The SPAN uses the delta value of options to convert them to equiva-
lent futures when calculating the inter-month spread charge because
gains in one month may not exactly offset losses in another and there
is a risk for the clearing house.
Intra-day margin
As we have already said, in times of very large movements up or down
in the price of a contract, the clearing house or exchange will recalcu-
late the initial margin requirement. An additional amount may be
required per contract for all contracts open, which are affected. It is
unlikely that all contracts are affected because the news that caused
the volatility may concern for example, a foreign economy, which has a
knock-on effect for domestic bonds.
If the clearing house believes that the situation is only temporary and
that conditions will quickly return to a more stable environment, then
they will leave the initial margin requirement at its original level for the
next day, only calling the intra-day margin as a one-off payment. More
likely however, the initial margin level will be changed as a result of
volatile conditions.
The intra-day margin call is made to cover the increased risk since
the original initial margin was paid in the morning, and then the new
increased initial margin rate is called from the next day onwards.
Intra-day margins can be called from the clearing members by the
clearing house up to any time as determined in their rules. The clear-
ing members must pay the required amount to the clearing house;
however, depending on the time of day that the call is made, it may
be difficult for the clearing member to receive the funds from their
clients. In some cases the clearing house only calls intra-day margin
from one side; for example, if the underlying has risen sharply then
the short positions are losing money. It is the holders of the short
positions that represent the risk to the clearing house because they
will have obligations to settle the next day. The holder of the long
positions are making a profit so will not owe anything to the clearing
house.
Brokers must endeavour to receive the funds or additional collat-
eral from their clients difficult as this may be and at the very least
must contact the client and let them know that additional funds are
due. In this respect, it is necessary that the clearing member is able
to re-calculate margin requirements during the day on their own sys-
tems so that they may see accurately which clients are affected and
reconcile the amounts that are due.
Margin and collateral 127
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