The financial crisis of 2008 highlighted the importance of stable and resilient financial systems. Efforts to improve market stability are being coordinated globally and a complete overhaul of the regulatory framework in both the EU and US is expected to result in a new regulatory regime for Central Counterparties (CCPs) by the end of 2012.
Nasdaq Clearing has adapted the new regulations and at the same time ensured member implementation of new requirements and features. Nasdaq Clearing manages risk through a comprehensive counterparty risk management framework, which is made up of policies, procedures, standards and resources. Nasdaq Clearing faces both traditional business risks and specific risks unique to derivatives clearing services. The most noteworthy risk is counter-party default, i.e. the risk that one or several market participants will default on their obligations to the clearing organization.
As stipulated in the European Market Infrastructure Regulation (EMIR Nasdaq Clearing maintains guarantee funds or reserve funds to which users contribute and does consequently enforce a loss-sharing scheme among its members. This means that in a default situation, Nasdaq Clearing’s own risk-bearing capital is at risk together with that of the non-defaulting members.
Members Required to Contribute to the Default Fund are:
General Clearing Members, Direct Clearing Members, Direct Pledging customers and Clearing Clients on the Nasdaq Derivatives Market and the Nasdaq Commodities market.
Default Fund Policy Papers
The Default Fund Policy Paper and Appendices provides the reader with a thorough overview of the structure of Nasdaq Clearing’s default funds. Nasdaq Clearing provides, within the same legal entity, CCP clearing services under two brands, Nasdaq Derivative Markets and Nasdaq Commodities. The clearing is divided into three services, Financial Market, Commodity Market and Seafood Market.
The documents are aimed at decision makers within Nasdaq Clearing’s clearing members’ organizations. The objective is to inform participants and stakeholders about the structure, procedures and overall set-up of the Nasdaq Clearing default funds.
The first part of the Policy Paper gives a description of Nasdaq Clearing’s regulatory capital structure, including the default funds and criteria for determining the sizes. Contribution criteria for clearing members are also described. The second part defines the order in which of the funds would be used, i.e. the Waterfall. Finally, the third part describes the legal implementation of the default funds by Nasdaq Clearing in relation to regulatory compliances and clearing participants. Nasdaq Clearing’s and members’ rights and obligations related to the default funds are specified in the Rules and Regulations of Nasdaq Derivatives Markets and Nasdaq Commodities Clearing Rules.
- Nasdaq Default Fund Policy Paper - Appendix 1, Loss in both markets
- Nasdaq Default Fund Policy Paper - Appendix 2, RCAR – Risk Valutation Capital At Risk
- Nasdaq Default Fund Policy Paper - Appendix 3, Assessment Power and Replenishment
- Nasdaq Default Fund Policy Paper - Appendix 4, Investment Policy principles
- Nasdaq Default Fund Policy Paper - Appendix 5, Eligible Funds
- Nasdaq Default Fund Policy Paper - Appendix 6, Commodity aspects