OSLO (Reuters) – Danske Commodities, one of Denmark’s largest commodity traders, has reduced its trading position on Nasdaq’s Nordic power exchange after one trader’s default left a 114 million euro ($134 million) hole in Nasdaq’s clearing house buffers.
Separately, Norway’s Eidsiva Energi and Denmark’s EWII said they were talking internally about leaving Nasdaq’s Nordic clearing house operation.
Danske Commodities, which agreed in July to a takeover by Norwegian oil firm Equinor pending regulatory approval, said Norwegian trader Einar Aas’ default on Sept. 10 had hit market liquidity.
Aas, a veteran derivatives trader, made large bets on the power market. His default triggered a demand to replenish buffers and post increased cash guarantees that all market participants must have to trade on the exchange.
In addition, traded electricity volumes have fallen by two-thirds since a 2002 peak, making the market less liquid and thus less attractive and riskier for traders. (Graphic: reut.rs/2xBrdRp)
“We have sized our position down by 30 to 40 percent,” Tor Mosegaard, Danske Commodities head of power markets, told Reuters without giving a value for its total position. “Depending on how liquidity on the market evolves, we may downsize it further.”
“The biggest liquidity provider (Aas) defaulted and that created a lot of illiquid products,” he added. “We can’t leave a big position in the market … We need to close it, we need to size down our mandate on Nasdaq.”
Danske Commodities trades on Nasdaq’s Nordic commodities exchange to hedge against German power prices, which it trades on Nasdaq’s rival exchange, EEX.
“We use EEX in all our German products. If liquidity picks up in its Nordic products we will follow and quit Nasdaq. We will not be the first movers but we will follow,” said Mosegaard.
Nasdaq declined to comment on Danske Commodities’ decision.
Reuters contacted more than twenty companies, a majority of which said they expected liquidity to decrease further as a result of Aas’ default and the higher collateral they are now asked to pay.
“I know that liquidity is gone… It increases the risk in swings (in the market), if you want to get out of the market, you can’t,” said the head of trading at a Nordic trading firm, who declined to be named.
Eidsiva Energi, Norway’s fifth-largest power firm by number of customers, and Denmark’s EWII, which posted revenues of 200 million euros last year, said they would soon decide whether to stop clearing power trades via Nasdaq.
They will continue to use Nasdaq to trade Nordic power contracts, but could use banks instead of Nasdaq’s clearing house for that function.
The clearing house, which is run by Nasdaq to ensure that electricity contracts traded on the company’s Nordic commodities exchange are completed on time, forced members to replenish funds lost when Aas ran out of cash on Sept. 10.
“We are discussing leaving Nasdaq Clearing and clearing through banks … because of the collateral cost,” Staale Stoerdal, a corporate adviser at Eidsiva Energi [EIDEH.UL] told Reuters.
Oliver Wolgast, EWII’s senior director for renewables, trading and consulting, said the company would decide within a few weeks whether to leave Nasdaq’s clearing house.
“Quitting as a direct clearing member and going to clear through banks is on the table after what happened,” he said.
Nasdaq said it continued to have an open dialogue with the 166 members of its Nordic clearing house.
“Nasdaq has been supporting a General Clearing Model for our Commodities Market for many years, and we support any member’s decisions to change their clearing model,” said a Nasdaq spokesman.
Rival trading platform EEX is the dominant exchange in European power markets and stands to benefit. Other exchanges include CME and ICE.
“After what happened with Aas, a number of members of Nasdaq asked for information to join, or increase their position with, EEX,” EEX’s Nordics chief, Heine Roenningen said.
Six traders told Reuters they were considering joining, or trading more, on EEX. Five declined to be named as the topic is sensitive.
Three of the six traders already had an account with EEX and could increase trading there, while the other three said they may join EEX and move most, if not all of their activity, there.
To reduce risk and restore trust after Aas’ default, Nasdaq raised initial margin levels and said it was considering lowering the maximum allowed positions in the Nordics.
The estimated margin level on a Nordic 2019 power year contract was around 8.9 percent and is 10.1 percent now. For German power, the margin levels were 7.9 percent before and 9.9 percent after, Nasdaq said.
Trading firms who already clear through banks said they expected banks to raise their fees as a result of the firms’ default-related losses and the higher collateral they are now asked to post.
SEB and ABN AMRO, which clear trades with Nasdaq told Reuters they were considering the possibility of raising their fees, among other options.”We will have a discussion with the members clearing through us and Nasdaq. One possible outcome after assessing the risk could be raising the cost of clearing fees,” said SEB spokesman Frank Hojem.
Editing by Elaine Hardcastle and Kirsten Donovan