A clearing house must ensure that it has adequate resources to absorb the losses that result from the default of one or more clearing members. The resources are contributed by the CCP itself as well as by its clearing members. The total resources available to the CCP for this protection is commonly referred to as the waterfall and shows the order in which the CCP can use these resources. The Nasdaq Clearing waterfall is illustrated in the diagram.
In order to avoid having to use any of the resources in the waterfall, the first layer of protection for the clearing house is its membership requirements, margining methodology, collateral requirements and pro-active risk management.
Nasdaq Clearing Junior Capital
In the event of a counterparty default where the defaulting counterparty's posted margin and default fund contribution is not sufficient to cover the cost of closing out the portfolio, Nasdaq Clearing's junior capital will absorb the first layer of loss. A specific amount of junior capital is dedicated for each market.
Loss Sharing Pool
In the event of a default, including OTC-traded interest rate derivatives (so-called generic rate instruments), default losses from such derivatives and other related fixed income contracts remaining after the junior capital is exhausted is covered by the loss sharing pool, consisting of assets posted by clearing members active in this market.
Commodities/Financial/ Seafood Markets
There are separate default funds for each clearing service. Each default fund is limited to counterparty defaults within its own clearing service. The size of each default fund is calculated to withstand a default of either the clearing service's largest or the second- and third-largest counterparty combined in an extreme but plausible scenario. Contributions to each of the default funds are only available to cover default losses in that particular market.
Nasdaq Clearing Senior Capital
The size of this layer, Nasdaq Clearing's senior capital, is calculated to be sufficiently large to ensure that, when aggregated with the junior capital and default funds per clearing service, Nasdaq Clearing can withstand a default of the two largest counterparties under an extreme but plausible scenario.
Assessment Power
Nasdaq Clearing holds an assessment power as a final layer in the waterfall. This ultimate layer strengthens the clearing house's contingent financial resources by committing clearing members to contribute additional capital in the event that prior levels of protection have not been sufficient to cover counterparty default(s). The commitment equals an obligation to provide additional funds up to an amount equal to 100% of each clearing member’s contribution to the financial default fund, the commodities default fund and the seafood default fund.
Commitments based on the default fund contributions to the financial market are only available to cover default losses in the financial market, commitments based on the default fund contributions to the commodities market are only available to cover default losses in the commodities market and commitments based on the default fund contributions to the seafood market are only available to cover default losses in the seafood market.
Other Regulatory Capital
In addition to capital held to withstand counterparty defaults, Nasdaq Clearing also holds capital to ensure that it is adequately protected from operational, legal, business and investment risks or non-default losses. In addition to the funds described above, Nasdaq Clearing holds sufficient operational capital to ensure an orderly winding down or restructuring of its operations.
Refer to the Resource Center below for more details about the default fund and other financial resources of Nasdaq Clearing.
Hypothetical Capital
Regulation requires qualifying central counterparties (QCCPs), such as Nasdaq Clearing, to submit specific data points to assist clearing members in determining their default fund exposures towards Nasdaq Clearing. The Standardised approach method for counterparty credit risk (SA-CCR) method is used to calculate the hypothetical capital of the CCP and the resulting c-factors, that are calculated individually for each default fund. They are published in the Excel spreadsheet which can be retrieved in the link below (EMIR article 50c notification, under the Resource Center). The c-factors are to be applied to the value of the default fund contribution in order to calculate the hypothetical capital of the clearing member. The spreadsheet is updated each month with end-of-month data.
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Nasdaq Clearing - Margining Methodology
Nasdaq Clearing - Margining Methodology
Our margin requirement systems calculate accurate risk-based margin requirements for each counterparty account.