Traders on Nordpool, and who are part of the Nasdaq clearing house, this last week faced a c.$133 million hole in a contingency fund as a trader defaulted as the market moved against him. According to Reuters,
“The derivative trader’s default was triggered by strong fluctuations in regional power market spreads, as heavy rain last week pushed down prices in the hydroelectric-dependant Nordic region, while a spike in the cost of carbon drove up German prices, Nasdaq said.
“My position was too big in relation to the market’s liquidity,” trader Einar Aas said in a statement, adding that his portfolio had been sold off by Nasdaq late on Wednesday and that he risked personal bankruptcy.
While Nasdaq said it had covered 7 million euros of the total losses, it told members of its commodity clearing operation to pay the remaining 107 million euros within two business days or risk being declared in default themselves.”
While the hole in the fund was covered by participants, Nasdaq also deposited $22 million in additional funds on a temporary basis to help restore trust in the market.
The incident is a timely reminder that stress testing portfolios and adequate risk management is essential in today’s commodity markets as is adequate liquidity. While weather conditions drove the market in an unusual manner, ideally such an event would have been part of a portfolio stress test? According to Reuters,
“In a single day, the difference between Nordic and German power prices for 2019 widened by 5.56 euros, 17 times more than the average daily move and exceeding the maximum level of 4 euros for which Nasdaq Clearing’s risk model had been calibrated. Since 2011, when the current pricing system was set up, the largest change in Nordic-German spreads on any single day had been 1.6 euros, Nasdaq said, calling the Sept. 10 market move “a true ‘Black Swan’ event.”
ComTech wonders if the trader concerned had in place adequate tools including an ETRM capable of offering risk modeling and management?
Modern ETRM solutions can operate in near real-time allowing traders to monitor position in volatile markets and to stress test portfolios to establish sensitivity to unusual conditions and are an essential tool for trading commodities such as electric power. Recently, we issued a white paper looking at the requirements of a modern ETRM solution for such markets, as well as on risk management that cover the issues and requirements well. Our research report into ETRM in a low price environment also offers a lot of market research into the important characteristics of ETRM solutions in today’s markets along with some insightful analysis.
More than ever before, it is imperative that traders utilize the proper systems to help record, monitor, assess and report on their trading activities. Many of these solutions include real-time alerting to let the trader know that there may be an issue with their positions and many also offer a variety of robust risk measures. The regulators increasingly demand that effective risk management is in place and with relatively low-cost cloud delivered solutions available these days, it needn’t be an expensive and long activity to install one.