We refer to the recent default event in Nasdaq Commodities market notified under Default Notice no 39/18 in relation to which Nasdaq Clearing has compiled the following questions and answers (“Q&A”) for members of Nasdaq Clearing. This Q&A should be read in conjunction with the previously issued market notices describing the default.
Please note that the information contained in these Q&A is:
- intended for Nasdaq Clearing members only;
- intended for general guidance only; and
- compiled on a best efforts basis and is not represented to be complete.
Q1 Describe the events that triggered the default process
- On Monday September 10, 2018, the markets in Nordic and German power experienced an extreme movement in the spread.
- The defaulted portfolio contained a large spread position between Nordic and German Power that was negatively impacted by the fluctuation in the spread between the Nordic and German power markets.
- An Intraday Margin Call (IDMC) was issued to the Relevant Clearing Member on Monday September 10
- The margin payment obligation triggered by the IDMC was not met in full by the Relevant Clearing Member, which triggered initial default procedures.
Q2 Did the margin system react immediately?
- The margin system did react immediately and an IDMC was issued to the Relevant Clearing Member
Q3 Did the Relevant Clearing Member meet Initial Margin (IM) requirements in the week of
3 – 7 September, 2018?
- In the week of 3-7 September 2018, the spreads in the Nordic and German power markets did increase gradually but did not display any abnormal volatility
- The Relevant Clearing Member met all IM calls during the week leading up to the default. Accordingly, no IDMC calls were issued to the Relevant Clearing Member during the week of 3-7 September 2018.
Q4 How large was the defaulting portfolio, expressed as a percentage of total Initial Margin?
- The defaulted portfolio represented less than 5% of the total Initial Margin pool for the Commodity Clearing Service
Q5 Describe the close-out process for the Relevant Clearing Member’s defaulted portfolio.
- The Relevant Clearing Member was declared to be in default on Tuesday September 11 at 8.20 am.
- Nasdaq Clearing’s default management procedures are built on closing out positions in the market, in combination with working with pre-assigned close-out providers.
- Nasdaq has “close-out provider” agreements with 6 Clearing Members in the Commodities market, based on the level of activity in the market.
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In this situation, the Default Committee made an assessment of the most appropriate process for closing out the Relevant Clearing Member’s position, this included (but was not limited to):
- an assessment of which members were likely to be able to bid on a significant part of this position;
- how to minimise losses in the Relevant Clearing Member’s defaulted portfolio by holding a closed auction in order to avoid creating extreme market movements and having to close-out in more volatile market conditions.
- Four members were invited to bid in the closed auction.
- The Nasdaq Commodities market consists of 166 members.
Q6 Where are we now in the process?
- Replenishment notices were issued in accordance with the Default Fund Rules during Thursday September 13, 2018.
- The replenishment is required to be met by Monday September 17, 2018.
Q7 Has Nasdaq Clearing replenished its part of the default fund?
- Yes.
- In addition, Nasdaq Clearing is implementing a temporary Junior Capital for the Commodity Market of 200 million SEK (approx. 19 million euro).
- This temporary Junior Capital will be added in addition to existing capital in the clearing default waterfall and will be funded by Nasdaq Clearing. This means that the temporary Junior Capital would be utilized first, before the remaining funds in the existing Commodity Default Fund. Please also note that replenished member funds would be the last tranche to be utilized during the interim period.
- The temporary Junior Capital will remain in place during an interim period of 90 days starting today.
Q8 Have any changes been made to Nasdaq’s margin levels as a result of the default?
- In order to reduce the risk profile in the market situation following the default, Nasdaq Clearing has decided to increase margin levels
- Confidence levels have been increased in order to shift risk of a particular portfolio from the mutualized default fund to the owner of the portfolio
- We have increased margins on spread positions
Q9 Will Nasdaq Clearing pursue recovery of funds from the Relevant Clearing Member in relation to that member’s defaulted portfolio?
- Nasdaq is taking all reasonable steps to recover funds from the Relevant Clearing Member.
- Any funds recovered will be apportioned in accordance with the Default Fund Rules.
Background – German/Nordic spread data
Data below is based on price movements of the next-in-delivery yearly power contract (currently 2019), as it is illustrative to describe the similar movements in power contracts covering different time periods.
- The market on Monday September 10 experienced an extreme movement in the spread
- The spread widened to a level not observed since the Swedish power market was segmented into four zones in 2011
- Prior to Monday September 10, the largest daily change in spread since 2011 was 1.6 EUR.
- 99% of all observations during this period were below 1 EUR.
- Nasdaq Clearing’s margin model for this particular spread was calibrated to cover changes in margin spread up to approximately 4 EUR.
- Observed changes in spread during the days leading up to the default
• 3 Sept: + 0.93 EUR
• 4 Sept: + 0.40 EUR
• 5 Sept: + 0.52 EUR
• 6 Sept: + 0.33 EUR
• 7 Sept: + 0.47 EUR
• 10 Sept: + 5.56 EUR
- On Monday September 10, the spread increased by 17 times compared to a normal day’s change.