By Terje Solsvik and Lefteris Karagiannopoulos
OSLO (Reuters) - Members of Nasdaq's Nordic commodities exchange have replenished more than 90 percent of 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 114 million euro ($133 million) 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 have been given until the end of Monday to cover the loss or face default themselves.
"Nasdaq would like to inform our members and clients that the Member Default Fund has more than 90 percent committed funds for recapitalization. We have no indication that any member will not replenish the default fund by the end of the day," it said.
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 (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 Sept. 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 euros, 17 times more than the average daily move and exceeding the maximum level of 4 euros 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 euros, Nasdaq said, calling the Sept. 10 market move "a true 'Black Swan' event."
GRAPHIC: German and Nordic year-ahead power prices https://reut.rs/2D3NJHs
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 mutualized 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 $22 million 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 risks personal bankruptcy.
($1 = 0.8598 euros)
($1 = 8.2498 Norwegian crowns)
(Additional reporting by Nerijus Adomaitis; Editing by Ole Petter Skonnord/Mark Potter/Susan Fenton)
Disclaimer: No Business Standard Journalist was involved in creation of this content
