«Published: Based on activities of Nasdaq OMX Clearing AB as at 31st March 2014 © 2014, The NASDAQ OMX Group, Inc. All Rights Reserved. 1 Contents I. ...»
NASDAQ OMX Clearing AB
Based on activities of Nasdaq OMX Clearing AB as at 31st March 2014
© 2014, The NASDAQ OMX Group, Inc. All Rights Reserved. 1
I. Executive summary
II. Summary of major changes since the last update of the disclosure
III. General background on the FMI
General description of the FMI and the markets it serves
General organisation of the FMI
Legal and regulatory framework
System design and operations
IV. Principle-by-principle summary narrative disclosure
V. List of publicly available resources
© 2014, The NASDAQ OMX Group, Inc. All Rights Reserved. 2
NASDAQ OMX Clearing AB
Jurisdiction(s) in which the FMI operates:
Authority(ies) regulating, supervising or overseeing the FMI:
NASDAQ OMX Clearing AB’s competent authority is Finansinspektionen under EMIR.
NASDAQ OMX Clearing AB is overseen by a college of European regulators, which includes Riksbanken, the central bank in Sweden, which also has financial stability responsibilities for NASDAQ OMX Clearing AB.
The date of this disclosure is December 2014.
This disclosure can also be found at:
http://www.nasdaqomx.com/transactions/posttrade/clearing/europeanclearing For further information, please contact Michelle Hallet, firstname.lastname@example.org.
Executive summary I.
This document (“Disclosure Framework”) is prepared in accordance with the Principles for Financial Market Infrastructure” (“PFMIs”) published in February 2012 and developed jointly by the Committee on Payment and Settlement Systems (“CPSS”) and the Technical Committee of the International Organisation of Securities Commissions (“IOSCO”). No disclosure is provided with respect to Principles 11 and 24 as they do not apply to CCPs. The objective of this Disclosure Framework is to provide relevant disclosure to market participants with respect to NASDAQ OMX Clearing AB (hereinafter referred to as “Nasdaq Clearing”, the “clearinghouse” or the “CCP”) and its role as a central counterparty and its management of different types of risk. The scope of the Disclosure Framework is limited to the clearing activities performed by Nasdaq Clearing under its current clearing license: i.e. (i) NASDAQ OMX Derivatives Markets which is the clearing of financial instruments (“Nasdaq Financial”), and (ii) Nasdaq Commodities which is the clearing of commodities instruments (“Nasdaq Commodities”).
© 2014, The NASDAQ OMX Group, Inc. All Rights Reserved. 3 Nasdaq Clearing is part of the NASDAQ OMX Group – an international group that inter alia offers services for trading in securities and technical systems for trading and processing of transactions in securities in more than 50 countries.
The European part of the NASDAQ OMX Group includes the stock exchanges in Copenhagen, Stockholm, Helsinki, Reykjavik, Tallinn, Riga and Vilnius, as well as the central securities depositories in Estonia, Latvia and Iceland. The Nasdaq Group also owns a share of the Lithuanian central securities depository. Derivative operations are conducted organizationally in the business area Nordic Transaction Services, which runs the stock exchanges in Stockholm, Helsinki, Copenhagen and Reykjavik and the derivatives exchange in Stockholm. Clearing is conducted via Nasdaq Clearing that operates central counterparty clearing for derivative instruments.
The participant base of Nasdaq Clearing is diverse and includes physical and financial players.
Nasdaq Clearing handles traditional business risks, as well as specific risks that are unique to the derivative clearing services it provides. The most noteworthy of these risks, with respect to the risk of loss, is counterparty default, the risk that one or several market participants will default on their obligations to the clearing organization. Nasdaq Clearing’s counterparty risks are professionally managed within the Risk Management department, through a comprehensive counterparty risk management framework. This consists of policies, procedures, standards, and human, informational and technological resources. All together this provides accurate measurement, reasonable control, and desired level of protection from all identifiable counterparty risks and all operational risks arising within the operations of Nasdaq Clearing.
The European Market Infrastructure Regulation (the Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories) (“EMIR”) came into force on August 16, 2012.
One of the objectives of EMIR is to reinforce the role of central counter parties in mitigating certain aspects of market and counterparty risk with the aim to protect the stability of the financial system.
Nasdaq Clearing has been authorised by and is under supervision by the Swedish Financial Supervisory Authority, Finansinspektionen, (the “Swedish FSA”) to conduct clearing operations in accordance with the Swedish Securities Market Act (2007:528).
However, following the implementation of EMIR, the Swedish Securities Market Act was amended as regards the application of the act for central counterparties. As a result, the Swedish Securities Market Act is only in limited parts applicable to central counterparties, which henceforward will be subject to the provisions of EMIR instead.
Nasdaq Clearing submitted its application for an EMIR clearing license to the Swedish FSA on 16 April, 2013, and was approved by the same authority as a clearing house under EMIR on 18 March 2014. Nasdaq Clearing plays an important role in terms of © 2014, The NASDAQ OMX Group, Inc. All Rights Reserved. 4 stability in the financial system and has thus been asked by the Swedish FSA and the Swedish Central Bank (“Riksbanken”) to perform a self-assessment in accordance with the PFMIs and the degree to which Nasdaq Clearing observes each of the recommendations (i.e. observed, broadly observed, partly observed or not observed).
The self-assessment and this Disclosure Framework have been conducted on the basis of Nasdaq Clearing’s activities as a central counterparty as per 31 March 2014. Nasdaq Clearing has concluded that it fully observes all Principles.
This is the first version of Nasdaq Clearing’s Disclosure Framework. Subsequent versions of Nasdaq Clearing’s Disclosure Framework will include a summary of major changes.
General description of the FMI and the markets it serves Nasdaq Clearing’s role in the overall payment, clearing and settlement landscape One of the principal functions of a clearing house is to guarantee that all contracts traded will be honored. The derivatives trading carried out at NASDAQ OMX Stockholm AB (the financial derivatives exchange) and NASDAQ OMX Oslo ASA (the commodities derivatives exchange) is automatically subject to clearing at Nasdaq Clearing, whereby Nasdaq Clearing becomes the counterparty in all transactions, i.e. acts as a buyer to the seller and as a seller to the buyer. Counterparty risk is the risk that one party in a transaction will not be able to fulfill its obligations in due time. In its capacity as a clearing house, counterparty risk is always present for Nasdaq Clearing. In order to ensure that the clearing house has the capacity to fulfill its obligations, it requires and receives collateral from the participating counterparties. In addition, it holds a member-sponsored default fund and retains its own capital resources.
As part of the clearing house operations, Nasdaq Clearing carries out expiration procedures, cash settlement and deliveries that arise from the contractual responsibilities established between the clearing house and its members. Daily cash settlement related to premiums, fees, mark-to-market (variation margin) and other cash settlement not related to delivery of securities are settled through one of Nasdaq © 2014, The NASDAQ OMX Group, Inc. All Rights Reserved. 5 Clearing’s approved settlement banks. Members of Nasdaq Clearing are required to hold a bank account with such approved settlement banks for purposes of managing daily cash settlement.
In addition to the settlement banks, Nasdaq Clearing has appointed concentration banks which act as an intermediary between Nasdaq Clearing’s approved settlement banks. All transfers between Nasdaq Clearing’s accounts with approved settlement banks are done through a concentration bank. For payments in SEK, DKK and EUR, the Swedish Riksbank, the Danish National Bank and the Finnish Central Bank respectively are engaged as concentration banks. For other currencies, a commercial bank is engaged as concentration bank.
As a central counterparty, Nasdaq Clearing guarantees all deliveries, independent of the original counterparty’s delivery or payment ability. However, Nasdaq Clearing does not undertake the responsibility to fulfill the transaction on the original settlement day if the original counterparty cannot fulfill its obligation. In that case, Nasdaq Clearing has the right to buy securities and charge a delay fee for failed delivery or take other steps to complete the delivery.
Delivery of shares is made through Nasdaq Clearing’s accounts in certain central securities depositories (“CSDs”). The principle “delivery versus payment” applies for all deliveries of underlying securities due to expiration or exercise. Delivery of Swedish fixed income instruments takes place in Euroclear Sweden and delivery of Danish fixed income instruments takes place in VP Securities Denmark. Delivery of allowances related to the exercise of EUA and CER forward and futures contracts and the electricity certificates contracts takes place in Nasdaq Clearing registry accounts with the relevant registrar.
The credit enhancing effects of a centralized clearing house boost market efficiency, reduce risk and allow broader client participation. Each of these features contributes to increasing liquidity in the marketplace. As a central counterparty, Nasdaq Clearing also plays an important role in terms of stability in the financial system.
General description of Nasdaq Clearing’s operations and services Nasdaq Clearing clears all trades executed on the derivatives markets operated by Nasdaq Financial and Nasdaq Commodities as well as OTC trades done outside the regulated markets and reported to the clearing house for clearing. Nasdaq Clearing offers clearing of equity and index derivatives on Swedish, Norwegian, Finnish and Danish instruments; fixed income derivatives on Swedish, Norwegian and Danish underlying; commodity derivatives on power, natural gas, emission rights, and renewable energy.
As a clearing house, Nasdaq Clearing becomes the legal counterpart to the original buyer and seller in a trade, through so called novation. This means that the original counterparts no longer have risk towards each other. Instead, the clearing house takes on this counterparty risk.
The ability to manage the counterparty risk is dependent on pro-active risk management, a sound legal foundation and the financial strength of the clearing house. Furthermore, rigid financial and operational requirements are applied to its © 2014, The NASDAQ OMX Group, Inc. All Rights Reserved. 6 members. Nasdaq Clearing also relies on an advanced portfolio-based margining system to determine the amount of collateral appropriate for the counterparty risks it assumes. In the event of a loss resulting from a counterparty default, Nasdaq Clearing has a member sponsored default fund as well as its own funded risk-bearing capital, which serves as a buffer between any defaulting counterparty and all other counterparties.
By taking on the responsibility of the original counterparts to the trade, as described above, Nasdaq Clearing becomes the counterpart to both the buyer and seller of the original trade. The clearing house thus becomes exposed to the risk of the original counterparts not being able to fulfill their obligations to the clearing house. Nasdaq Clearing is protected from this risk by a number of means, including the collateral it collects, the default fund and its own capital resources. Nasdaq Clearing also has predefined default management procedures, which are tested and proven via real defaults and default fire drills.
Please see below statistics showing the average aggregate intraday exposure that
Nasdaq Clearing has towards its participants:
The intraday exposure of Nasdaq Clearing to its participants can be measured by the total average daily margin requirement, i.e. the total amount of collateral that it demands from its participants. For 2013, the average total daily margin requirement was SEK 34 billion or EUR 3.9 billion.
One of the cornerstones of a clearing house is its operations. The clearing house should have stable and reliable systems, adequate capacity and the ability to quickly handle major disruptions by the use of backup facilities and well-tested routines to mitigate
the effects of operational risk. The operational reliability of Nasdaq Clearing is high:
availability of the Genium INET clearing system during 2013 was 99.98%, and for the CONDICO system 100%. As well as resilience of systems, which is tested at least annually with failover from primary to secondary sites, the clearing house also has controls and checks in place to cover resilience of daily operations. These BCP arrangements cover all aspects of the business including relocation of staff from the primary office as well as back-up processes in case a critical function is not functioning.
Since the end of 2009 Nasdaq Clearing is in full compliance with the Sarbanes-Oxley Act. Each process that significantly contributes to the financial result of Nasdaq Clearing is described in detail and the existing controls are documented. Subsequently, each process is analyzed from a risk perspective, utilizing the COSO framework, and any potential risk issues or control weaknesses are addressed and remedied.