Understanding Margin Impact in ES and NQ Index Calendar Spreads: Real-Time P&L Considerations

[killATwill]

Hi there.

I'm curious to know more about how after-hours fluctuations in the price of ES can affect the available margin in an account managing positions in futures calendar spreads that include a long-dated (less liquid) leg.

As I'm sure many traders on here know, ES futures calendar spreads have their own market which tends to be at its most liquid when the stock market is open. These spread products find an EOD price at settlement time.

But what happens when the more active near-month contracts experience significant movement in after-hours, while the less liquid long-dated contracts remain unchanged because the stock market is closed and the spread market itself has basically no volume?

Say news breaks during after-hours, causing a 2% move in ES, while the price of the long-dated leg remains frozen. In such a situation, do brokers immediately mark the P&L of both individual contracts in real time, or do they wait until the next settlement day when the calendar spread market aligns contract values more accurately?

If possible, it would be great to hear directly from traders who have navigated managing index futures calendar spreads during volatile market periods. Any firsthand experiences shared with regard to margin fluctuations would be greatly appreciated.

Thanks.

 

[TrAndy2022]

If you do calendar spreads then you are speculating on changes of the yield curve. Why then not trading the interest rates futures ? For me it does not make sense what you described above.

 

[Overnight]

...about how after-hours fluctuations in the price of ES can affect the available margin in an account managing positions in futures calendar spreads that include a long-dated (less liquid) leg.

It doesn't. Margin requirements are fixed in place and do not change at the exchange level without 1 day prior notice, and any changes that do occur would take effect at the next 6PM ET opening. Index future margins don't change all that often, maybe once or twice per yer (except in 2020).

The latest changes happened just recently in fact.

https://www.elitetrader.com/et/threads/latest-cme-margin-increase.377509/

 

[Slow Learning Elf]

If you do calendar spreads then you are speculating on changes of the yield curve. Why then not trading the interest rates futures ? For me it does not make sense what you described above.

Actually, it's not that simple. The equity cash basis (the calendar spreads in equity futures is a forward basis position) is driven by (a) funding rates because a bank carrying a basis position would have to fund the stocks (b) cost of balance sheet because the bank would be consuming valuable balance sheet space that can be used for profit-making instruments and (c) dividend yield since the stocks held will pay dividends, though these aren't not very volatile.

You can trade dividend futures to express a view on dividends (see here: https://www.cmegroup.com/trading/equity-index/us-index/equity-index-dividend-futures.html), you can trade SOFR or Fed Funds futures to express a view on rates. However, if the OP is trading a fairly short-dated calendar, e.g. Mar/Jun, what he's really isolating is the cost of balance sheet. Many macro guys think that a TRS on a spooz basis position is one of the best ways to express a view on bank balance sheet costs/stress (unlike bond futures which have a big special and CTD component to the basis).

 

[killATwill]

Thanks, I probably wasn't clearly communicating. My question isn't about the margin requirements specifically. It's more about how a significant after-hours movement in the near-term leg might affect the available margin in an account.

Specifically, if the shorter-term contract experiences a substantial change in after-hours while the less active long-dated leg maintains its settlement price, how does this impact the available margin and the risk of facing a margin call?

It doesn't. Margin requirements are fixed in place and do not change at the exchange level without 1 day prior notice, and any changes that do occur would take effect at the next 6PM ET opening. Index future margins don't change all that often, maybe once or twice per yer (except in 2020).

The latest changes happened just recently in fact.

https://www.elitetrader.com/et/threads/latest-cme-margin-increase.377509/

 

[killATwill]

Thank you for your insights. I'm particularly interested in longer-dated spreads for a few reasons: Firstly, I already have a stance on the yield curve expressed through SOFR, but my account limits my total exposure on those products. Secondly, it appears that the margin requirements for index spreads are more efficient compared to similar "pure" rates trades. Thirdly, these spreads involve dividends as an input, making them not solely reliant on rates.

Your point about the basis is new to me, so I appreciate you highlighting that. My primary concern relates to the liquidity risk during after-hours trading, as mentioned in my previous post in this thread. Specifically, I'm curious if I should be worried about the lack of liquidity on the longer-dated legs in case there's a significant after-hours movement in the near-term contract.

Actually, it's not that simple. The equity cash basis (the calendar spreads in equity futures is a forward basis position) is driven by (a) funding rates because a bank carrying a basis position would have to fund the stocks (b) cost of balance sheet because the bank would be consuming valuable balance sheet space that can be used for profit-making instruments and (c) dividend yield since the stocks held will pay dividends, though these aren't not very volatile.

You can trade dividend futures to express a view on dividends (see here: https://www.cmegroup.com/trading/equity-index/us-index/equity-index-dividend-futures.html), you can trade SOFR or Fed Funds futures to express a view on rates. However, if the OP is trading a fairly short-dated calendar, e.g. Mar/Jun, what he's really isolating is the cost of balance sheet. Many macro guys think that a TRS on a spooz basis position is one of the best ways to express a view on bank balance sheet costs/stress (unlike bond futures which have a big special and CTD component to the basis).

 

[Overnight]

...

Specifically, if the shorter-term contract experiences a substantial change in after-hours while the less active long-dated leg maintains its settlement price, how does this impact the available margin and the risk of facing a margin call?

Considering how insanely low the margin req. is for a spread, it's not something you should be overly worried about, but in any event, it would be just like holding an outright position...If the position moves against you enough where your NLV is bumping closer and closer to zero, you'd need to wire some more money into your account stat.

Keep in mind that all active contracts use the front month as the anchor in settlement calculations, so as it moves so do all the others, even if there's no volume. You'll never have a situation where the back months will settle so far out of whack with the front month that shit would break.

 

[killATwill]

Thanks. I'm imagining a trade involving 40 spread units.

It's not out of the ordinary for ES to move significantly, say by 100 points, after the regular trading hours due to unexpected news. In such cases, the front contract in a calendar spread might adjust quickly, but the longer-dated contract may not reflect this change until the settlement.

To provide an example, let's consider a 40-unit spread. A 100-point move could potentially result in a temporary loss of $200,000 (calculated as 100 points x $50 x 40 units).

So, I'm curious about the repercussions of such a scenario. Would an account holder with a modest account of around $100,000 face an immediate margin call from risk teams, or even forced liquidation, before daily settlement re-pricing of the long-dated contracts?

I should note that in this scenario, the $100,000 is theoretically a healthy amount of capital to initiate the trade, maintaining a significant cushion between the initial capital and maintenance margin requirements.

Thank you for your insights.

Considering how insanely low the margin req. is for a spread, it's not something you should be overly worried about, but in any event, it would be just like holding an outright position...If the position moves against you enough where your NLV is bumping closer and closer to zero, you'd need to wire some more money into your account stat.

Keep in mind that all active contracts use the front month as the anchor in settlement calculations, so as it moves so do all the others, even if there's no volume. You'll never have a situation where the back months will settle so far out of whack with the front month that shit would break.

 

[Slow Learning Elf]

Firstly, I already have a stance on the yield curve expressed through SOFR, but my account limits my total exposure on those products. Secondly, it appears that the margin requirements for index spreads are more efficient compared to similar "pure" rates trades. Thirdly, these spreads involve dividends as an input, making them not solely reliant on rates.

If you’re doing it to make a punt on rates, it is worth checking if you get more or less dv01 (change in contract value per one basis point change in rates) using this vs SOFR or FF futures. I am too lazy to do any math right now, but my intuition tells me that using actual rates futures is more capital efficient.

My primary concern relates to the liquidity risk during after-hours trading, as mentioned in my previous post in this thread. Specifically, I'm curious if I should be worried about the lack of liquidity on the longer-dated legs in case there's a significant after-hours movement in the near-term contract.

I am pretty sure the exchange does its margin calculation using a prompt contract and then shocking the basis. So it’s unlikely you gonna get liquidations in such a scenario. Plus, it’s a real arb and plenty of people are watching these rolls to bring them back in-line, so such a dislocation is not gonna last.

 

[Overnight]

...It's not out of the ordinary for ES to move significantly, say by 100 points, after the regular trading hours due to unexpected news. In such cases, the front contract in a calendar spread might adjust quickly, but the longer-dated contract may not reflect this change until the settlement.

To provide an example, let's consider a 40-unit spread. A 100-point move could potentially result in a temporary loss of $200,000 (calculated as 100 points x $50 x 40 units)...

The real trick of your scenario would be to see if the spread reflects the change between the two contracts during intraday moves. I don't have access to exchange-traded spreads from my broker, so cannot see it's movements. But I've seen a few charts over the years from others, and they just don't seem to move all that much, no matter the underlying action.

Today would be a good example to pull up, as I noticed the ES went down around 40-45 points at one point. So if you have access to any ES spread data for today, check the PA of any of those spreads and look for a large spike-up. I'm guessing you won't see much of one at all, and coupled with the uber low margins of a near-dated spread, you're looking at only $10,000 margin on a 40-lot, so you have a lot of wiggle room with a 6 figure account.