NASDAQ was aware of the build-up of greater risk as they had raised the Default Fund from EUR 74mm on the 1st March 2018 to EUR 133mm on the 1st June to the final EUR 166mm on the 1st September 2018...only 10 days before the declaration of default of Mr. Aas. Surely somebody must have known something was up and perhaps flagged it appropriately, including to members. This also applies for market concentration risk. I understand that Mr. Aas had something in the order of 50% of the market exposure...not usually seen as healthy. Perhaps position limits would have been of use here.


NASDAQ asked its members for an additional EUR 100mm to replenish the Default Fund, 90% of which were received by the 17th September. However, the positions held by Mr. Aas were dealt with only within a closed auction of just four members being allowed to bid for them, possibly at a deep discount and crystallising the debt of EUR 114mm. I understand this has come under criticism but commentators seem to be of the opinion that this was done by NASDAQ to ‘...keep a lid on the news to avoid moving the market.’. This part leads to one of the most important questions raised.


Whilst trying to ‘...keep a lid on the news...’, NASDAQ was also apparently slow to inform other clearing houses of the default. This has left some of them to allegedly accuse NASDAQ of breaking a ‘gentleman’s agreement’ to share news of clearing member defaults. One source at a regulator has been quoted as saying ‘When this happened, NASDAQ didn’t immediately identify, for at least 24 hours, who the defaulter was to the other clearing houses in the world’. We live in a world of incredible fast communications and market movements. With the major regulatory reforms post the Great Financial Crisis of ten years ago moving derivative markets away from bilateral exposure and to a more centrally clearing model, the role of Central Counterparty Clearing (‘CCP’) and the systemic importance of CCPs has grown immensely. It was not just the shock that over two-thirds of a CCPs margin default fund was used for just one trader’s position. Rather communication between Clearing Houses seems so discretionary and dare I say it... antiquated and with apparently no legal or regulator obligation other than a ‘gentleman’s agreement’.


Finally, I’d like to look at the margining itself. NASDAQ utilises the SPAN model developed back in the 1980s by the CME and used by many other exchanges and clearing houses for derivative margin calculation. This thirty plus year old model is moving to be overhauled. Rivals to NASDAQ have been seen using more recent margin models. It will be interesting what the outcome will be once we see at least some dust start to settle on the post mortems. NASDAQ itself is apparently looking at two key areas of the default. Treatment of non-bank clearing members and concentration risk. However, such caution after the event could lead to some negative consequences. Higher and more onerous requirements for a clearer and perhaps leading to less liquid, more volatile and fragmented markets as smaller and marginal participants may reluctantly move away from a central clearing environment.


I have a fear which manifests itself at times like this. In my career I’ve seen brokerages, significant ones, fall away. I saw a whole market threatened during the Tin Crisis in the 1980s and the collapse of Lehman ten years ago. Always they seem to be getting bigger, not just in monetary terms but in actual impacts on markets. My fear is that one day a CCP will fall. I really hope it doesn’t come about. However, every few years a new generation has to learn and perhaps relearn lessons on risk and exposure that were obvious in hindsight.


Eddie Tofpik E: eddie.tofpik@admisi.com T: +44(0) 20 7716 8201


‘…SOME OF THEM ALLEGEDLY


ACCUSE NASDAQ OF BREAKING A ‘GENTLEMAN’S AGREEMENT’.


11 | ADMISI - The Ghost In The Machine | November/December 2018


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