Patrick L Young (“PLY”)


Exchange Invest

NB For more context, apart from back issues, this useful opinion piece “Default at NASDAQ Clearing” by Jake Pugh at the time of the Nasdaq CCP default is worth reading.


NB This link & story is from the Exchange Invest newsletter today – the rest of the newsletter is available only to subscribers:

How A Lone Norwegian Trader Shook The World’s Financial System

The New York Times


PLY: Revisiting the tragic Norse tale of how one trader made a right Einar of himself. Alas this kind of story was probably inevitable…in this case further confirming The New York Times’ descent into managed obsolescence. My annoyance at the time of the fi-aas-co was that it would promote journalistic jaded nonsense. Coupling generalist journalists with specialist finance usually leads to a form of media counterparty failure in its own right. Tabloidesque screams of crisis are frankly warmed over drivel: nobody went bust other than the culprit and all losses were covered. Seamlessly. A financial catastrophe this wasn’t. A brand disaster? Well it was Nasdaq’s finest hour.


Nasdaq’s cardinal sin of allowing individual CCP members has already been cast aside (albeit this is arguably somewhat technical – had there been EinarCorp it would hardly have made any difference per se). Equally, a post event consultant fest has delivered process change. (I was only disappointed they didn’t ask for a tyre-kicking lateral thinker to consider where other risks may lie…). Nasdaq could point to substantive work taking place on enhancing risk management practice in various areas, including:


  1. Enhanced initial margin framework – more granular concentration and tail risk margin add-ons;


  1. Enhanced credit risk framework through additional Membership criteria (liquidity and capital)


  1. Increased monitoring and rule based tools for mitigation.


The auction process appeared somewhat flawed. In the fi-aas-co perfect storm it went awry – a significant issue in power markets with counterparty concentration. The accelerative factor of the auction may require study for some time to come. That left a healthy dollop of Norwegian egg all over the temporarily depleted CCP but in terms of causing tremors? The Fjords didn’t jiggle a single millimeter.

Nasdaq ended up paying a price (well CCP members paid the hard cash). However there was no question of the CCP pool being left delinquent. Rank that from cluster-mess to fi-ass-co on the unexpurgated risk scale as you prefer but it did not amount to a tragedy or a catastrophe. With the exception of Mr Aas, it wasn’t remotely an extinction level event. An embarrassment for Nasdaq prompted a lot more thinking about how narrow auction processes but this is on the footnote end of trading losses scale with or without historical inflation adjustment (qv Mizuho lost several times this amount through a fat finger error on Tokyo SE in 2006).


The venerable NYT faces little respite from seemingly inevitable death at the hands of the 21st century. Whereas the CCP model is robust, the newspaper model means a once quality name now resembles a desperate facsimile of page 6 without the glamour. It was frustratingly inevitable the Nasdaq CCP debacle would gain wider coverage – the irony is that a lot, if not all, of the holes have been plugged which this story has chosen to ignore in an effort to deliver…well a tragically typical contemporary NY Times article: flawed.


The Aas affair was Herstatt risk writ large at a fraction of the losses generated by the German bank’s 1974 implosion. The NYT sensationally proclaims Einar shook the financial system. A Financial Centre Shock? Nasdaq CCP 2018 doesn’t qualify as a knee trembler.


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