Nasdaq Commodities is the brand name for Nasdaq Inc.’s worldwide suite of commodity related products and services. The Nasdaq Commodities offerings include power, natural gas and carbon emission markets, seafood derivatives, electricity certificates and clearing services. Nasdaq ASA is the commodity derivatives exchange authorized by the Norwegian Ministry of Finance and supervised by the Norwegian Financial Supervisory Authority.
Nasdaq Clearing is the trade name of Nasdaq Clearing AB which is authorized and supervised as a multi-asset clearinghouse by the Swedish Financial Supervisory Authority in Sweden as well as authorized to conduct clearing operation in Norway by the Norwegian Ministry of Finance. All trades with Nasdaq Commodities are subject to clearing with Nasdaq Clearing.
NASDAQ COMMODITIES: STRATEGIC INITIATIVES FOR 2019
In early 2018, Nasdaq Commodities undertook a fundamental strategy review that resulted in a consolidated business strategy comprised of three key areas; focus on European Power products, the launch of an integrated Spot Trading Platform (NEMO) and decommissioning of non-core business products and services.
Some elements of this plan have already been delivered – for example the migration of our freight products to our North American futures exchange NFX and the move of liquidity from DS Futures to Futures. However, the bulk of the changes will be implemented during 2019, including continued preparations for the launch of our NEMO Platform and the addition of Physical Settlement to our futures products. Our aim is to enter 2020 with the most efficient Power Trading platform in Europe, matched to meet the expectations of our customers and designed to leverage the regulatory changes to the market landscape.
The Nordic Power market has suffered from declining volumes and liquidity during the past decade. We are fully engaged with our members to work towards turning this tide. Our members continue to view Nasdaq Commodities as the natural hub for Nordic Power and share our desire to retain a liquid and transparent market. This is important for the entire commodity community and we will work to ensure a transparent, liquid and robust market for the future.
As part of our plans for 2019, risk management enhancements across the CCP are of the utmost priority. Based on lessons learned from the member default event in September 2018 and discussions with our members, we will implement changes to our risk management framework to ensure a robust and resilient market infrastructure.
Hence, Nasdaq Commodities will be focusing on three action areas for 2019:
- Develop and Expand Commodity Market Participation
- Increasing Liquidity
- Enhancing Risk Management Framework
EFFORTS TO DEVELOP AND EXPAND COMMODITY MARKET PARTICIPATION
During 2019 we will focus on Power trading solutions. We will make sure we come out of this year with a harmonized product offering across geographies.
Our biggest project during 2019 will be the creation of a day-ahead auction solution for Nordic, German and French power. The Capacity Allocation and Congestion Management (CACM) regulation provides a new framework clearly defining the tasks and obligations of the transmission system operators (TSOs) and Power Exchanges designated as Nominated Electricity Market Operators (NEMOs). NEMOs will compete with each other on a shared order book basis and this enables Power Exchanges to compete for business across auctions. On 8 January we received our NEMO designation from the Swedish Energy Market Inspectorate (EI).
We believe it will be key for commodity exchanges to be able to offer a combined SPOT and Future solution going forward. One single platform for SPOT and Futures will provide synergies and efficiencies to our customers. In all of these efforts it is fundamental that our customers are involved. To address this we have initiated a number of forums to cooperate closer with market participants, and this will intensify during 2019.
FOCUS ON INCREASING LIQUIDITY
Strengthening market liquidity is critical and we are working towards addressing existing liquidity issues in conjunction with our core member base. We have consulted with our customers in great detail on these matters. This work has sparked a number of initiatives which we believe will stimulate market liquidity.
Firstly, we are launching a new market maker program on the Nordic Market, with the aim to have it up and running during Q1 2019. Secondly, we have issued a proposal for a new liquidity provider program aimed to attract additional trading in a number of key contracts during two one-hour trading windows per day. This initiative is showing good progress and we hope to see it go live in Q1 2019.
We will continue to work with our customers to find new ideas and ways to strengthen the liquidity in the market during the next few years.
ENHANCED AND MORE ROBUST RISK MANAGEMENT FRAMEWORK
Below, we outline the main enhancements to the risk management framework we are planning for during 2019. We look forward to our clearing members’ feedback, which will be used to refine these actions as necessary and ensure that market liquidity and business goals are considered. Timelines and deliverables will be subject to member consultation and advice (via the Member Risk Committee, bilateral discussions and risk councils), as well as regulatory approvals.
Initial Margin Framework
We will enhance our margin framework through more specific and targeted margin add-ons, raising margins for portfolios identified to pose additional risk to the CCP and its members:
- Increase confidence level to 99.5% for main commodity products (completed Sept 2018)
- Introduce additional margin requirements for large stress loss accounts, defined through the ratio of uncovered stress loss and posted initial margin. The purpose of this change is two-fold; (a) to re-allocate stress loss risk from mutualised to individual members with large stress losses and (b) to provide Nasdaq Clearing with an additional risk monitoring tool. (roll-out in Jan 2019)
- Enhance current concentration margin add-ons, to provide additional protection in the scenario where concentrated positions need to be liquidated. Nasdaq Clearing will establish new metrics for concentration (based on items such as open interest, average daily trading volumes), and apply those in a more granular and flexible manner across the commodity markets. (Q1 2019)
Default Fund Structure
We will increase CCP capital in the waterfall and make changes to the default fund structure to strengthen members’ position in a default scenario and eliminate spill-over effects:
- Increase our junior capital, to minimum EUR 20m for the commodity market, to solidify Nasdaq Clearing’s commitment to the markets it operates. (completed Dec 2018)
- Move to a default fund structure with no mutualized layer across markets to eliminate the risk of spill-over between markets in the case of a member default. (member consultation in Q1 2019, implementation in 2019)
- Increase the default fund size update frequency from quarterly to monthly. (2019)
Membership and Credit Assessment Framework
We will enhance our membership and credit assessment framework through additional scrutiny and resulting mitigating actions for all members considering our diverse member base:
- Imposing a liquidity requirement on each member, which is linked to the size of exposure of the member. This requirement will be monitored on an ongoing basis and mitigating actions will be codified. (roll-out in Jan-Feb 2019)
- The financial requirement for being a clearing member will be updated for Direct Clearing Members, Direct Clearing Agents and Direct Clearing Clients, to further ensure that each member has a sufficient capital base for clearing purposes. (roll out in end of Q1 2019).
- Qualitative requirements will be reviewed and strengthened to ensure that each member has sufficient operational capacity and suitable organization. (roll out end of Q1 2019)
- Roll out a due diligence questionnaire to capture additional information from clearing members on an annual basis, enabling more detailed assessment of our members’ operational and risk management capabilities. (roll-out in Jan 2019)
- Enhancement of the credit scoring model and develop a tiering framework for members which will take into account their credit position, membership type, qualitative criteria assessed via the due diligence questionnaire. This tiering framework will be explicitly linked to mitigating action and controls, ranging from increasing frequency and intrusiveness of monitoring to extraordinary margins and position controls. (roll out end of Q1 2019)
Default Management Framework
We will further increase transparency in the auction process and introduce measures to achieve the best possible outcome.
- Extend the number of close-out providers in Commodities and implement an incentive structure to increase auction bidding and close-out. (reach-out process to close-out providers during Q1 2019)
- Enhance fire drills and increase transparency around roles and responsibilities for close-out providers, including clarifying and standardizing Nasdaq operations and communication in case of a default. The purpose of these changes is to increase transparency around, and preparation for, any default event. (member consultation in Q1 2019, implementation in 2019)
We believe these measures, taken in conjunction with business enhancements and our liquidity program, will significantly improve the functionality and safeguarding of our markets. We look forward to receiving feedback and input from our members and the wider industry throughout 2019 and will update affected participants regularly, as changes are rolled out.
Nasdaq Commodities offers trading and clearing of commodity derivatives contracts. The markets covered are Nordic, German, French, Dutch, Belgian, Italian, Spanish, UK power, El-Cert, carbon allowances and natural gas. In addition Nasdaq Commodities offers clearing of seafood derivatives traded on third party exchange.
Trading of commodities products takes place over "the exchange" (Nasdaq Oslo ASA) and clearing through "Nasdaq Clearing" (Nasdaq Clearing AB). The exchange is subject to regulations and legal requirements through its derivatives exchange licence issued by the Norwegian Ministry of Finance.
A well-functioning market presupposes and depends on trust. This must be held by all participants affected by the business. The Exchange's corporate governance principles accordingly address all the factors which can influence trust in the market.
The Exchange's corporate governance principles aim to ensure that:
- it facilitates transparent price formation
- it provides an efficient marketplace
- the regulatory authorities are confident that the exchange fulfils the roles assigned by its licences
- employees comply with the company’s ethical guidelines
- control bodies in the organisation are adequate for ensuring that all elements of the business are subject at all times to systematic risk analysis
- the participants want the exchange as their preferred marketplace
The object of the code of practice issued by the Norwegian Corporate Governance Board (NCGB) is confined to ensure that listed companies provide a clarification of the division of roles between shareholders, the board of directors and the executive management which goes beyond legal requirements.The NCGB code is intended for listed companies with numerous shareholders, so that many of its 15 main points are not relevant for the exchange, where a single owner hold the shares in the company.
With regard to building further trust in the market through its corporate governance, Nasdaq Commodities has several bodies which handle risk management and member compliance with the Rulebook.
Among legislation and statutory regulations which supplement the recommendations in the NCGB code, Chapter 3 of the Norwegian Exchange Act and regulation 1080/2008 from the Financial Supervisory Authority of Norway on clarifying control responsibility, documentation and confirmation of internal control are particularly important.
- Nord Pool introduced power derivatives for Germany and the Netherlands.
- Nord Pool ASA entered into an agreement with Eurex to sell the 17.39 percent stake Nord Pool holds in the Leipzig based European Energy Exchange AG (EEX) for a consideration of €46 million or €6.60 per share.
- Nord Pool Clearing ASA launched a general clearing membership (GCM) model.
- Nord Pool ASA was granted a license by the US Commodity Futures Trading Commission (CFTC) to allow US companies to trade and clear Nordic and international power derivatives and carbon products.
- NASDAQ OMX acquired Nord Pool Clearing ASA, Nord Pool Consulting AS as well as the international products from Nord Pool ASA. The acquired companies were merged into NASDAQ OMX Commodities AS.
- NASDAQ OMX Commodities and Nord Pool Spot were chosen by the Futures & Options Association (FOA) in the UK to establish spot and cash-settled derivative power market with a full range of clearing services for the UK wholesale power market.
- Fortis Bank Global Clearing NV joined Nord Pool ASA as the first general clearing member (GCM) and Fortis Bank (Nederland) NV became the first non-clearing member (NCM).
- Merger of NASDAQ OMX Commodities AS and its wholly owned Nord Pool Clearing ASA subsidiary were merged into NASDAQ OMX Stockholm AB.
- Launch of a physical certified emission reduction (CER) spot contract. The CER spot contract completed the current spot offering.
- N2EX, the market for UK power contracts, was launched 12 January. N2EX is the brand name for NASDAQ OMX Commodities’ and Nord Pool Spot’s UK power exchange.
- Agora-X, a US electronic trading platform for over-the counter (OTC) commodities and derivatives contracts, became a part of NASDAQ OMX Commodities when NASDAQ OMX bought a major interest in the company.
- NASDAQ OMX purchased North American Energy Credit and Clearing Business, which became a part of NASDAQ OMX Commodities Clearing Company (NOCC), an offering within physical delivery of OTC power and gas contracts in the US.
- NASDAQ OMX acquired Nord Pool ASA, following Statnett’s and Svenska Kraftnät’s decision to exercise their option to sell the shares in the company.
- Launch of UK futures
- Genium INET for Commodities
- Launch of Spark Spreads
- Launch CfD contracts for Estonia (Tallinn area)
- Launch of European Options for German Power
- Launch of European Union Aviation Allowances (EUAA)
- Launch of Czech, Dutch, French and Belgium CfD contracts as hedging tools between Germany and named price areas
- Renaming of Forward contracts to DS Futures and CfDs to EPADs
- Launch of Pre-trade Risk management
- Launch of Swedish-Norwegian Electricity Certificates
- Nasdaq OMX Clearing Receives EMIR Authorization
- Merger of NASDAQ OMX Clearing and NOS Clearing
- Introduction of Block Trade Facility for Commodities instruments
- Launch of Index for German Wind Power Production
- Launch of German Wind Index Futures
- Clears the Freight Market’s First Option Contracts on the New Capesize Basket
- Signed first Market Maker for German Wind Index Futures
- Launch of French Power Futures Contracts
- Move of Market Making from DS Futures to Futures contracts in Nordic Electricity
- Nasdaq receives approval as recognized market operator (“RMO”) for Commodities in Singapore
- Launch of seven new European Power Markets and seven new Gas Markets
- Offers flexible solution in the dry freight market
- Goes live with German Only Electricity Futures Contracts
- Nasdaq Commodities and Saxo Bank introduced a collaboration, offering SMEs in the Nordic region direct access to Nordic Power futures on Saxo’s fully integrated trading and risk management platform.