Members of Nasdaq’s Nordic commodities exchange have fully replenished vital clearing house contingency funds that were lost last week when a single Norwegian trader defaulted, the exchange operator said.
Einar Aas, a derivatives trader who made large bets on the power market, left a €114mn ($133mn) hole in the clearing house buffers when his funds ran out, drawing scrutiny from regulators seeking to clarify whether rules were broken.
Energy firms and other players on the 166-member market had been given deadline to cover the loss or face default themselves.
“The Member Default Fund now has been recapitalised by 100%, or €107mn ($125mn),” Nasdaq said in a statement.
The company had previously said it would replace the remaining loss of €7mn itself.
Clearing houses like the one operated by Nasdaq are vital for the stability of markets, acting as an intermediary in stock, bond or derivatives transactions and ensuring completion if one side goes bust.
“Finansinspektionen (the Swedish Financial Supervisory Authority) is following up on whether Nasdaq Clearing has acted in compliance with current regulation and whether the regulation is sufficient,” the Swedish financial markets regulator said in a statement late on Friday.
The clearing house will also hire an external party to review its handling of the case, Nasdaq Clearing chief executive officer Julia Haglind told Reuters.
While Aas had bet that Nordic-German spreads would narrow, this backfired on September 10 as heavy rain pushed down prices in the hydroelectric-dependant Nordic region, while a spike in the cost of carbon drove up German prices, Nasdaq said.
In a single day, the difference between Nordic and German power prices for 2019 widened by €5.56, 17 times more than the average daily move and exceeding the maximum level of €4 for which Nasdaq Clearing’s risk model had been calibrated.
Since 2011, when the current pricing system was set up, the largest change in Nordic-German spreads on any single day had been €1.6, Nasdaq said, calling the September 10 market move “a true ‘Black Swan’ event.”
Nordic power prices continued to fall on Monday due to wet weather and lingering concerns about the default, said Lauri Riihimaki, a trading manager at Finnish energy services company Enegia.
Following the default of Aas, Nasdaq’s clearing house on Friday said it would adjust its models and demand bigger capital buffers in order to shift more of the risk from the mutualised default fund to the owners of individual portfolios.
“The fact that they are increasing marginal requirements could decrease (market) liquidity,” investor relations manager Maans Holmberg at Finnish power firm Fortum told Reuters.
“But if they didn’t increase them after last week’s event maybe some members would anyway reduce their liquidity as they may be worried about trading safety,” he said.
“Lower liquidity could be an outcome of this, it is completely logical. After an incident like this it is normal that you will see an effect on liquidity.
And it is unfortunate as we have seen liquidity falling over the years,” he added.
Nasdaq on Friday also deposited $22mn in additional funds on a temporary basis to help restore trust in the market, the exchange said. Aas is now barred from trading, and said on Thursday that he risked personal bankruptcy.
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