For OTC instruments - such as Interest Rate Swaps (IRS), Overnight Index Swaps (OIS) and Generic Forward Rates Agreements (TM-FRA) - that are reported for clearing are covered by pre-novation checks; a check is made by the CCP to ensure that sufficient collateral has been posted, before the trade is novated. If sufficient collateral does not exist, the trade is put in a pending state, where the trade is neither accepted nor rejected. As soon as sufficient collateral is posted, the trade is accepted and novated.With the establishment of MiFID2, Nasdaq will introduce a threshold amount to improve the pre-novation process on OTC instruments. This means that if a smaller amount of collateral is missing for an individual trade to be cleared within the 10 second timeframe, the trade will still be accepted for clearing.
The threshold is set high enough to avoid unnecessary operational tasks as a result of negligible deficits, but low enough to ensure that Nasdaq mitigates the counterparty risk it assumes in its capacity as a clearing organization. The threshold is established on the market as a whole (not on an individual member level) and the size is subject to revision.
In order for a rejected trade to be accepted, the deficit needs to be covered by either an increase in collateral value or a decrease in the margin requirement, and the trade needs to be re-entered. Risk reducing trades will always be accepted for clearing (given that the other party of the trade is also reducing its risk, or has sufficient available collateral).
Background
For OTC instruments - such as Interest Rate Swaps (IRS), Overnight Index Swaps (OIS) and Generic Forward Rates Agreements (TM-FRA) - that are reported for clearing are covered by pre-novation checks; a check is made by the CCP to ensure that sufficient collateral has been posted, before the trade is novated. If sufficient collateral does not exist, the trade is put in a pending state, where the trade is neither accepted nor rejected. As soon as sufficient collateral is posted, the trade is accepted and novated.
In connection with the implementation of MiFID2, the rules around the pre-novation process will be adjusted. The CCP shall accept or not accept the clearing of a cleared derivative transaction concluded on a bilateral basis within 10 seconds from the receipt of the clearing member's acceptance or nonacceptance (RTS26, Article 4 [3]). For trades subject to pre-novation, the pending state will be removed, and trades will be rejected if there is insufficient collateral.
Further details are covered by the Regulatory Technical Standards – RTS26 (specifying the obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing [STP]).
Questions and feedback
For further information concerning this exchange notice please contact:
Risk Management: risk.management@nasdaq.com / Henrik Rosén, +46 8 405 6525 Henrik.rosen@nasdaq.com
Fixed Income: fixedincomesweden@nasdaq.com / Ulrica Ahlstedt, +46 8 405 6238 ulrica.ahlstedt@nasdaq.com
Nasdaq Nordic represents the common offering by Nasdaq Copenhagen, Nasdaq Helsinki, Nasdaq Iceland and Nasdaq Stockholm. Nasdaq Copenhagen, Nasdaq Helsinki, Nasdaq Iceland and Nasdaq Stockholm are respectively brand names for Nasdaq Copenhagen A/S, Nasdaq Helsinki Ltd, Nasdaq Iceland hf. and Nasdaq Stockholm AB.
