Default Fund -

standing settlement instructions, waterfall and notifications

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Default Fund

Nasdaq Clearing

The financial crisis of 2008 highlighted the importance of stable and resilient financial systems. Efforts to improve market stability are being coordinated globally and a complete overhaul of the regulatory framework in both the EU and US is expected to result in a new regulatory regime for Central Counterparties (CCPs) by the end of 2012.

Nasdaq Clearing has adapted the new regulations and at the same time ensured member implementation of new requirements and features. Nasdaq Clearing manages risk through a comprehensive counterparty risk management framework, which is made up of policies, procedures, standards and resources. Nasdaq Clearing faces both traditional business risks and specific risks unique to derivatives clearing services. The most noteworthy risk is counter-party default, i.e. the risk that one or several market participants will default on their obligations to the clearing organization.

As stipulated in the European Market Infrastructure Regulation (EMIR Nasdaq Clearing maintains guarantee funds or reserve funds to which users contribute and does consequently enforce a loss-sharing scheme among its members. This means that in a default situation, Nasdaq Clearing’s own risk-bearing capital is at risk together with that of the non-defaulting members.

Members Required to Contribute to the Default Fund are:

General Clearing Members, Direct Clearing Members, Direct Pledging customers and Direct Clearing Clients on the Nasdaq Derivatives Market and the Nasdaq Commodities market.

Guide to Nasdaq Clearing Default Funds

The Guide to Nasdaq Clearing Default Funds and Appendices provide the reader with a thorough overview of the structure of Nasdaq Clearing’s default funds. Nasdaq Clearing provides, within the same legal entity, CCP clearing services under two brands, Nasdaq Derivative Markets and Nasdaq Commodities. The clearing is divided into three clearing services: Financial Market, Commodity Market and Seafood Market.

The documents are aimed at decision makers within Nasdaq Clearing’s clearing members’ organizations. The objective is to inform participants and stakeholders about the structure, procedures and overall set-up of the Nasdaq Clearing default funds.

The first part of the Guide gives a description of Nasdaq Clearing’s regulatory capital structure, including the default funds and criteria for determining the sizes. Contribution criteria for clearing members are also described. The second part defines the order in which of the funds would be used, i.e. the Waterfall. Finally, the third part describes the legal implementation of the default funds by Nasdaq Clearing in relation to regulatory compliances and clearing participants. Nasdaq Clearing’s and members’ rights and obligations related to the default funds are specified in the Rules and Regulations of Nasdaq Derivatives Markets and Nasdaq Commodities Clearing Rules.

Standing Settlement Instruction (SSI) – Default Fund

Clearing members wishing to settle their securities contributions on T+0 must have placed complete settlement instruction on the respective CSD/ICSD at least two (2) hours prior to last settlement batch.


Clarification regarding spill-over risks between the Financial Default Fund, the Commodities Default Fund and the Seafood Default Fund, all part of the member sponsored Nasdaq Clearing Default Fund structure (the ‘Waterfall’)

Products cleared by Nasdaq Clearing AB are for risk management purposes allocated to three distinct Default Funds: The Financial Default Fund, the Commodities Default Fund and the Seafood Default Fund. The clearing members contribute to the different Default Funds only to the extent they clear the relevant products (equity and fixed income products for the Financial Default Fund and energy- related products for the Commodities Default Fund, and seafood products for the Seafood Default Fund). Each clearing member will in addition contribute to the Mutual Default Fund which is a layer in the Waterfall common for all Default Funds. Similarly, the senior capital, which consists of Nasdaq Clearing’s own capital, is also common for all Default Funds. Therefore, there is a spill-over risk between the Default Funds in terms of using the shared clearing capital in case a member defaults, but the shared capital is placed senior in the waterfall.

The structure of the default fund and the other financial resources provided by Nasdaq Clearing, also referred to the “Waterfall”, is illustrated in the picture which can be retrieved from the link below. The Waterfall starts from the bottom and works its way through the capital resources towards the top of each pillar. The main characteristics of the Waterfall structure are: 1) Nasdaq Clearing retains the first layer of exposure and 2) a separation of risk between the Financial Market, the Commodities Market and the Seafood Market (although the contributions to the Mutualized Default Fund and Senior Capital are available to cover default losses occurring in any of the markets).

Regulation requires qualifying central counterparties (QCCPs), such as Nasdaq Clearing, to submit specific data points assist clearing members in determining their default fund exposures towards Nasdaq Clearing. The Current Exposure Method (CEM) is used to calculate the hypothetical capital of the CCP and the resulting c-factors, that are calculated individually for each default fund, are published in the Excel spreadsheet which can be retrieved in the link below. The c-factors are to be applied to the value of the default fund contribution in order to calculate the hypothetical capital of the clearing member. The spreadsheet is updated each month with end-of-month data.

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