The aftershocks of Einar Aas

Many things went wrong at Nasdaq Commodities in early September. Only in the weeks afterwards did all of them come to light.

The default of power spread trader Einar Aas was dealt with by a closed auction: this has come under criticism for crystallising a €114 million ($130 million) loss by allowing only four members to bid, potentially at a deep discount. Nasdaq’s intention seems to have been to keep a lid on the news in order to avoid moving the market – probably the same reason that it was so slow to inform other clearing houses of the default, leaving them to accuse Nasdaq of breaking a ‘gentlemen’s agreement’ to share news of clearing member defaults. And the spotlight has also fallen on Nasdaq’s margining model.

A relatively small market shift should not have burned through the whole of Aas’s initial margin payment and two-thirds of the exchange’s default fund, critics point out, though in Nasdaq’s defence the bottom line is that the default was, ultimately, handled in an orderly fashion.

A sudden wave of caution hitting central counterparties is likely to mean higher margin requirements and more onerous requirements for clearing membership

Certainly the Nasdaq default is more than just an energy market story. The Span model developed by CME in the 1980s, and licensed out to Nasdaq and many other exchanges for calculating margins on derivatives of many kinds, is now heading for a complete overhaul, and Nasdaq has come under fire from rival trade venues whose margin models have a more recent pedigree. Nasdaq is also re-examining two areas of its oversight procedures involved in the default: its treatment of non-bank clearing members, and its approach to calculating margin against concentration risk.

But that doesn’t mean it does not have particular salience for the energy and commodity markets. Commodity markets are often highly volatile, highly illiquid, fragmented, or all three. A sudden wave of caution hitting central counterparties is likely to mean higher margin requirements and more onerous requirements for clearing membership – and, as knock-on effects, the risk of even less liquidity, more volatility, and more fragmentation, as smaller and more marginal players are warned away from central clearing.