## Key Statistics of NOMX DM, 2006–10 ## Source details **Canonical URL:** [Key Statistics of NOMX DM, 2006–10](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11284.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11284.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11284.pdf.json) --- ### Overview and scope - NOMX DM clears equity, fixed income derivatives and repos. - Clears exchange traded and OTC transactions denominated in SEK, DKK, NOK, EUR; bulk of products are in SEK. - NOMX DM is a central counterparty (CCP) included within NASDAQ OMX Stockholm (NOMX STO) and operates under NOMX STO’s legal status and supervision. - Assessment undertaken in the context of the IMF’s Financial Sector Assessment Program (FSAP) Update for Sweden, March 9–22, 2011. ### Executive summary — salient strengths - Clear separation of lines and skilled personnel. - Offers a segregation account service described as nearly unique. - Comprehensive legal framework supporting enforcement of transactions, netting, protection of customer assets, and delivery-versus-payment (DvP) with finality. ### Executive summary — principal concerns and deficiencies - NOMX STO comprises both NOMX DM and another CCP (NOMX COM) clearing commodities in a Norwegian branch; both CCPs share the same financial protection for extreme losses, creating spillover risk. - Financial resources set aside to face extreme losses are ring-fenced through a highly complex mechanism that may create legal uncertainty and delay access to funds. - Financial resources do not provide a sufficiently reliable liquidity level. - Collection of margins is totally outsourced to Custodian Institutions which are not subject to effective control by NOMX DM. - Acceptance of bank guarantees as collateral (illiquid by definition) from banks that are also NOMX DM members; two of those banks are the sole liquidity providers. - Concentrated Swedish banking sector limits diversification of liquidity providers. - Upcoming European Market Infrastructures Regulation (EMIR) will compel significant changes that should address many weaknesses. ### Institutional and market structure — key points - NOMX DM provides CCP services for equity and fixed income derivatives and repos since 2010. - NOMX DM has no separate legal existence; it is a secondary legal name (brandname) within NOMX STO. - NOMX Group acquired Nord Pool Clearing in 2008; in December 2009 Nord Pool Clearing was incorporated in NOMX STO and conducted as a Norwegian branch. ### Key statistics (as presented in the source) - Table 1. Sweden: Key Statistics of NOMX DM, 2006–10 - 200620072008 20092010 - 1.Number of transactions (thousands) - 1.1 Equities Derivatives 788765696 762870 - 1.2 Equity Index Derivatives 1.9083.8806.683 7.8328.643 - 1.3 Fixed Income Derivatives 314053 3848 - TOTAL - 2.7274.6857.432 8.6329.561 - 2. Value of transactions (SEK billions) 4.7917.4906.605 6.5606.623 - 3. Average daily value of transactions (SEK billions) - 182925 2026 - 4. Peak value of transactions (SEK billions) 109152116 101119 - 5. Number of clearing members of which: - 313737 4846 - 5.1 Foreign clearing members 91215 2624 - 6. Clearing fund (EUR millions) 000 00 - Source: RB. ### Regulatory framework and oversight - NOMX STO is authorized as an exchange and has a permit from Finansinspektionen (FI) to conduct clearing operations under the Securities Market Act. - NOMX DM is subject to supervision by FI and oversight by the Riksbank (RB); FI and RB apply the CPSS-IOSCO Recommendations for Central Counterparties (RCCPs) in their supervision/oversight. - FI and RB have ability and resources to carry out regulation and oversight effectively, but do not have sufficient information and understanding of NOMX COM’s activities given potential spillover effects on NOMX STO and NOMX DM. - FI and RB cooperate but could achieve efficiency gains through more effective cooperation and a more risk-based approach. ### Main findings by recommendation area (high level) - Legal framework (Rec. 1) - Consistent and solid set of laws, rules, and contractual provisions supporting novation, netting, collateral, default procedures, and finality. - Participation requirements (Rec. 2) - Access and exit criteria are well defined and publicly disclosed; members must be regulated entities with minimum capital and operational capability. - Direct pledge end customers are not subject to specific requirements despite direct counterparty risk; recommendation: set participation requirements for direct pledge end customers. - Financial risk management (Rec. 3–6) - Comprehensive risk management framework; real-time monitoring and intraday margin calls; regular model validation. - No mutualized default fund; financial resources to cover extreme losses provided by NOMX STO itself, creating moral hazard and complex ring-fencing with legal uncertainty and potential delays. - NOMX DM accepts bank guarantees as collateral (illiquid) from participant banks; two banks are sole liquidity providers. - Recommendation to operationalize access to intraday credit and the Riksbank deposit facility given legal permissibility. - Default procedures - Default procedures clearly stated; agent clearing model and customer segregation facilitate transfer of collateral and positions in a default. - Custody and investment risks (Rec. 7) - Collection of collateral fully reliant on custodian banks that are also CCP members; risk that NOMX DM may not have access to collateral in a custodian default. - NOMX DM does not sufficiently monitor custodians; lacks real-time knowledge of collateral composition and only performs an annual test. - Operational risk (Rec. 8) - Operational risk identified and analyzed; outsourced operations covered; two mirrored sites and tested Business Continuity Plan (BCP); Internal Audit covers operational risk. - Money settlements (Rec. 9) - Uses central bank model for SEK and DKK which represent 99 percent of settlement flows; payments effected on accounts with RB and Nationalbank. - Physical deliveries (Rec. 10) - Deliveries carried out through securities settlement systems ensuring DVP; obligations for physical delivery are clearly stated. - Links between CCPs (Rec. 11) - Not applicable — no operational links in place. - Efficiency (Rec. 12) - Regular review of pricing, service levels and capacity; periodic benchmarking with other European CCPs. - Governance (Rec. 13) - Governance arrangements specified and publicly available; separation in reporting lines supports robust risk management. - Head of risk management has veto power in Clearing risk committee and Default committee. - Participants not represented on NOMX STO Board or through participant committees; NOMX DM does not sufficiently seek multilateral feedback from members. - Transparency (Rec. 14) - NOMX DM discloses rules and relevant documentation to clearing members and market participants; published a comprehensive self-assessment following the RCCPs methodology. - Regulation and oversight (Rec. 15) - Legal basis for effective regulation and oversight exists; FI and RB require information for oversight but need better understanding of NOMX COM and could improve cooperation and risk-based approaches. ### Applicable law and conflict-of-law framework (Section 3) - Laws in the country where the Custodian Institution is situated might apply to third party rights to collateral. - Swedish law will be applicable to the Custodian Institutions of NOMX DM that are situated in Sweden. - Denmark, Norway and Finland have implemented the Finality Directive and the Collateral Directive and thus have similar protection for posted collateral as Sweden. - The Settlement Systems Act resolves conflict of law issues by stating that if a participant in a notified settlement system is in default, the rights and obligations of that participant are governed by the law appointed by the system. - Because the R&R appoint Swedish law as applicable, Swedish law will be applicable for the participants at NOMX DM in an insolvency situation. - Assessment: Observed. - Comment: The legal framework applying to NOMX DM is well-founded. - Comment: FI’s approval of changes in the R&R would provide further confidence in maintaining coherence with the legal framework and consistency with the whole risk management framework. ### Participation structure, requirements and monitoring (Recommendation 2) - Clearing models: - General Clearing member (GCM): entitled to participate on its own behalf, on behalf of customers, and on behalf of Non-Clearing Members (NCM). - Direct Clearing Member (DCM): entitled to clear on its own behalf and on behalf of customers. - Customer clearing: principal-to-principal model and agent customer clearing model (direct pledging and indirect pledging customers). - Nomx DM has about 500 direct pledging customers. - Minimum capital requirement: - SEK 500 million for GCM. - SEK 10 million for DCM for all the products cleared. - Operational and suitability monitoring: - RMD reviews all members minimum once per year. - Two full-time positions within RMD dedicated to monitoring counterparties. - Credit Watch routine for counterparties considered above average risk. - Suspension and termination: R&R Section 1.9.1 and 1.9.12 specify grounds and measures; Clearing Default Committee decides default matters. - Assessment: Broadly Observed. - Recommendation: Set participation requirements for direct pledge end customers (NOMX DM has started a process). ### Measurement and limitation of credit exposures (Recommendation 3) - Margins calculated end-of-day and intra-day; hourly risk reporting from 10:00 a.m. to 6:00 p.m. - Official margin requirement calculated end of day must be met by 11.00 a.m. the day after. - Intraday policy: intraday call if real-time margin requirement increases by more than SEK 200 million during the day. - Concentration limits: - Fixed income concentration limit: 25 percent of the outstanding volumes. - Equities concentration limit: 10 percent of outstanding volumes. - No loss-sharing scheme with clearing members; NOMX assumes full counterparty risk in defaults. - Assessment: Observed. ### Sufficiency of margining models and validation (Recommendation 4) - Margin methodologies: - OMS II for equity and fixed income derivatives (in-house, introduced 2003). - Cash Flow Margin (CFM) for repos (implemented 2010). - Margin coverage and parameters: - Equity and fixed income forward and options: two days applied. - Less liquid products (example: the SEK repo): 3 lead days. - Price estimations based on one-year historical data; volatility uses the second largest volatility in absolute terms experienced during last 12 months. - Risk Committee reviews parameters quarterly; models reviewed by Clearing Risk Committee and Internal Audit with external consultants. - Confidence interval: 99.2 percent confidence interval. - Back-testing and intraday margin policy in place. - Assessment: Broadly Observed. - Concern: Acceptance of bank guarantees as collateral (illiquid) and concentration of bank-provided collateral. ### Assets accepted as margin, custodians, and haircuts - Eligible collateral types: cash in various currencies; bank guarantees (subject to criteria); government bonds and bills (selected countries); commercial paper (selected issuers); bonds issued by banks or financial institutions; certificates of deposits; stocks (selected issuers). - Custodian Institutions confirm daily (no later than 12 am) whether sufficient collateral is pledged. - May 2010 asset class breakdown (annual full-scale inquiry): - 33 percent government securities - 28 percent bank/mortgage institution securities - 24 percent cash - 10 percent guarantee - 5 percent large cap equities - 0 percent mid cap equities - Bank guarantees: six counterparties currently pledge guarantees; value of the six existing bank guarantees is 3,043 bio SEK in total. - Haircuts (R&R; revaluated semi-annually) — selected entries preserved exactly: - Government Treasury Bills and bonds: - Maturity (Year) 0 - 5 → Haircut 95% ; Maximum Amount None ; Minimum Debt Rating S&P: AA+ & Moody's: Aa1 - Maturity (Year) 5 - 10 → Haircut 93% ; Maximum Amount None ; Minimum Debt Rating S&P: AA+ & Moody's: Aa1 - Maturity (Year) > 10 → Haircut 90% ; Maximum Amount None ; Minimum Debt Rating S&P: AA+ & Moody's: Aa1 - Maximum amount limit is NOK 300 million on Norwegian Government Treasury Bills and Bonds. - Bonds issued by banks or mortgage-credit institutions (Denmark) and issuing institutions (Sweden): - Maturity (Year) 0 - 5 → Haircut 90% ; Maximum Amount DKK 800 / SEK 1 000 / 850 NOK / 100 EUR / 140 USD / 90 GBP million per issuer ; Minimum Debt Rating S&P: A- or Moody's A1 - Maturity (Year) 5 - 10 → Haircut 85% ; Minimum Debt Rating S&P: A- or Moody's A1 - Maturity (Year) > 10 → Haircut 80% ; Minimum Debt Rating S&P: A- or Moody's A1 - Note: 20 percent haircut and maximum amounts EUR 37.5 million per issuer on Bonds issued by Finnish deposit banks and mortgage credit banks. - Equities: haircuts in the range of 70 percent - 50 percent depending on segment (large cap/mid cap) and average value traded; concentration limit on maximum value of one specific stock remitted as collateral. - Assessment and comment: NOMX DM accepts bank guarantees (illiquid) and faces concentration risk; recommendation: NOMX DM should not accept bank guarantees as collateral. ### Sufficiency of financial resources, stress testing and regulatory capital (Recommendation 5) - Stress test methodology: RCaR / RIVA Capital at Risk to estimate additional resources needed beyond margins for defaults of the two members with largest exposures; applied separately to NOMX DM and NOMX COM then summed. - Stress test scenarios: - Stressed market move for individual instruments: +/-150 percent of the margin risk interval parameter for non-index instruments and +/-200 percent for index instruments. - Current stress parameter example: OMXS30 Index parameter 14 percent compared to largest one- and two-day movement since Jan 2008 of 12.6 percent (upward). - Stress testing frequency: - Daily: stress test performed separately for NOMX DM and NOMX COM. - Quarterly: stress test including evaluation of risk-weighted exposures of all clearing participants for combination of all clearing participants and all cleared instruments in both CCPs. - Annual: comprehensive review of models, parameters and scenarios. - Regulatory Capital defined and composition: - Total regulatory capital specifically dedicated to clearing activities: SEK 2,270 million. - Clearing Capital: SEK 1,970 million. - Operational Capital: SEK 300 million. - Operational Capital objective: resources to run the CCP for 1 to 2 quarters to allow orderly wind down; raised from SEK 150 to SEK 300 million at end 2009 (provided to FI with NOMX Oslo merger). - Regulatory capital covers both CCPs (NOMX DM and NOMX COM); there is no mutualised default fund. - Regulatory capital composed of: - Own capital resources of SEK 720 million: SEK 251 million in share capital and restricted reserves and 469 MSEK in retained earnings. - SEK 1,550 million represented by an insurance policy provided by OMX Capital Insurance AG (OMXCI). - OMXCI details: wholly-owned insurance company within NASDAQ OMX Group; OMXCI own financial resources of 750 MSEK invested in low risk government securities dedicated to clearing capital; OMXCI benefits a financial guarantee of 800 MSEK issued by SEB and collateralized with government bonds held with Danske Bank under an escrow account. - NOMX STO additional resources: total shareholders’ equity SEK 3,788 MSEK (as per Dec 31 2009); 941 MSEK is non regulatory tangible capital in excess of regulatory capital that could be utilized to absorb losses. - Liquidity and credit lines: - Committed and unsecured credit line arrangements of around 1,300 MSEK with SEB and Danske Bank, usable with same day value. - Immediate availability: Clearing Capital own resources invested: - In low risk Swedish government securities up to 420 MSEK (part of Clearing Capital). - In NASDAQ OMX’s cash pool (Operational Capital), managed by Group Treasury. - Assessment: Partly Observed. - Concerns: - Both CCPs share same regulatory capital → spillover risk. - Regulatory capital structure complex and only partly funded (insurance guarantee) → legal uncertainty and potential delay accessing funds. - Liquidity resources not sufficiently reliable: Clearing Capital invested in securities held in one bank (also a CCP member) and only two liquidity providers. - Liquidity framework inadequate after introduction of repo clearing; liquidity management not upgraded. - Policy recommendations (identified in source): - Overhaul regulatory capital structure to a straightforward, fully funded framework. - Establish two totally ring-fenced capital bases for NOMX DM and NOMX COM. - Set up two separated guarantee funds for NOMX DM and for NOMX COM (mutualized guarantee funds envisaged to meet EMIR requirements). - Authorities should analyze pros/cons of trading and clearing activities being conducted within same legal entity (NOMX STO); consider isolating clearing activities in a distinct legal entity. - Enhance liquidity framework: exclude bank guarantees as collateral; raise number of liquidity providers; operationalize use of intraday liquidity and deposit facility from RB. - Implement new Collateral Management Service (see Recommendation 7) to permit access to cash collateral and invest in liquid assets for repo with central bank to obtain intraday liquidity. ### Default procedures (Recommendation 6) - R&R sections 1.9.1–1.9.3 define default and grant wide discretion to close out/manage positions. - R&R (Section 1.9.12 (viii)) permit transfer and liquidation of positions and collateral of customers of defaulting participant; priority to protect customers and re-register customer contracts. - NOMX DM can immediately seize and use defaulting participant’s collateral. - Market-structure-specific procedures and contracted price-quoting banks exist; NOMX DM has internal broker desk. - Clearing Default Committee composition and veto rights specified. - Historical practice: defaults handled by cooperation; customer contracts often re-registered with other clearing members. - Assessment: Observed. ### Custody, investments, and concentration management (Recommendation 7) - Custodian approval criteria: credit institutions; after-tax shareholder's equity > 500 MSEK. - Limitations: - Collateral managed by Custodian Institutions; NOMX DM lacks direct, continuous access to collateral composition; annual compliance audits only. - CCAB may conduct investigations and annual random tests. - Investment policy: - Clearing Capital invested in Government Bills or Bonds up to 30 years, or Mortgage Bills and Bonds up to 5 years; maximum 40 percent of portfolio in Mortgage Bonds/Bills; lowest acceptable rating A/A2. - In practice invested in Swedish Government Bills and Bonds (AAA) with average duration approx. 2.5 years. - Clearing capital invested in government securities held in two escrow accounts in Danske Bank. - Collateral: not allowed to re-use; pledged and legally seized only in case of member default. - Assessment: Partly Observed. - Recommendations: - Overhaul custodian arrangements and rely on CSDs for real-time access and immediate collateral control. - Review investment policy and consider restricting investments to the highest rated securities (e.g., AAA). - NOMX DM planning new collateral collection arrangement by 2012. ### Operational risk, systems resilience, and BCP (Recommendation 8) - Operational risk management embedded in ERM; latest risk assessment August 2010. - Information Security Policies and Standards applied across NASDAQ OMX Group. - BCP and contingency: - Two mirrored sites ~15 km apart; target relocation time 45–75 minutes; full-scale test at least once a year. - Target availability: 99,90 percent; 2010 outcome: 99,99 percent. - Controls and audits: Manual and automated controls; Internal Audit independent reviews. - Assessment: Observed. ### Money settlement and settlement bank risk (Recommendation 9) - Central bank model used for SEK and DKK; private settlement agent model for EUR, NOK, USD. - About 99 percent of cash settlements are in SEK and DKK. - SEK settlements: settled in RB payment system RIX; settlement bank must have necessary balance available no later than 11.30 CET. - DKK settlements: settled in KRONOS; settlement bank must have necessary balance available no later than 11:00 CET. - Settlement banks: SEB and Nordea; EUR mainly in SEB (Finland); NOK main settlement bank changed from Nordea to SEB (Norway) at end of 2010. - Finality: Settlement Finality Directive implemented in relevant countries; intraday finality provided. - Assessment: Observed. ### Physical delivery obligations (Recommendation 10) - R&R (section 3.10): NOMX DM commits to deliver assets to buying counterparty even if selling clearing member defaults; may buy securities to deliver in lieu of defaulter. - Deliveries effected in CSDs according to DVP. - Swedish deliveries via Euroclear Sweden (NOMX DM account). - Danish and Finnish securities via VP SECURITIES (VP) and Euroclear Finland. - Norwegian deliveries via VPS; NOMX DM not a VPS member; deliveries via custody bank SEB (changed from Nordea at end of 2010). - Enforcement: NOMX DM may charge margins for unsettled instructions; additional costs passed to failing counterparty. - Assessment: Observed. - Concern/recommendation: Implement a penalty system for failed delivery. ### Links to other CCPs (Recommendation 11) - NOMX DM does not have any links established to other CCPs. - Assessment: NA ### Cost-effectiveness, service levels, and participant engagement (Recommendation 12) - Regular benchmarking and reviews of pricing, service levels, capacity. - Customer satisfaction surveys since 2004; spring 2010 Nordic customers gave average rating 3.5 on “Overall impression of NASDAQ OMX” (scale 1-5) — survey focused on trading side. - Fora for participant engagement: Derivatives Market Committee, Fixed Income Advisory Board, Operations Forum, Risk Management Forum, IT Forum. - Assessment: Observed. - Recommendation: Include clearing services questions in annual satisfaction survey. ### Governance arrangements (Recommendation 13) - Decisions relating to NOMX DM operations are Board responsibility of NOMX STO; NOMX STO fully owned by NASDAQ OMX Nordic Limited and The NASDAQ OMX Group, Inc. - Head of RMD reports to NASDAQ OMX Group treasurer and has veto in Clearing Risk Committee and Clearing Default Committee. - Board composition: NOMX STO Board of five executives (senior managers); NASDAQ OMX Nordic Ltd and The NASDAQ OMX Group, Inc boards include external members. - Participant involvement limited; recommendation to enhance member involvement via a formal advisory committee. - Assessment: Broadly Observed. ### Disclosure and transparency (Recommendation 14) - NOMX DM provides extensive information on website including R&R and plain-language publications (“NOMX DM as a Counterparty”). - Publishes clearing activities on annual, monthly and daily basis (turnover, outstanding contracts, settlement statistics, system availability). - Documentation available in Swedish and English. - Assessment: Observed. ### Regulation and oversight (Recommendation 15) - Supervisory authorities: FI (supervision/licensing) and RB (oversight; payment system safety and lender of last resort). - FI supervision: Markets Department group (five individuals) with legal support; NOMX STO is high priority for FI. - RB oversight: Financial Infrastructure Division (nine individuals; three on clearing and settlement). - Cooperation: FI and RB have joint assessments and cooperation agreements (2003, amended 2005); FI has agreements with Finnish, Danish and Norwegian supervisors. - Concerns and recommendations: - Unclear responsibilities between Swedish and Norwegian authorities regarding NOMX COM; Swedish authorities’ understanding of NOMX COM activities not entirely adequate given spillover risks. - Authorities should formalize FI–RB routines, operationalize MOU on cross border financial stability, consider common reporting requirements, and strengthen quantitative analysis staffing. - RB should explore Nordic central banks’ interest in participating in oversight arrangements for NOMX DM. - Assessment: Broadly Observed. ### Key recommendations (summary) - Recommendation 1: FI should approve substantial changes in the R&R to maintain consistency with the risk management framework. - Recommendation 2: Set participation requirements for direct pledge end customers. - Recommendation 4: Do not accept bank guarantees as collateral. - Recommendation 5: Overhaul regulatory capital structure; implement a fully funded framework; create two ring-fenced capital bases for NOMX DM and NOMX COM; establish two separated guarantee funds; analyze legal separation of trading and clearing; enhance liquidity framework (exclude bank guarantees, increase liquidity providers, operationalize access to RB intraday liquidity and deposit facility). - Recommendation 7: Overhaul custodian arrangements and rely on CSDs; review investment policy to restrict to highest rated securities (e.g., AAA); implement new collateral management arrangement by 2012. - Recommendation 10: Implement penalty system for failed delivery. - Recommendation 12: Include clearing services questions in annual satisfaction survey. - Recommendation 13: Enhance member involvement in governance via formal advisory committee. - Recommendation 15: Clarify cross-border responsibilities with Norwegian authorities; enhance supervisory knowledge of NOMX COM; operationalize MOU; formalize FI–RB cooperation and information sharing; consider reporting changes and staffing for quantitative analysis. ### Authorities’ response (selected points) - Swedish authorities welcome the IMF assessment and consider the recommendations constructive; work has been initiated and plans are being developed. - On Recommendation 2: A process for setting requirements for direct pledge clients is under way. - On Recommendation 4: Authorities will enter discussions with NOMX DM about use of bank guarantees as accepted collateral. - On Recommendation 5: NOMX DM is running a project to introduce a default fund to adjust to coming European regulation; authorities follow the project and a liquidity framework review is taking place; legal separation of clearing and trading will be further considered. - On Recommendation 7: NOMX DM is in the middle of a project to introduce a new collateral management system in 2012; authorities are monitoring progress. - On Recommendation 13: Authorities will engage NOMX DM to ensure appropriate member involvement in governance for clearing activities. - On Recommendation 15: Authorities take the points seriously and have provided comments. *Source: _cr11284* ### 1. Key Statistics of NOMX DM, 2006–10................................................................................ ### Key Statistics of NOMX DM, 2006–10 ### Overview and scope - NOMX DM clears equity, fixed income derivatives and repos. - Clears exchange traded and OTC transactions denominated in SEK, DKK, NOK, EUR; bulk of products are in SEK. - NOMX DM is a central counterparty (CCP) included within NASDAQ OMX Stockholm (NOMX STO) and operates under NOMX STO’s legal status and supervision. - Assessment undertaken in the context of the IMF’s Financial Sector Assessment Program (FSAP) Update for Sweden, March 9–22, 2011. ### Executive summary — salient strengths - Clear separation of lines and skilled personnel. - Offers a segregation account service described as nearly unique. - Comprehensive legal framework supporting enforcement of transactions, netting, protection of customer assets, and delivery-versus-payment (DvP) with finality. ### Executive summary — principal concerns and deficiencies - NOMX STO comprises both NOMX DM and another CCP (NOMX COM) clearing commodities in a Norwegian branch; both CCPs share the same financial protection for extreme losses, creating spillover risk. - Financial resources set aside to face extreme losses are ring-fenced through a highly complex mechanism that may create legal uncertainty and delay access to funds. - Financial resources do not provide a sufficiently reliable liquidity level. - Collection of margins is totally outsourced to Custodian Institutions which are not subject to effective control by NOMX DM. - Acceptance of bank guarantees as collateral (illiquid by definition) from banks that are also NOMX DM members; two of those banks are the sole liquidity providers. - Concentrated Swedish banking sector limits diversification of liquidity providers. - Upcoming European Market Infrastructures Regulation (EMIR) will compel significant changes that should address many weaknesses. ### Institutional and market structure — key points - NOMX DM provides CCP services for equity and fixed income derivatives and repos since 2010. - NOMX DM has no separate legal existence; it is a secondary legal name (brandname) within NOMX STO. - NOMX Group acquired Nord Pool Clearing in 2008; in December 2009 Nord Pool Clearing was incorporated in NOMX STO and conducted as a Norwegian branch. ### Key statistics (as presented in the source) - Table 1. Sweden: Key Statistics of NOMX DM, 2006–10 - 200620072008 20092010 - 1.Number of transactions (thousands) - 1.1 Equities Derivatives 788765696 762870 - 1.2 Equity Index Derivatives 1.9083.8806.683 7.8328.643 - 1.3 Fixed Income Derivatives 314053 3848 - TOTAL - 2.7274.6857.432 8.6329.561 - 2. Value of transactions (SEK billions) 4.7917.4906.605 6.5606.623 - 3. Average daily value of transactions (SEK billions) - 182925 2026 - 4. Peak value of transactions (SEK billions) 109152116 101119 - 5. Number of clearing members of which: - 313737 4846 - 5.1 Foreign clearing members 91215 2624 - 6. Clearing fund (EUR millions) 000 00 - Source: RB. ### Regulatory framework and oversight - NOMX STO is authorized as an exchange and has a permit from Finansinspektionen (FI) to conduct clearing operations under the Securities Market Act. - NOMX DM is subject to supervision by FI and oversight by the Riksbank (RB); FI and RB apply the CPSS-IOSCO Recommendations for Central Counterparties (RCCPs) in their supervision/oversight. - FI and RB have ability and resources to carry out regulation and oversight effectively, but do not have sufficient information and understanding of NOMX COM’s activities given potential spillover effects on NOMX STO and NOMX DM. - FI and RB cooperate but could achieve efficiency gains through more effective cooperation and a more risk-based approach. ### Main findings by recommendation area (high level) - Legal framework (Rec. 1) - Consistent and solid set of laws, rules, and contractual provisions supporting novation, netting, collateral, default procedures, and finality. - Participation requirements (Rec. 2) - Access and exit criteria are well defined and publicly disclosed; members must be regulated entities with minimum capital and operational capability. - Direct pledge end customers are not subject to specific requirements despite direct counterparty risk; recommendation: set participation requirements for direct pledge end customers. - Financial risk management (Rec. 3–6) - Comprehensive risk management framework; real-time monitoring and intraday margin calls; regular model validation. - No mutualized default fund; financial resources to cover extreme losses provided by NOMX STO itself, creating moral hazard and complex ring-fencing with legal uncertainty and potential delays. - NOMX DM accepts bank guarantees as collateral (illiquid) from participant banks; two banks are sole liquidity providers. - Recommendation to operationalize access to intraday credit and the Riksbank deposit facility given legal permissibility. - Default procedures - Default procedures clearly stated; agent clearing model and customer segregation facilitate transfer of collateral and positions in a default. - Custody and investment risks (Rec. 7) - Collection of collateral fully reliant on custodian banks that are also CCP members; risk that NOMX DM may not have access to collateral in a custodian default. - NOMX DM does not sufficiently monitor custodians; lacks real-time knowledge of collateral composition and only performs an annual test. - Operational risk (Rec. 8) - Operational risk identified and analyzed; outsourced operations covered; two mirrored sites and tested Business Continuity Plan (BCP); Internal Audit covers operational risk. - Money settlements (Rec. 9) - Uses central bank model for SEK and DKK which represent 99 percent of settlement flows; payments effected on accounts with RB and Nationalbank. - Physical deliveries (Rec. 10) - Deliveries carried out through securities settlement systems ensuring DVP; obligations for physical delivery are clearly stated. - Links between CCPs (Rec. 11) - Not applicable — no operational links in place. - Efficiency (Rec. 12) - Regular review of pricing, service levels and capacity; periodic benchmarking with other European CCPs. - Governance (Rec. 13) - Governance arrangements specified and publicly available; separation in reporting lines supports robust risk management. - Head of risk management has veto power in Clearing risk committee and Default committee. - Participants not represented on NOMX STO Board or through participant committees; NOMX DM does not sufficiently seek multilateral feedback from members. - Transparency (Rec. 14) - NOMX DM discloses rules and relevant documentation to clearing members and market participants; published a comprehensive self-assessment following the RCCPs methodology. - Regulation and oversight (Rec. 15) - Legal basis for effective regulation and oversight exists; FI and RB require information for oversight but need better understanding of NOMX COM and could improve cooperation and risk-based approaches. *Source: RB.* ### Section 3). Applicable laws with regard to third party rights to collateral might be ### _cr11284 - Section 3). Applicable laws with regard to third party rights to collateral might be ### Applicable law and conflict-of-law framework - The laws in the country where the Custodian Institution is situated might apply to third party rights to collateral. - Swedish law will be applicable to the Custodian Institutions of NOMX DM that are situated in Sweden. - Denmark, Norway and Finland have implemented the Finality Directive and the Collateral Directive and thus have similar protection for posted collateral as Sweden. - The Settlement Systems Act resolves conflict of law issues by stating that if a participant in a notified settlement system is in default, the rights and obligations of that participant are governed by the law appointed by the system. - Because the R&R appoint Swedish law as applicable, Swedish law will be applicable for the participants at NOMX DM in an insolvency situation. ### Assessment of legal framework - Assessment: Observed - Comment: The legal framework applying to NOMX DM is well-founded. - Comment: FI’s approval of changes in the R&R would provide further confidence in maintaining coherence with the legal framework and consistency with the whole risk management framework. ### Recommendation 2 — Participation requirements, financial resources, operational capacity - Principle: A CCP should require participants to have sufficient financial resources and robust operational capacity and should monitor ongoing compliance. Participation requirements should be objective, publicly disclosed, and permit fair and open access. Description — membership structure and models - NOMX DM offers two types of clearing: member clearing and customer clearing. - Two types of member clearing: - General Clearing member (GCM): entitled to participate in clearing on its own behalf, on behalf of customers, and on behalf of Non-Clearing Members (NCM). - Direct Clearing Member (DCM): entitled to clear on its own behalf and on behalf of customers. - Two customer clearing models (and possible combination): - Principal to principal model: NOMX DM has no legal relationship with members’ customers; customers and NCMs have counterparty risk against the clearing member; the clearing member is fully liable towards NOMX DM for customer and NCM contracts. - Agent customer clearing model: the member acts as agent and represents the customer towards NOMX; customers have a direct legal relationship with NOMX DM and have rights and obligations under the R&R; customers are margined separately on customer level and there is no position netting between customers or between members and customers. Customers may be indirect pledging customers or direct pledging customers. In the direct pledging customer case, customers have no counterparty risk towards the agent clearing member in case of clearing member default; the risk is against NOMX DM and to a certain extent against the Custodian Institution holding the collateral. NOMX DM has currently about 500 such direct pledging customers. - Participation criteria are defined in Section 3.2 of the R&R and apply to GCM and DCM. Customers under the agent model are not subject to specific requirements. Financial and suitability requirements - GCM and DCM must be allowed to operate securities business in accordance with the law of their domicile. - Minimum capital requirement: - SEK 500 million for GCM. - SEK 10 million for DCM for all the products cleared. - RMD assesses creditworthiness by reviewing financial stability, historical financial performance, ownership, affiliated companies and debt ratings for applicants and for ongoing monitoring. - R&R stipulates members must have suitable banking arrangements, organization, necessary risk management routines, sound IT systems and otherwise be suitable in NOMX DM’s opinion. - Each member should have at least one designated contact person responsible for clearing and settlement and at least two employees who fulfill back office personnel requirements. - Specific education and knowledge requirements for member staff are provided via NOMX DM training. - Operational capability is assessed at application and monitored ongoing via data from operations, surveillance, RMD and members. Monitoring compliance with participation requirements - Members are monitored by Risk Management and Operations Departments, with support from Legal Department. - RMD reviews all members minimum once per year. - There are two full-time positions within the RMD dedicated to monitoring the counterparties of NOMX DM. - If a counterparty is considered above average risk, a Credit Watch routine provides more frequent monitoring and additional credit assessments; NOMX DM may request supplemental information if public information is insufficient. Suspension and termination of membership - R&R Section 1.9.1 lists circumstances for suspension or termination: breach of R&R, substantial risk of breach, no longer suitable pursuant to R&R or Swedish Securities Market act, bankruptcy, insolvency indications. - NOMX may take measures per Section 1.9.12 of the R&R, including refusing exchange transactions and registration. - Clearing Default Committee decides matters concerning default in clearing operations. - Under Section 1.15.1 of the R&R, NOMX may adopt measures, including ceasing or limiting exchange or clearing operations, where circumstances outside its control seriously affect operations. - NOMX DM can suspend a participant from trading and clearing immediately; all orders belonging to the participant would be inactivated. - During suspension or termination, NOMX may accept requests to enter into new transactions/close-out transactions to permit orderly wind down, subject to NOMX approval and normally via NOMX’s manual order book. - In defaults NOMX DM cooperates with the defaulting counterparty to manage/close-out market risk; customers’ contracts have often been re-registered with other clearing members in past defaults. - Under the R&R, members must, upon NOMX demand, take all measures necessary to transfer customers’ contracts to other members and to transfer any collateral pledged by the end customer to the member. A corresponding obligation applies to contracts on segregated accounts for customers or NCMs. Open and fair access (Q3) - The same rules apply to all applicants and standards; participation requirements are clearly stated and publicly disclosed in the R&R. - Rules covering default are publicly disclosed. - Assessment: Broadly Observed - Comment: NOMX DM has adequate membership requirements. However, direct pledge end customers, who have direct relationships with NOMX DM and with whom NOMX DM has direct counterparty risk, are not subject to specific requirements. NOMX DM should set participation requirements for direct pledge end customers. NOMX DM has started a process for possibly setting requirements for such end customers. ### Recommendation 3 — Measurement and limitation of credit exposures - Principle: A CCP should measure credit exposures at least once a day and limit exposures so that the CCP operation is not disrupted and non-defaulting participants are not exposed to unanticipated losses. Measurement of exposures (Q1) - NOMX DM calculates margins on an end-of-day and intra-day basis for members and direct pledge customers. - End-of-day calculation determines the amount of collateral to be pledged to the Custodian Institution. - Risk exposures are also measured hourly from 10:00 a.m. through to 6:00 p.m. via automatic intra-day risk reporting. - The official margin requirement calculated end of day has to be met by 11.00 a.m. the day after. - Intra-day calculations are based on real-time positions with full re-evaluation always done. - Equity products are evaluated with real-time prices. - Fixed income derivatives products are evaluated with last traded derivatives price; NOMX DM has the capacity to source and use real-time prices from primary dealers if needed in default situations. - A margin simulation facility is open to members to simulate margin requirements at any time and to alter portfolio positions to see effects on margin requirements. Risk mitigation tools (Q2) - NOMX DM limits exposure via conservative margin requirements, an intraday risk policy, and concentration limits. - Margin requirements: portfolio-based margining systems are used; methodology validated by regular back testing. - Intraday risk policy: introduced on September 25, 2009 and unchanged since then. The policy requires NOMX DM to call for additional margin intraday if the real-time margin requirement for a counterparty increases by more than SEK 200 million during the day. The intraday exposure limit size is partially connected to overall clearing capital and acceptable overnight risk. The intraday exposure limit is decided by NOMX STO board of directors. - Additional limits: system of limits linked to an internal risk ranking monitors participants whose margin requirements would become unusually higher; monitoring ensured by RMD. - Concentration limits: - Fixed income concentration limit: 25 percent of the outstanding volumes. - Equities concentration limit: 10 percent of outstanding volumes. - These concentration limits are decided by the Clearing Risk Committee. - Structure note: NOMX DM does not enforce a loss-sharing scheme with clearing members; instead NOMX assumes the full counterparty risk in default situations. - Assessment: Observed ### Recommendation 4 — Sufficiency of margining models and parameters - Principle: If a CCP relies on margin requirements, those requirements should cover potential exposures in normal market conditions; models and parameters should be risk-based and reviewed regularly. Description — models and parameters (Q1) - NOMX DM requires margins for all cleared products. - For equity and fixed income derivatives, NOMX DM uses a scenario based margin methodology called OMS II, built in house and introduced in 2003. - For repos, NOMX DM uses a yield curve based model called Cash Flow Margin (CFM), implemented in 2010 when repo clearing started. Parameters used to determine margin levels - Margins intend to cover NOMX DM in case of counterparty defaults during adverse but not extreme market conditions. - Margins are set to cover the expected time to liquidate positions in case of member default: - For equity products and fixed income forward and options: two days are applied. - For less liquid products (example: the SEK repo): 3 lead days. - The time interval is based on the Risk Committee’s view of how long it would take to close out exposure for specific products. - Price estimations (volatility for equity and fixed income, shift in curve for repo and swaps) are based on one-year historical data for each underlying instrument. - For volatility, it is the second largest volatility in absolute terms experienced during last 12 months. - The Risk Committee may add a forward looking view and can decide to have more conservative parameters than calculated. - The Risk Committee reviews the risk parameters on a quarterly basis. - The margin parameters are calculated with a numerical statistical method using a *Source: _cr11284 - Section 3). Applicable laws with regard to third party rights to collateral might be* ### 99.2 percent confidence interval. ### _cr11284 - 99.2 percent confidence interval. ### Validation of models and margining - Models and parameters are reviewed and approved by the Clearing Risk Committee and reviewed by NOMX Internal Audit with external consultant support. - No significant changes to the OMS II margin methodology since implementation in 2003; new CFM model approved by the Risk Committee and reviewed by Internal Audit via external consultants. - RMD implements back-testing on a daily basis; margin back-testing results have validated the adequacy of NOMX DM's margining requirements and have been supported by successful management of actual defaults. - Intraday margin policy: NOMX DM may call intraday margin at any time; policy requires an intraday call if real-time margin requirement for a counterparty increases by more than SEK 200 million during the day. - Assessment: Broadly Observed — margin requirements cover potential exposures in normal market conditions; models/parameters are product-specific and regularly validated. ### Assets accepted as margin, custodians, and haircuts - Eligible collateral types (Collateral List, Appendix 12 to the R&R): - Cash in various currencies - Bank guarantees (subject to criteria and specific approval) - Government bonds and bills (selected countries; subject to minimum debt rating restrictions) - Commercial paper (selected issuers; subject to minimum debt ratings) - Bonds issued by banks or financial institutions (selected issuers; subject to minimum debt ratings) - Certificates of deposits (selected banks in selected countries; subject to minimum debt ratings) - Stocks (selected issuers listed on the NASDAQ OMX Nordic List; subject to liquidity and concentration limits) - Custodian Institutions manage collateral and confirm at minimum once per business day (no later than 12 am) whether sufficient collateral is pledged; Custodian Institutions must ensure collateral complies with eligibility requirements and is valued using R&R haircuts. - Annual full-scale inquiry to Custodian Institutions; most recent inquiry: May 2010 — asset class breakdown: - 33 percent government securities - 28 percent bank/mortgage institution securities - 24 percent cash - 10 percent guarantee - 5 percent large cap equities - 0 percent mid cap equities - Bank guarantees: NOMX DM holds directly the bank guarantees; six counterparties currently pledge guarantees; value of the six existing bank guarantees is 3,043 bio SEK in total. - Revaluation frequency: assets revaluated at least once every bank day; Custodian Institutions inform NOMX DM no later than 12.00 each bank day whether pledged collateral satisfies requirements. - Haircuts (as stipulated in R&R; revaluated semi-annually): - Government Treasury Bills and bonds: - Maturity (Year) 0 - 5 → Haircut 95% ; Maximum Amount None ; Minimum Debt Rating S&P: AA+ & Moody's: Aa1 - Maturity (Year) 5 - 10 → Haircut 93% ; Maximum Amount None ; Minimum Debt Rating S&P: AA+ & Moody's: Aa1 - Maturity (Year) > 10 → Haircut 90% ; Maximum Amount None ; Minimum Debt Rating S&P: AA+ & Moody's: Aa1 - Maximum amount limit is NOK 300 million on Norwegian Government Treasury Bills and Bonds. - Bonds issued by banks or mortgage-credit institutions (Denmark) and issuing institutions (Sweden): - Maturity (Year) 0 - 5 → Haircut 90% ; Maximum Amount DKK 800 / SEK 1 000 / 850 NOK / 100 EUR / 140 USD / 90 GBP million per issuer ; Minimum Debt Rating S&P: A- or Moody's A1 - Maturity (Year) 5 - 10 → Haircut 85% ; Minimum Debt Rating S&P: A- or Moody's A1 - Maturity (Year) > 10 → Haircut 80% ; Minimum Debt Rating S&P: A- or Moody's A1 - Note: 20 percent haircut and maximum amounts EUR 37.5 million per issuer on Bonds issued by Finnish deposit banks and mortgage credit banks. - Equities: haircuts in the range of 70 percent - 50 percent depending on segment (large cap/mid cap) and average value traded; concentration limit on maximum value of one specific stock remitted as collateral. - Assessment and comment: NOMX DM accepts bank guarantees (illiquid) and faces concentration risk (e.g., banks may represent about 30 percent of collected collateral on a specific day). Recommendation: NOMX DM should not accept bank guarantees as collateral. ### Sufficiency of financial resources (Recommendation 5) — stress testing and regulatory capital - Stress test methodology: RCaR / RIVA Capital at Risk to estimate additional financial resources needed beyond margins for defaults of the two members with largest exposures; methodology applies separately to NOMX DM and NOMX COM, then sums the two largest exposures for both CCPs. - Stress test grouping and scenarios: - Cleared instruments grouped into stress tested markets per asset class and instrument country. - Two market scenarios per stress tested market: market price stressed up and stressed down; correlation between instruments set to 1. - Correlation between different stress tested markets set to 0, resulting in a total of 2 to the power of scenarios evaluated. - Stressed market move for individual instruments: +/-150 percent of the margin risk interval parameter for non-index instruments and +/-200 percent for index instruments. - Current stress parameter example: OMXS30 Index parameter 14 percent compared to largest one- and two-day movement since Jan 2008 of 12.6 percent (upward). - Stress testing frequency: - Daily: stress test performed separately for NOMX DM and NOMX COM (excluding evaluation of risk-weighted exposures of all clearing participants). - Quarterly: stress test including evaluation of risk-weighted exposures of all clearing participants for combination of all clearing participants and all cleared instruments in both CCPs. - Annual: comprehensive review of models, parameters and scenarios; parameters reviewed quarterly alongside normal margin review. - Model and scenarios reviewed by Regulatory Capital Committee quarterly and more comprehensively annually. - Regulatory Capital defined and composition: - Total regulatory capital specifically dedicated to clearing activities: SEK 2,270 million. - Clearing Capital: SEK 1,970 million. - Operational Capital: SEK 300 million. - Operational Capital objective: resources to run the CCP for 1 to 2 quarters to allow orderly wind down; raised from SEK 150 to SEK 300 million at end 2009 (provided to FI with NOMX Oslo merger). - Regulatory capital covers both CCPs (NOMX DM and NOMX COM); there is no mutualised default fund. - Regulatory capital composed of: - Own capital resources of SEK 720 million: SEK 251 million in share capital and restricted reserves and 469 MSEK in retained earnings. - SEK 1,550 million represented by an insurance policy provided by OMX Capital Insurance AG (OMXCI). - OMXCI details: wholly-owned insurance company within NASDAQ OMX Group; OMXCI own financial resources of 750 MSEK invested in low risk government securities dedicated to clearing capital; OMXCI benefits a financial guarantee of 800 MSEK issued by SEB and collateralized with government bonds held with Danske Bank under an escrow account. - NOMX STO additional resources: total shareholders’ equity SEK 3,788 MSEK (as per Dec 31 2009); 941 MSEK is non regulatory tangible capital in excess of regulatory capital that could be utilized to absorb losses. - Liquidity and credit lines: - Committed and unsecured credit line arrangements of around 1,300 MSEK with SEB and Danske Bank, usable with same day value. - Immediate availability: Clearing Capital own resources invested: - In low risk Swedish government securities up to 420 MSEK (part of Clearing Capital). - In NASDAQ OMX’s cash pool (Operational Capital), managed by Group Treasury. - Assessment: Partly Observed — although stress testing implies sufficient resources to withstand at minimum a default by the largest exposure (methodology assumes simultaneous default of the two largest members), concerns: - Both CCPs share the same regulatory capital → spillover risk between CCPs. - Regulatory capital structure is complex and only partly funded (use of insurance policy guaranteed by bank collateral) → legal complexity and potential delay accessing funds. - Liquidity resources not sufficiently reliable: Clearing Capital invested in securities held in one bank (also a CCP member) and only two liquidity providers. - Liquidity framework inadequate after introduction of repo clearing (higher liquidity needs); liquidity management not upgraded. - Recommendations (policy actions identified in source): - Overhaul regulatory capital structure to a straightforward, fully funded framework. - Establish two totally ring-fenced capital bases for NOMX DM and NOMX COM. - Set up two separated guarantee funds for NOMX DM and for NOMX COM (mutualized guarantee funds envisaged to meet EMIR requirements). - Authorities should analyze pros/cons of trading and clearing activities being conducted within same legal entity (NOMX STO); consider isolating clearing activities in a distinct legal entity. - Enhance liquidity framework: exclude bank guarantees as collateral; raise number of liquidity providers (only two currently); operationalize use of intraday liquidity and deposit facility from RB. - Implement new Collateral Management Service (see Recommendation 7) to permit access to cash collateral and invest in liquid assets for repo with central bank to obtain intraday liquidity. ### Default procedures (Recommendation 6) - Definition and powers: - R&R sections 1.9.1–1.9.3 clearly state default; R&R grant wide discretion to promptly close out or manage positions of defaulting participant. - R&R (Section 1.9.12 (viii)) permit transfer and liquidation of positions and collateral of customers of defaulting participant; priority to protect customers and re-register customer contracts with another clearing participant. - NOMX DM can immediately seize and use defaulting participant’s collateral. - Default resolution support: - Policy to contract, where appropriate, a minimum of two independent banks to quote prices on instruments to facilitate unwinding of positions; NOMX DM has its own broker desk to support resolution. - Market-structure-specific procedures: - Equity derivatives: internal broker desk to close out via electronic orderbook or OTC negotiated trades. - Fixed income OTC: contracted banks to quote prices. - Repo market: 4 banks have signed agreement to quote prices in case of a default. - Historical practice: defaults (including one in 2010) handled by cooperation with defaulting counterparty; customer contracts largely re-registered with other clearing members. - Default management governance: - Clearing Default Committee membership: - President of NOMX STO—as Chairman and with power of veto - Head of NOMX Clearing Risk Management Europe—Power of veto - Head of NOMX Clearing Risk Management Commodities - Head of NOMX Clearing Risk Management Financial Derivatives - Head of NOMX Clearing Operations - Chief Legal Counsel NOMX STO (or alternate) - NOMX Treasurer Non-U.S. - Any other person(s) deemed appropriate - Procedures reviewed at least annually; RMD responsible for maintaining plans; tests conducted annually (fire drills). - Transparency: default procedures publicly available on NOMX DM website and Default Management brochure. - Assessment: Observed. ### Custody, investments, and concentration management (Recommendation 7) - Custodian Institution approval criteria: must meet operational and financial requirements in R&R section 1.5.2; must be credit institutions; after-tax shareholder's equity > 500 MSEK. - Custodian Institutions are supervised by FI (Swedish) or respective local supervisors for non-Swedish custodians. - Nomx DM publishes list of approved Custodian Institutions (annex to R&R); before approving custodians outside Denmark, Sweden and Finland, legal confirmation required regarding enforceability and prompt access to collateral. - Limitations in NOMX DM visibility: - Collateral is managed by Custodian Institutions; NOMX DM has no direct, continuous access to detailed collateral composition and cannot normally investigate connections between counterparties and their collateral; RMD can request information as necessary. - Annual compliance audits of collateral composition performed by RMD. - CCAB (jointly owned by NOMX DM and Swedish Securities Dealers Association) may conduct investigations and annual random tests at Custodian Institutions. - Investments of CCP resources: - NOMX Group investment policy defined by Group Treasury and approved by Finance Committee and Audit Committee; NOMX STO has Regulatory Capital Policy approved by Board. - Policy: Clearing Capital invested in Government Bills or Bonds up to 30 years, or Mortgage Bills and Bonds up to 5 years (issued by entity not part of a clearing member group); maximum 40 percent of portfolio in Mortgage Bonds/Bills; lowest acceptable rating A/A2. - In practice, NOMX STO has invested in Swedish Government Bills and Bonds (AAA) for last 10 years; benchmark defined as solely Swedish Government Bills and Bonds with average duration approx. 2.5 years. - Clearing capital invested in government securities held in two escrow accounts in Danske Bank. - Collateral collected as margins: not allowed to re-use (re-hypothecate/reinvest); collateral is pledged and legally seized only in case of member default. - Concentration limits and risk controls: - Regulatory Capital Policy: no more than 40 percent of total regulatory capital may be invested in mortgage institutions; entities that are clearing members or part of clearing member group are not approved as issuers. - Market risk of pledged securities managed by conservative haircuts and maximum amounts per pledging counterparty/security in relation to liquidity and creditworthiness. - Assessment: Partly Observed — weaknesses: - No real-time knowledge of collateral composition; reliance on Custodian Institutions (which may also be CCP members) for collection, valuation, haircuts, and compliance. - Investment policy allows investment in A rated securities, though practice is AAA; recommendation to strengthen investment policy to invest only in AAA government securities. - Recommendation to overhaul custodian arrangements and rely on CSDs for real-time access and immediate collateral control; NOMX DM is planning a new collateral collection arrangement by 2012 intended to address these weaknesses. ### Operational risk, systems resilience, and BCP (Recommendation 8) - Operational risk management: comprehensive analysis annually and updated during year as part of ERM; latest NOMX DM risk assessment: August 2010; results reported bi-annually to management and significant risks to the Board. - Information security: Information Security Policies and Standards by NASDAQ OMX Group applied across development, maintenance, production, outsourcing and vendors. - BCP and contingency: - Crisis Management and Business Continuity Management policies established; formal incident response procedures tested regularly. - Staff relocation procedures tested regularly; full scale test at least once a year. - Target relocation time to back-up site: between 45 and 75 minutes depending on traffic. - Two mirrored sites ~15 km apart with independent infrastructure, high security, and independent power supply; no data loss expected during breakdown. - Yearly review of BCP including emergency tests twice a year. - Controls and audits: - Manual and automated controls in clearing/settlement; continuous review. - New Product Risk Committee at NOMX Group level vetting new products since Q3 2010 (not yet applied to NOMX DM new product launches). - Historical loss data tracked and analyzed; Internal Audit (parent NOMX) performs independent reviews based on annual audit plan. - Availability and scalability: - Target availability: 99,90 percent; 2010 outcome: 99,99 percent. - IT responsibilities partly outsourced to GITS; critical IT systems not shared with other NOMX entities. - Technical solution: dedicated line or VPN; HP RTR on Open VMS for transaction integrity and real-time transaction disaster tolerance. - Service level agreements with GITS; performance evaluated monthly; capacity tests performed regularly. - Assessment: Observed. ### Money settlement and settlement bank risk (Recommendation 9) - Settlement model: - Central bank model used for SEK and DKK settlements; private settlement agent model for EUR, NOK, and USD. - About 99 percent of cash settlements are in SEK and DKK. - SEK settlements: settled in RB payment system RIX on settlement day; non-RIX member members must use a settlement bank that is a RIX member; settlement bank must have necessary balance available no later than 11.30 CET on settlement day. - DKK settlements: settled in Denmark central bank system KRONOS on settlement day; settlement bank must have necessary balance available no later than 11:00 CET on settlement day. - Settlement banks used: SEB and Nordea. EUR mainly settled in SEB (Finland) with Nordea as backup; NOK main settlement bank changed from Nordea to SEB (Norway) at end of 2010. - Finality: all countries where settlement banks are situated have implemented the Settlement Finality Directive; all payment systems used provide intraday finality. - NOMX DM verifies settlements in SEK at RIX cut-off (11:45) and payments in NOK, DKK, EUR daily by local cut-off time 12:00 am. - Settlement bank selection criterion: minimum rating level A-; must support intraday intercompany payments and daily account balance statements. - Assessment: Observed. ### Physical delivery obligations (Recommendation 10) - NOMX DM obligation: R&R (section 3.10) — commit to deliver assets to buying counterparty even if selling clearing member defaults; NOMX DM to buy securities to deliver to buying clearing member in lieu of defaulter. - NOMX DM not committed to original settlement date if original counterparty cannot fulfill obligation; has right to buy-in shares per R&R or take other measures. - DVP: deliveries effected in CSDs in local country according to DVP principle, eliminating delivery without payment. - Swedish deliveries via Euroclear Sweden (NOMX DM account) guaranteeing final and irrevocable settlement through DVP. - Danish and Finnish securities via VP SECURITIES (VP) and Euroclear Finland similarly. - Norwegian deliveries via VPS; NOMX DM not a VPS member; deliveries via custody bank SEB (changed from Nordea at end of 2010). - Enforcement: NOMX DM may charge margins for unsettled instructions; additional costs from late/failing delivery can be passed to failing counterparty. - Securities loan agreements with SEB and Nordea to guarantee delivery and buy-in facility. - Assessment: Observed. ### Links to other CCPs (Recommendation 11) - NOMX DM does not have any links established to other CCPs. - Assessment: NA ### Cost-effectiveness, service levels, and participant engagement (Recommendation 12) - Cost control: budgetary process, benchmarking with other exchanges/CCPs though comparisons limited by data availability and structural differences (default funds, clearing scope). - Service level review channels: - Direct contact through account managers and bilateral meetings. - Customer satisfaction surveys since 2004; latest spring 2010: Nordic customers gave average rating 3.5 on statement “Overall impression of NASDAQ OMX” (scale 1-5); survey focused on trading side, not clearing. - Fora: Derivatives Market Committee (eight times/year), Fixed Income Advisory Board (four times/year), Operations Forum, Risk Management Forum (rare), IT Forum, meetings with Securities Dealers Association IT group. - Board receives operational reliability reports each meeting. - Assessment: Observed. ### Governance arrangements (Recommendation 13) - Governance structure: - Decisions relating to NOMX DM operations are Board responsibility of NOMX STO; NOMX STO fully owned by NASDAQ OMX Nordic Limited, ultimately owned by The NASDAQ OMX Group, Inc. - Board adheres to group policies; parent company monitors subsidiaries’ policy implementation and compliance. - Board delegated powers and adopted Regulatory Capital Policy and Clearing Policy; Instructions for the President define delegated powers for non-major R&R amendments. - Legal structure and board composition disclosed on NASDAQ OMX website. - Risk management separation: - Risk Management function separated from business lines; head of RMD reports to NASDAQ OMX Group treasurer and has veto in Clearing Risk Committee and Clearing Default Committee. - Clearing Risk Committee is single decision authority for clearing risk matters; Clearing Default Committee for defaults. - Management, incentives, and accountability: - NOMX STO Board of five executives (senior managers of NASDAQ OMX Group); board members subject to fit and proper tests by FI. - Reporting: clearing risk issues, operational incidents, claims & litigation, compliance, capital adequacy reported regularly to Board. - NASDAQ OMX Nordic Ltd board composition: one senior management member and ten external members (mostly independent); The NASDAQ OMX Group, Inc board: one senior management member and fifteen external members (mostly independent). - Public interest and participant involvement: - Public interest objectives are set by Securities Market Act and FI regulations. - Participant involvement is limited: participants not represented on NOMX STO Board or through a formal participant committee; Derivatives Market Committee focuses on trading rather than clearing. - Assessment: Broadly Observed. - Recommendation: enhance member involvement via adequate representation (e.g., a formal advisory committee). ### Disclosure and transparency (Recommendation 14) - Risk management disclosure: - NOMX DM provides extensive information on website including R&R and plain-language publications (“NOMX DM as a Counterparty”). - Publishes clearing activities on annual, monthly and daily basis (turnover, outstanding contracts, settlement statistics, system availability). - Membership prerequisites: personnel must complete courses and examinations covering systems, R&R and clearing routines. - Documentation available in Swedish and English. - Answers to key questions of RCCPs are published on NOMX DM website and reviewed yearly. - Assessment: Observed. ### Regulation and oversight (Recommendation 15) - Supervisory authorities: FI (supervision/licensing) and RB (oversight; payment system safety and lender of last resort). - Legal rights: FI and RB have statutory rights to demand information and conduct on-site investigations under respective Acts; changes to R&R are communicated to FI (no formal approval process stated in legislation). - Agency resources and activities: - FI supervision conducted by a Markets Department group (five individuals) with legal support; NOMX STO is high priority for FI supervision. - RB oversight by Financial Infrastructure Division (nine individuals; three on clearing and settlement); specialist skills in risk management, law and IT available. - RB and FI perform joint assessments and have cooperation agreements (2003, amended 2005) including Ministry of Finance involvement; FI has agreements with Finnish, Danish and Norwegian supervisory authorities. - Cross-border/domestic issues and gaps: - Unclear exact responsibilities between Swedish and Norwegian authorities regarding NOMX COM in normal and crisis times; informal contacts exist but Swedish authorities’ understanding of NOMX COM activities not entirely adequate given spillover risks to NOMX DM via shared regulatory capital. - Authorities have not been fully proactive regarding NOMX DM collateral management outsourcing to Custodian Institutions despite noting concerns. - Recommendations to authorities: - Swedish authorities should clarify practical sharing of responsibilities with Norwegian authorities concerning NOMX COM. - Swedish authorities should enhance knowledge of NOMX COM activities due to spillover effects. - RB should explore Nordic central banks’ interest in participating in oversight arrangements for NOMX DM. - Authorities should operationalize the MOU on cross border financial stability (Aug 2010) via regular information sharing based on the MOU template. - Formalize routines/procedures of FI-RB cooperation for improved information exchange, task allocation, and joint analysis; consider common reporting requirements to receive regular updated data from NOMX DM. - Authorities should consider adopting a more risk-based approach to assessments (reassess annual assessment frequency). - Authorities should strengthen staffing with quantitative analysis skills to assess and review quantitative models used for margins and financial resources. - Assessment: Broadly Observed. *Source: _cr11284 - 99.2 percent confidence interval.* ### 1. CCPs should have a well-founded, clear ### _cr11284 - 1. CCPs should have a well-founded, clear ### Legal basis - Finding (O): The laws and regulations governing the operations of NOMX DM, its rules and contractual provisions for its participants are clearly stated and are readily accessible to participants and the public. - Finding (O): The legal framework demonstrates a high degree of assurance that there is a clear and effective legal basis for NOMX DM’s operations and risk management procedures. - Finding (O): The rules and contracts of NOMX DM are enforceable in the case of the insolvency of NOMX DM’s participants, and there is a high degree of assurance that actions taken under such rules may not be later stayed, avoided or reversed. - Recommended Action (Table 5, Recommendation 1): FI should approve any substantial changes in the R&R in order to ensure that the rules stay consistent with the whole risk management framework. ### Participation requirements - Principle: A CCP should require participants to have sufficient financial resources and robust operational capacity; requirements should be objective, publicly disclosed, and permit fair and open access. - Finding (BO): NOMX DM has established membership requirements to ensure members have sufficient financial resources and operational capacity; procedures exist to monitor ongoing compliance; participation requirements are objective, publicly disclosed, and permit fair and open access. - Finding (BO): Direct pledge end customers, which have direct relationships with NOMX DM and represent direct counterparty risk, are not subject to specific requirements. - Key recommendation (Table 4, Recommendation 2): NOMX DM should set participation requirements for direct pledge end customers. Note: NOMX DM has started a process for possibly setting requirements for such end customers. ### Measurement and management of credit exposures - Principle: A CCP should measure its credit exposure to participants at least once a day and limit exposures so non-defaulting participants are not exposed to unanticipated losses. - Finding (O): NOMX DM measures exposures of members on an intraday basis and at the end of the day; information for calculations is timely. - Finding (O): NOMX DM calls margins at the end of the day and on an intraday basis when margin requirements hit a threshold of 200 mio SEK. ### Margin requirements - Principle: Margin requirements should be sufficient to cover potential exposures in normal market conditions; models and parameters should be risk-based and reviewed regularly. - Finding (BO): Margin requirements set by NOMX DM cover potential exposures in normal market conditions; models and parameters are based on risk characteristics of products and are regularly validated; NOMX DM makes intraday margin calls. - Concern: NOMX DM accepts bank guarantees as collateral, which are not liquid resources; providers of such guarantees are also NOMX DM members, and two of them are the sole liquidity providers. - Concern: Sectoral concentration risk exists; for instance banks may represent about 30 percent of collected collateral on a specific day. - Key recommendation (Table 4, Recommendation 4): NOMX DM should not accept bank guarantee as collateral due to illiquidity and provider-member conflicts. ### Financial resources - Principle: A CCP should maintain sufficient financial resources to withstand at least the default of the participant with the largest exposure in extreme but plausible market conditions. - Finding (PO): Based on stress test procedures, NOMX DM has sufficient financial resources to withstand at a minimum a default by the clearing member to which it has the largest exposure; stress tests encompass simultaneous default of the two members with the largest exposures. - Concern: Both CCPs within NOMX STO share the same “regulatory capital” dedicated to cover losses, creating spillover risk between CCPs. - Structural concern: The “clearing capital” is 1,970 mio SEK, is only partly funded, and its coverage is complex (insurance guarantee guaranteed by a bank guarantee, with securities being collateralized), raising legal uncertainty and potential delay in access to funds. - Liquidity concern: Financial resources do not provide a sufficiently reliable liquidity level; liquidity comes from clearing capital invested in securities held in only one bank (also a CCP member) and two liquidity lines provided by the same two banks. - Operational concern: NOMX DM recently started clearing repos, which can create higher liquidity needs; the liquidity management framework has not been upgraded when repo clearing was introduced, increasing NOMX DM liquidity risk. - Planned improvement: NOMX DM is contemplating a new Collateral Management Service (see recommendation 7) that would enable access to cash collateral and investment in liquid assets that could be repoed with the central bank. - Key recommendations (Table 4, Recommendation 5): - Overhaul the complete structure on which regulatory capital is based and implement a more straightforward and fully funded framework. - Set up two totally ring-fenced capital bases for both NOMX DM and NOMX COM to face losses in stressed situations. - Based on envisaged mutualized guarantee fund to meet likely EMIR requirements, set up two separated guarantee funds for NOMX DM and for NOMX COM. - Swedish authorities should analyze advantages and drawbacks of trading and clearing activities being conducted within the same legal entity NOMX STO; consider isolating clearing activities in a distinct legal entity. - NOMX DM should enhance its liquidity framework: ensure collected collateral has a high degree of liquidity and exclude bank guarantees; raise the number of liquidity providers (only two currently); operationally put in place ability to use intraday liquidity from RB and implement RB deposit facility operationally for immediate use in distressed markets. ### Default procedures - Principle: Default procedures should be clearly stated, ensure timely actions to contain losses and liquidity pressure, and key aspects should be publicly available. - Finding (O): Default procedures are clearly described in the R&R and permit closing out or managing positions of defaulting clearing members. - Finding (O): Customer segregation under the agent clearing model facilitates transfer of collateral and positions of end-customers in case of default. - Finding (O): Legal framework gives high assurance that NOMX DM’s decisions in event of default would not be reversed. - Finding (O): NOMX DM has an internal plan delineating responsibilities for managing customers’ positions in default and drawing on financial resources. - Finding (O): Key aspects of default procedures are publicly available through publication of the R&R. ### Custody and investment risk - Principle: A CCP should hold assets to minimize risk of loss or delay in access; assets invested should have minimal credit, market and liquidity risks. - Finding (PO): NOMX DM has no real time knowledge on composition of collateral collected and limited ex post information (annual test only). - Finding (PO): NOMX DM relies on Custodian Institutions (also CCP members) for collection, valuation, haircuts, compliance with concentration limits; controls on Custodian Institutions are delegated to an outside body that may conduct inspections. - Finding (PO): Investments are made in high quality securities (AAA Swedish government bonds), but investment policy allows investment in A rated securities. - Key recommendation (Table 4, Recommendation 7): NOMX DM should completely overhaul current custodian arrangements and rely on CSDs. - Recommended Action (Table 4, Recommendation 7): NOMX DM is in process of setting up a fully new arrangement to collect collateral by 2012, which based on draft project should address observed weaknesses. - Additional recommendation (Table 4, Recommendation 7): NOMX DM should review investment policy and analyze whether to restrict investment to the highest rated securities, e.g., AAA securities as currently done in practice. ### Operational risk - Principle: A CCP should identify operational risk sources and minimize them through appropriate systems, controls, procedures; systems should be reliable, secure, scalable; BCPs should allow timely recovery. - Finding (O): NOMX DM identifies and analyses operational risks, including outsourced operations; has two mirrored sites and a BCP regularly tested; operational risk is under Internal Audit. ### Money settlements - Principle: Settlement arrangements should eliminate or strictly limit settlement bank risks; funds transfers should be final when effected. - Finding (O): NOMX DM uses the central bank model for SEK and DKK which represent 99 percent of settlement flows. - Finding (O): Payments are effected on accounts with RB and Nationalbank; funds transfers to NOMX DM’s accounts are final when effected. - Finding (O): Payments through commercial banks are negligible and not relevant from a risk management perspective. ### Physical deliveries - Principle: CCP should state obligations for physical deliveries and manage associated risks. - Finding (O): R&R clearly set obligations regarding deliveries of securities; NOMX DM uses securities settlement systems that ensure DvP. - Concern: NOMX DM has not implemented a penalty regime for late delivery while some new participants are a source of late delivery. - Additional recommendation (Table 5, Recommendation 10): NOMX DM should implement a penalty system for failed delivery. ### Risks in links between CCPs - Finding: Not applicable. ### Efficiency - Principle: CCPs should be cost-effective while maintaining safe and secure operations. - Finding (O): NOMX DM regularly reviews costs, pricing, service levels and operational reliability; benchmarks costs and fees with other CCPs but treats comparisons cautiously. - Additional recommendation (Table 5, Recommendation 12): The satisfaction survey conducted by NOMX DM every year should include questions on clearing services. ### Governance - Principle: Governance arrangements should be clear and transparent to fulfill public interest requirements and support risk management objectives. - Finding (BO): Governance arrangements are clearly specified and publicly available; separation in reporting lines supports robust risk management; head of risk management has veto power in Clearing risk committee and Default committee. - Concern: Lack of users’ feedback and involvement through consultative user groups; NOMX DM does not sufficiently request multilateral member feedback; participants are not represented on NOMX STO Board or through participant committees. - Key recommendation (Table 4, Recommendation 13): NOMX DM should enhance members’ involvement in clearing activities through adequate representation, e.g., a formal advisory committee. ### Transparency - Principle: A CCP should provide sufficient information for market participants to evaluate costs and risks. - Finding (O): NOMX DM discloses a wide range of information, in Swedish and in English, usable by members to evaluate risks of using CCP services. ### Regulation and oversight - Principle: A CCP should be subject to transparent and effective regulation and oversight; central banks and securities regulators should cooperate. - Finding (BO): Legal basis for effective regulation and oversight exists; FI and RB have ability and resources to carry out regulation and oversight. - Concern: Authorities could have been more proactive regarding NOMX DM collateral management system and its outsourcing to Custodian Institutions. - Concern: FI and RB do not have sufficient information and understanding of activities conducted by NOMX COM given potential spillover effects on NOMX STO and NOMX DM. - Findings on cooperation: FI and RB cooperate and have clearly defined responsibilities publicly disclosed; efficiency gains possible via more effective cooperation and more risk-based approach. - Concern: Exact responsibilities between Norwegian and Swedish authorities regarding NOMX COM, in normal and crisis situations, are not fully clear. - Note: The MOU on cross border financial stability among MOF, central banks, and FSAs in Nordic countries, signed in August 2010 and explicitly covering CCPs, has not resulted in measures stipulated in the MOU. - Key recommendations (Table 4, Recommendation 15 and Table 5): - Swedish authorities should clarify practical sharing of responsibilities with Norwegian authorities regarding NOMX COM and adapt supervision and oversight. - Swedish authorities should enhance knowledge of activities conducted by NOMX COM due to spillover effects. - Authorities should operationalize the MOU on cross border financial stability for clearing activities. - FI and RB should formalize routines and procedures of cooperation to increase information exchange, share/allocate tasks, enhance common analysis capacity, and gain efficiency; consider common reporting requirements for regular updated data from NOMX DM. - Authorities should analyze whether annual assessment frequency is necessary or if less frequent review combined with a more risk-based approach could be used. - Authorities should strengthen staffing resources with skills in quantitative analysis to assess or critically review quantitative models used to calculate margins and financial resources. - Additional recommendation (Table 5, Recommendation 15): RB as an overseer should explore with central banks in Denmark, Finland and Norway whether they have interest to participate in an oversight arrangement for NOMX DM. ### Key Recommendations (summary from Table 4) - Recommendation 2: Set participation requirements for direct pledge end customers. - Recommendation 4: Do not accept bank guarantees as collateral. - Recommendation 5: Overhaul regulatory capital structure; implement fully funded framework; create two ring-fenced capital bases for NOMX DM and NOMX COM; establish two separated guarantee funds; analyze legal separation of trading and clearing; enhance liquidity framework (exclude bank guarantees, increase liquidity providers, operationalize access to RB intraday liquidity and deposit facility). - Recommendation 7: Overhaul custodian arrangements and rely on CSDs; review investment policy to restrict to highest rated securities (e.g., AAA); implement new collateral management arrangement by 2012. - Recommendation 13: Enhance member involvement in governance via formal advisory committee. - Recommendation 15: Clarify cross-border responsibilities with Norwegian authorities; enhance supervisory knowledge of NOMX COM; operationalize MOU; formalize FI–RB cooperation and information sharing; consider reporting changes and staffing for quantitative analysis. ### Additional Recommendations (summary from Table 5) - Recommendation 1: FI should approve substantial R&R changes to maintain consistency with risk management framework. - Recommendation 10: Implement penalty system for failed delivery. - Recommendation 12: Include clearing services questions in annual satisfaction survey. - Recommendation 15 (additional): RB should explore oversight participation with Nordic central banks. ### Authorities’ response (selected points) - Swedish authorities welcome the IMF assessment and consider the recommendations constructive; work has been initiated in response and plans are being developed. - On Recommendation 2: Authorities agree a process for setting requirements for direct pledge clients is under way and are following progress closely. - On Recommendation 4: Authorities will enter discussions with NOMX DM about use of bank guarantees as accepted collateral. - On Recommendation 5: NOMX DM is running a project to introduce a default fund to adjust to coming European regulation; authorities follow the project and a liquidity framework review is taking place; legal separation of clearing and trading will be further considered. - On Recommendation 7: NOMX DM is in the middle of a project to introduce a new collateral management system in 2012; authorities are monitoring progress. - On Recommendation 13: Authorities will engage NOMX DM to ensure appropriate member involvement in governance for clearing activities. - On Recommendation 15: Authorities take the points seriously and have provided comments. *Source: _cr11284 - 1. CCPs should have a well-founded, clear* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11284.pdf_