The rules governing when a clearing member could be considered to be in default are stated in section 1.8 in the Clearing Rules for Nasdaq Derivatives Markets and in section 8 in the General Terms of the Clearing Rules of the Commodity Derivatives Markets.
Clearing members are inter alia considered to be in default in either of the following circumstances:
- The member has breached 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 will breach these rules and regulations or other regulations regarding the clearing operations.
For a full list of circumstances that may trigger a default event please refer to the Rules and Regulations of Nasdaq Clearing.
If a clearing member is 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 specified in the Default Management Procedures (see below under Resource Center ), for example to close-out of the member’s position and to liquidate collateral posted by the member.
The Nasdaq Clearing Default Committee is the decision-making authority within Nasdaq Clearing for declaring default events and deciding which, if any, actions will be taken as permitted under its Rules and Regulations as well as any applicable legal agreements.
Default situations due to clearing members not having met their end-of-day margin requirement, default fund requirement or intra-day margin call requirement two hours past the deadline, will be escalated directly to the Default Committee, while other default situations might first be escalated to the Credit Committee and then handed over to the Default Committee if the Credit Committee assesses that the Default Committee should evaluate whether the situation should be assessed as a default event.
The Credit Committee and the Default Committee are made up of the following representatives in order to help ensure that all decisions are well informed.
- 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).
- Chief Risk Officer (Chair)
- Head of Strategy and Client Relations
- Head of Clearing Risk
- Legal Counsel
- Head of Treasury EMEA – APAC
The Default Committee has the mandate issued by the Board of Nasdaq Clearing to act in every possible way (provided that it is permitted under the Rules and Regulations) to reduce and ultimately eliminate the risk in the portfolio if a default has been declared. This includes, but is not limited to, neutralize positions by creating hedge positions and close-out trades through different channels etc.
The Default Committee decides on further actions in the default management process, depending on internal and external factors. The Default Committee shall consider all possible ways to close positions, for example through exchange trades, directly towards members and through an auction.
Nasdaq Clearing will notify the Swedish FSA, the Swedish Central Bank and the defaulting party.
Nasdaq Clearing will announce the default on its website and also through a clearing notice which will be sent to all subscribers. Please note that only subscribers of such notices will be able to receive notifications of defaults through clearing notices. Such a notice will be published the same day if practically possible but will not be published 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 of the size of the loss and, if applicable, the size of the replenishment and/or if the assessment power will enter into force.