99.8% of all estimated price changes over the closing period for the relevant product. The closing period is scaled according to the liquidity of the relevant product. The closing period may vary from two to five days and shall reflect the estimated time it will take to close positions in the relevant product in a default situation.

Calculation of risk interval

To simulate the worst case market scenario for each account the portfolio must be valued in different market scenarios. To do this, a risk interval for each underlying instrument is established. The risk interval is expressed as a negative/positive percentage change in the market price (closing price).

NOS calculates the risk interval based on an analysis of the daily change in the futures prices on all the different contracts, and the period needed to close a portfolio.

This means that both volatility and liquidity in the different products are considered to assess the desired margin.

Calculation of margin requirements

NOS uses the SPAN®^[1]  methodology to calculate the margin requirement. SPAN® is a method of calculating risk in a portfolio commonly used by clearing houses world wide. NOS has implemented SPAN® in the QeptaTM clearing system. In SPAN®, the portfolios are valued in 16 different price and implied volatility scenarios based on the Risk Intervals and implied volatility shift factors for options.

The NOS SPAN® parameters files are available under this link.

Risk-reducing effects of price correlation or covariance between contracts are implemented in QeptaTM by means of margin offsets called “time spread credit” and “inter-commodity spread credit”. But NOS allows such offsets only in cases where there is conclusive evidence of stable correlation at contract level.

Options are valued by the use of recognized option pricing models. The risk of a change in implied volatility is taken into account by calculating the value of a portfolio with a higher and lower volatility than the current volatility.

NOS re-calculates margin requirements at least once a day, on the basis of end-of-day positions and closing prices. Collateral for the end-of-day margin requirement must be posted by a fixed time limit the next business day. In addition to the end-of-day margin requirement, margin requirements are re-calculated each time a new trade is registered on a clearing position account. As a basic principle, collateral for margin requirements must be posted prior to each trade.
 

[1] SPAN® is a registered trademark of the Chicago Mercantile Exchange and is used here under license. Chicago Mercantile Exchange accepts no liability in connection with use of SPAN by any natural or legal person.