Star Trader’s Default Still Rattling Power Market a Year Later

(Bloomberg) -- The expulsion of Einar Aas from Nasdaq Inc.’s commodities unit in Europe is continuing to rattle power markets a year after the trader racked up more than $100 million in debt from bets he couldn’t repay.

The default of the Nordic market’s most successful trader forced Nasdaq to focus on restoring confidence to the market. Buying and selling of electricity has been on the decline for years, and the Aas scandal only made matters worse. Activity in 2018 dropped to the lowest in two decades and volumes are down another 21% this year through August. Less trading has widened spreads, especially on contracts for the years ahead, according to market participants.

“If there had been 10 traders as big as Einar Aas in the market, the other nine would probably have seized the opportunity and moved in to fill the gap,” said Arne Bergvik, head of analysis at Swedish utility Jamtkraft AB. “Unfortunately, there’s now a void.”

His demise took many in the market by surprise. After all, regulators around the world had spent a decade shoring up rules to avoid another default after the collapse of Lehman Brothers Holdings Inc. in 2008. Aas, who traded on the world’s oldest power exchange for his own account, slipped through the net because of his stature, and rival traders had to pitch in to cover his losses.

What Has Nasdaq Done Since the default?

The exchange shored up rules on trading and capital requirements to make less likely another event like the default of Aas. Those changes include, increased requirements for how much capital and liquidity members of the clearing house has available.

“You can never get to a 100% guarantee that this kind of event never happens again, but the actions we are taking now are significantly reducing the risk,” Georg Aasen, vice president for Nasdaq Commodities, said by phone.

What are traders and utility executives saying?

There’s an open question about how a single trader could be allowed to take the kinds of risks Aas racked up, said Marcus Annell, head of financial trading at the utility Bixia AB. Confidence in the exchange and its risk management has taken a knock.

But while the lack of trust in the exchange has meant some business has gone elsewhere, Annell says there will always be a need for utilities to buy and sell power in advance. That means opportunities for traders, albeit at a smaller scale. The default means it will be even more difficult for Nasdaq to regain volume.

The exchange should also be wary of too much increased regulation. If paperwork becomes too burdensome for smaller traders, then there’s a risk that the market will just have a handful of giant producers left, Annell said.

Simon-Erik Ollus, head of trading at Fortum Oyj, doesn’t blame Nasdaq alone for the failure. In a bid to keep a lid on trading costs, it was a “Nordic compromise” to allow traders to become direct clearing members. But now, “we can probably call it a failure in the design of risk management,” he said.

Fortum had to pay 20 million euros ($22 million) into Nasdaq’s default fund to help cover the losses, and has called for more product development in the Nordic market to boost trade. That is a focus right now, he said.

Anna Borg, chief financial officer at utility Vattenfall AB, says that’s although volumes are declining it’s premature to call the market’s demise just yet. More regulation makes trading even more complex, but it’s also reducing risk, and this is where the market and the exchange jointly need to find the right balance.

“Nasdaq has shot itself in the foot,” said Fredrik Bodecker, head of adviser Bodecker Partners AB and a former trader. While there are potentially new types of market participants, including wind power producers, the increase in margins and compliance is forcing smaller traders and producers on to the bilateral market, where they are instead trading directly with utilities, he said.

What action has the regulators taken?

Norway’s financial supervisory authority, after carrying out an audit of Nasdaq’s Norwegian unit, concluded in January that the exchange had lapsed in its oversight of Aas. It found that he had other people trading on his account, even if it was solely personal. There wasn’t sufficient investigation by the bourse and in the aftermath, Nasdaq had failed to disclose such vital information voluntarily.

Sweden’s FSA, which oversees Nasdaq’s Nordic clearinghouse in Stockholm, still has separate investigations underway into the company, focusing on risk management, participation requirements, default management procedures and margin calculation.

Have others markets benefited?

“Not yet,” said Steffen Riediger, director of European power derivatives at the European Energy Exchange AG, a rival bourse. The company said in the aftermath of Aas’s default that it would expand in the Nordic power market. Volumes are up, but to a small extent he said, adding that more participants are setting up the product now.

What about Aas himself?

Aas, who declined to comment when reached by phone, avoided bankruptcy after striking a deal with the other traders and utilities at Nasdaq who were forced to top up the clearing house’s default fund.

He got to keep his main house in Grimstad, a few hours’ drive southwest of Oslo. But he has sold other assets to settle claims, including sea-side properties, a mountain cabin, shares in an oil company and a painting by Andy Warhol.

So far, those sales have brought in more than 160 million kroner ($18 million), according to Bloomberg calculations based on reports in Norwegian media. A few other major assets remain: investments in real-estate projects in Spain, and a possible tax refund stemming from a rule that would let Aas deduct 2018 losses from income in earlier years.

“The sales process involving the Spanish real-estate investments is in full swing,” Aas’s lawyer, Marius Moursund Gisvold, said by phone, declining to provide any other details.

The book value of his Spanish investments was set at 258 million kroner in the 2018 annual report of Aas’s investment firm Toppen Invest AS. The tax refund could be worth more than 200 million kroner, according to calculations published by local paper Agderposten.

--With assistance from Mathew Carr.

To contact the reporters on this story: Lars Paulsson in London at lpaulsson@bloomberg.net;Jesper Starn in Stockholm at jstarn@bloomberg.net;Mikael Holter in Oslo at mholter2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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