The rules governing when an exchange member, clearing member or customer is considered to be in default are stated in section 1.9 in the Rules and Regulations for the Financial Derivatives Markets and in section 8 in the General terms of the Clearing rules of the Commodity Derivatives Markets.
Clearing members or customers (with a direct contractual relationship with the clearing house) are considered to be in default in either of the following circumstances:
- They breach the Rules and Regulations of Nasdaq Clearing or other regulations regarding Nasdaq Clearing’s clearing operations.
- In the judgment of Nasdaq Clearing, there is a substantial risk that the clearing member or customer will breach these rules and regulations or other regulations regarding the clearing operations.
- If clearing members, clearing clients, direct pledging customers or indirect pledging customers are declared in default, Nasdaq Clearing has the right to elect, at the expense of the defaulting party, to take one or more of the measures summarized below, provided that client/customer accounts must be treated in accordance with the rules and procedures for segregation and porting. Unless otherwise specified, Nasdaq Clearing has the right to take such measures without consulting the defaulting party in advance. Please note that the below is only a summary of the relevant sections of the Rules.
- Withhold settlement or delivery due to the defaulting counterparty.
- To declare any obligations of the counterparty to be due and payable and set-off any obligations due to the counterparty against any obligations due to Nasdaq Clearing.
- To refuse registration of any transactions.
- To effect a close-out in respect of the counterparty’s positions.
- To enter into hedging transactions.
- To buy or sell positions on behalf of the counterparty.
- To settle the counterparty’s contracts in advance, in whole or in part.
- To liquidate or appropriate collateral posted by the counterparty.
- To convert collateral to required currency.
- To purchase or sell deliverable instruments or the contract base, cancel the counterparty’s settlement obligation and claim compensation.
- To terminate any Customer/Clearing Client Agreements to which a defaulting clearing member is a party.
- To terminate the clearing membership or Customer Agreement of the defaulting counterparty.
Since Nasdaq Clearing began its derivatives clearing operations, thirteen (13) clearing participants have experienced financial difficulties resulting in the participant being declared in default.
A Swedish-based market maker member experienced liquidity problems due to trading losses. After all positions had been closed, the market maker had an unpaid settlement amount for options amounting to SEK 736,000, which was covered by Nasdaq Clearing’s equity reserves.
A Swedish-based sole market maker had insufficient capital due to losses in stock options. The posted collateral was seized to cover the closeout costs. Nasdaq Clearing did not incur any loss due to this default.
The Swedish based brokerage firm Orion Fondkommission AB was placed into bankruptcy and Nasdaq Clearing’s required margin covered all the costs associated with the closing of the counterparty’s positions. Nasdaq Clearing did not incur any loss due to this default.
UK-based Enron Europe Trading Ltd, a member of the UKPX, experienced serious financial difficulties. The OMLX and the Nasdaq Clearing acted early in the progression that led to the bankruptcy of Enron’s parent company, Enron USA. When Enron was placed into default, costs of GBP 4,442 were incurred when the position was closed out. These costs, together with some miscellaneous items, were fully covered by the posted collateral. Neither Nasdaq Clearing nor OMLX (*) incurred any loss due to this default.
The Commodities Markets clearing member Enron Capital & Trade Resources International Corp (ECTRIC), a wholly owned subsidiary of Enron Corp. and incorporated under US legislation, experienced serious financial difficulties. Nasdaq Clearing acted early in the progression that led to the bankruptcy of Enron’s parent company, Enron USA, and put ECTRIC in default due to ECTRIC not being able to meet extraordinary margin call issued. Nasdaq Clearing initiated immediate closeout of the portfolio, which was closed by day end. The closeout cost was fully covered by the collateral posted by ECTRIC. Nasdaq Clearing did not incur any loss due to this default.
A clearing member on the Commodities markets was declared in default after the company did not meet a daily margin requirement. As the clearing member was not in bankruptcy, the member was put into default administration—meaning the default was not communicated to the market and the Clearinghouse let the clearing member close down their exposure under the Clearinghouse’s supervision. The clearing member was kept anonymous during the default process, the closeout cost was fully covered by the collateral pledged by the clearing member, and NA Nasdaq SDAQ Clearing did not incur any loss due to this default. Later, the defaulted clearing member withdrew from the market.
UK-based TXU Europe Energy Trading Ltd. was placed into default after the company filed for administration protection. Default proceedings were initiated; the member’s positions were taken over by the clearing organization and liquidated during the trading day. The amounts resulting from position liquidation totaled SEK 204,000. The full settlement amount was paid from excess cash. Neither Nasdaq Clearing nor OMLX (*) incurred any loss due to this default.
Two affiliated indirect pledge customers of a Finnish bank simultaneously failed to meet their margin requirement pertaining to positions in stock forwards, and were subsequently declared in default. The combined margin requirement was MEUR121. The positions were liquidated within 24 hours at a cost of MEUR 98. Nasdaq Clearing did not incur any loss due to this event.
A clearing member on the Commodities market was declared in default after the company did not meet its daily margin requirement. As the clearing member was not in bankruptcy, the member was put into default administration—meaning the default was not communicated to the market and the Clearinghouse let the clearing member close down their exposure under its supervision. The clearing member was kept anonymous during the default process, the closeout cost was fully covered by the collateral posted by the clearing member, and Nasdaq Clearing did not incur any loss due to this default. Later, the defaulted clearing member withdrew from the market.
A direct pledge end customer filed for suspension of payments and was subsequently declared in default. The customer’s stock options portfolio, with a margin requirement of MSEK 9, was liquidated within one hour at a cost of MSEK 7. Nasdaq Clearing did not incur any loss due to this default.
Clearing member Weavering Capital AB failed to comply with the minimum financial criteria for clearing members and was declared to be in default. Weavering Capital AB administered approximately 20 indirect pledge end-customers but had no proprietary trading book. Before the end of the day of the default, all end customers had been successfully transferred to other clearing members. Nasdaq Clearing did not incur any loss due to this default.
HQ Bank had its banking and trading license revoked by the Swedish FSA and was declared in default. Nasdaq Clearing actively traded out of the proprietary positions and transferred (or, where necessary, liquidated) customer accounts. Nasdaq Clearing did not incur any loss due to this default process.
MF Global UK Ltd, clearing member of both the financial and commodities markets, went into special administration due to insolvency and was declared to be in default. MF Global only had open positions on behalf of clients on the financial markets and the remaining position was closed out in one day without Nasdaq Clearing incurring any losses.
On September 10, 2018 the markets in Nordic and German power experienced an extreme movement in the spread. One of Nasdaq Clearing´s members had a portfolio containing a large spread position between Nordic and German Power that was negatively impacted by the fluctuations. When the member no longer could meet the margin requirement due to the losses in the portfolio Nasdaq Clearing declared the member in default. The subsequent default management resulted in a loss that exceeded the member’s margin collateral and default fund contribution, leading to a loss for Nasdaq Clearing and the Nasdaq commodities member default fund. Nasdaq Clearing is recovering funds from the defaulted member to its members, and has also been working with members and other stakeholders to implement an action plan leveraging the lessons learned from this event.
* Enron Europe Trading Ltd and TXU Europe Energy Trading Ltd. were clearing members of UKPX (the UK Power Exchange), a division of the former OMLX (OM London Exchange Ltd.) which at the time was a London-based, wholly-owned subsidiary of Nasdaq Clearing. Because part of Nasdaq Clearing’s clearing capital also covered the liabilities of the OMLX and UKPX’s operations, and as there is only one Default Committee within Nasdaq Clearing authorized to manage counterparty default events, these default incidents are included in the overview of the default history of Nasdaq Clearing.
The Nasdaq Clearing Default Committee is the single decision-making authority within Nasdaq Clearing for evaluating default situations and events and deciding which—if any—actions will be taken as permitted under its Rules and Regulations as well as any applicable legal agreements. The Default Committee is made up of the following representatives in order to help ensure that all decisions are well informed. The Default Committee shall include the following ordinary members:
- Head of Clearing Risk (Chair)
- Chief Executive Officer (CEO)
- Chief Risk Officer (CRO)
- Chief Operating Officer (COO)
- Chief Compliance Officer (CCO) (advisory role)
- Legal Counsel
- Senior Treasury Specialist
In addition, experts within relevant areas can be invited to the Default Committee meetings as observers (in a non-voting capacity).
The Default Committee has the mandate to act in every possible way to reduce the risk in the portfolio. This means that Default Committee is authorized by the Boards to choose whatever solution adequate to reduce or eliminate the risk exposure. In this respect, there are different ways to reduce and eliminate the risk exposure:
- Open new trades/positions to create synthetic hedges (does not need to be a perfect hedge as long as it has a substantial risk reducing effect)
- Close out trades
- Hold risk neutral positions (RNP) unchanged
- Create new RNPs through open up new positions in overlapping products
- Neutralize exposure by making RNP look-alikes
- Prioritizing close out based on a risk assessment
The Default Committee decides the progress in the close-out trades/risk reduction, but the progress will be depending of internal and external factors. The Default Committee shall consider all possible ways to close positions:
- Close out trades through the OTC market via brokers
- Directly towards clearing members; open or closed “auction sale”, collect binding bid/ask prices from clearing members
- Supervised close out, let the defaulting party do the close out trades itself
- Close out trades through the exchange, depending on liquidity and impacts on market prices
Nasdaq Clearing will notify the defaulting party and the Swedish FSA (Finansinspektionen).
Nasdaq Clearing will announce the default on this website and also through an exchange notice which will be sent out to all subscribers. Please note that only subscriber of such notice will be able to receive notifications of defaults through exchange notices. Such notice will be made the same day if practically possible but will not be made later than one day following the default.
When the final cost of the default has been established, Nasdaq Clearing will send a notification to all Default Fund Participants to such email addresses authorized by each Default Fund Participant under the General Terms for Custody Account. If a loss has occurred, Nasdaq Clearing will realize the necessary Default Fund contributions in the order described in the Waterfall of Resources and notify the Default Fund Participants on the size of the loss and, if applicable, the size of the replenishment and/or if the assessment power will enter into force.