3.4.4.1. Inter-Commodity Spread Margins
With inter-commodity spreads, the exchanges or clearinghouses add the hedge margins for the separate legs of the spread and then apply a specific spread credit in recognition of their offsetting risks. The spread credit is a fixed percentage set by the exchange that reduces the initial or maintenance margin requirement for the combined positions.
Example: A corn-soybean spread consists of two long corn contracts and one short soybean contract. The maintenance margin for two corn contracts is $1,800 ($900 x 2). The maintenance margin for one soybean contract is $2,100. By combining the two positions, the margin requirement before applying the spread credit is $3,900. It happens that the spread credit for both corn and soybeans is 55%. When you credit the combined margin by 55%, you get a maintenance margin for the corn-soybean spread of $1,755 ($3,900 – ($3,900 x 55%)).
Spread credits vary by commodity, taking account of their price volatility. Treasury bonds and feeder cattle, for example, both receive a 70% spread credit. The S&P 500 index receives an 85% credit.
Sometimes one leg of an inter-commodity spread will receive a larger credit than another. Soybeans, for example, receive a 55% credit, while soybean meal and soybean oil receive a 70% credit. When this occurs, the specific credit is applied to each leg of the spread and then the reduced margins are added together.
Example: Suppose that soybean futures have a maintenance margin of $2,100, while soybean meal and soybean oil have maintenance margins of $1,800 and $725, respectively. To find the maintenance margin of a 1:1:1 soybean crush, you would first apply a 55% spread credit to the soybean contract, and a 70% credit to the soybean meal and soybean oil contracts. If you added all 3 legs together without assigning a credit, the maintenance margin would be about $4,625. Instead, you apply the 55% credit to the soybean contract