@bone How is the reduced margin handled usually in an FCM's customer account in case of an intermarket spread position that benefits from SPAN margin reduction according to the CME rules? For instance, let us assume that product A requires an initial margin of $5,000, product B - $4,500, and a spread consisting of 10 x long A + 9 x short B gets a reduced margin rate of $2,000. If I wanted to close all 10 contracts of leg A, only to re-open it immediately afterwards, will I need to post the full margin for the "naked" 9 contracts of leg B, even if they are "naked" only for a few seconds?
It depends on how your trading account is margined for the day as well. You can ask for reduced margins for day positions so it would not affect your trading. What you carry overnight will be the CME margins for outright and spreads.
SPAN is calculated in real-time, so if you close one leg of a spread, the new maintenance margin will be the maintenance margin for the other leg, without a discount (margin relief). However, (AFAIK) closing one leg is the same thing as sending an order to initiate the full position of the other leg outright (in terms of risk), and so it carries the same initial margin requirement as that order would have. It is possible to lever up a spread (basket orders) such that closing either side in full would result in a margin violation. If you try to do that, the order to close will be rejected. You would have to close the spread without violating risk. You should always know (before you put a spread on) what the full initial margin requirement for each leg would be if you had to hold the position outright. @bone would know for sure, but I am pretty certain that the broker's margin software will not allow any violations because it could result in fines by regulators. Disclaimer - I am not an expert. Also, some brokers don't even offer SPAN margin to clients!
So, if I haven't got enough margin for outright position of any leg, does it mean I am not able to close the positions (liquidate everything) at all? How do I get out of the market then?
In practice: I enter the spread manually, one leg at a time. 10 x A = $50,000 in initial margin. Now I place an order for 9 x B. Do I need to put up another $45,000, or does the system take a margin reduction at this point?
This is VERY FCM dependent. I will steer clients away from discount brokers because their risk systems are simply not set up for spread offset margins - I mean, 99+% of their clients are scalping flat price outrights. I've had clients using famous name discount brokers who margined each correctly hedged spread leg as outright risk which is just a freaking disaster. If you want to be really safe about it - use the exchange supported spreads and do not manually leg the spreads. Using an autospreader is about the same as manually legging spreads from a risk perspective. If you are leaving legs open for any length of time - minutes or even hours; then your FCM Risk Department is naturally going to margin those legs as outright. I steer clients towards major Chicago FCMs who have a long list of commercial and spec spread traders as clients. Their Risk Managers know how to set allowances on their systems to accommodate a spread trader. One very famous FCM will give my spread clients 4 times daily buying power for intraday and then for carried positions overnight the SPAN margin offsets get assigned. But don't abuse this trust - otherwise the Risk Manager will throw your ass out on the curb. When legging spreads, I teach my clients to split the difference. In other words, I will work a bid on one leg and when that bid gets hit I will immediately hit the bid on the other leg. If you are intent on buying a bid on one leg and selling the offer on the other leg that is a fool's errand that will end up costing you far more than you eked out on the rare times that it worked out for you. If you're going to sit there that long with open legs and take on that kind of risk then yeah, nut up and expect to pay full outright margin on each leg. But as I mentioned before the BEST method for both trader and Risk Manager is to use the exchange spreads. And it's perfectly fine to use combinations of exchange spreads - I use exchange calendar pair spreads to construct Butterflies and Condors all the time. You can leg exchange supported butterflies and condors to construct spreads with several legs. You can buy one exchange strip and sell another exchange strip. You have tens of thousands of possible combinations using exchanges spreads. If you are legging one exchange spread against another the risk profile and margin requirements are completely different as compared to legging one outright against another outright.
Where can I find the product codes for CME-supported spreads? I can only find margin ratios and respective margin amounts for futures
At the exchange home page, go to products, then margins, then choose either intra or inter for the type of spread. Intra is same product different expiry; Inter is between two different but highly correlated products. Every exchange will have SPAN margins for exchange spreads - including Eurexchange and SIMEX and TOPEX, etc. They will even offer inter exchange margins. For example, ICE and CME have an agreement to margin ICE Mini-Russell versus CME ES. INTRA: Like a Eurodollar Butterfly: https://www.cmegroup.com/trading/in...ctor=INTEREST+RATES&exchange=CME&pageNumber=1 INTER: Like a WTI versus Gasoline Crack Spread: https://www.cmegroup.com/trading/en...ml?marginsTab=INTER#exchange=NYM&pageNumber=1 Interest Rate Futures: https://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html Select the DEC 2019 tab. You can also download the CME SPAN calculator tool: https://www.cmegroup.com/tools-information/webhelp/cme-core/Content/margin-calculator.html