Prof. Jayanth R. Varma's Financial Markets Blog

Photograph About
Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

Subscribe to a feed
RSS Feed
Atom Feed
RSS Feed (Comments)

Follow on:
twitter
Facebook
Wordpress

October
Sun Mon Tue Wed Thu Fri Sat
 
8
     
2018
Months
Oct
2017
Months

Powered by Blosxom

Mon, 08 Oct 2018

Lessons from the Nasdaq Clearing Default

Last month, the loss caused by the default of a single trader in a Nordic power spread contract cleared by Nasdaq Clearing consumed the entire €7 million contribution of Nasdaq to the default waterfall and then wiped out more than two thirds of the €168 million default fund of the Commodities Market segment of Nasdaq (the diagram on page 7 of this document shows the entire default waterfall for this episode).

Nasdaq explained its margin methodology as follows:

The margin model is set to cover stressed market conditions, covering at least 99.2% of all 2-day market movements over the recent 12 month period. In the final step of the margin curve estimation a pro-cyclicality buffer of 25% is applied.

The MPOR (Margin Period of Risk) for the relevant products is two days.

It also provided the following historical data:

There has been a lot of excellent commentary on this episode:

The episode highlights a number of important lessons about risk management that we knew even before this default happened:

Posted at 18:07 on Mon, 08 Oct 2018     View/Post Comments (0)     permanent link