Nasdaq Clearing holds an Assessment Power as a final layer in the waterfall. The size of this layer, Nasdaq Clearing’s Senior Capital, is calculated to be sufficiently large to ensure that, when aggregated with the Junior Capital and Default Funds per clearing service, Nasdaq Clearing will withstand a default of the two largest counterparties, under an extreme but plausible scenario. Contributions to each of the default funds are only available to cover default losses in that particular market. The size of each default fund is calculated to withstand a default of either the clearing service’s largest, or of the second and third largest counterparty combined, in an extreme but plausible scenario. Each default fund is limited to counterparty defaults within its own clearing service. There are separate default funds for each clearing service. Default Fund (Commodities/Financial Market/Seafood Market) In the event of a default including OTC-traded interest rate derivatives (so-called Generic Rate Instruments), default losses from such derivatives and other related fixed income contracts remaining after the Junior Capital has been exhausted will be covered by the Loss Sharing Pool, consisting of assets posted by the clearing members active in this market. A specific amount of Junior Capital is dedicated for each market. In the event of a counterparty default where the defaulting counterparty’s posted margin and default fund contribution is not sufficient to cover the cost of closing out the portfolio, Nasdaq Clearing’s Junior Capital will absorb the first layer of loss.
If the margin collected from the defaulted member is insufficient to cover the costs associated with the default, the clearing house will use the defaulted party’s default fund contribution. Defaulted party’s default fund contribution If a clearing member is declared in default and there are costs incurred by the clearing house in order to handle the portfolio of the defaulting member, the clearing house will start by using the margin collected from the defaulting member. In order to avoid having to use any of the resource in the waterfall, the first layer of protection for the clearing house is its membership requirements, its margining methodology, its collateral requirements, and its pro-active risk management.
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