Nasdaq CEO, Facing Questioning, Says Nordic Loss Under Scrutiny

(Bloomberg) -- The head of Nasdaq Inc., facing sharp questioning about the exchange’s role in a 107 million-euro ($125 million) loss on its Nordic power market, said steps are being taken to prevent a repeat.

“The members of course are extremely upset,” Adena Friedman, Nasdaq’s chief executive officer, said Wednesday at the annual Futures Industry Association conference in Chicago.

Friedman shared the stage with other exchange leaders and panel moderator Jerome Kemp, Citigroup Inc.’s global head of futures, clearing and collateral, who’s also chairman of the industry’s lobbying and advocacy group. Citigroup and other bank and broker members of the Nordic market were left on the hook to repay the $125 million -- the largest clearinghouse loss in recent memory -- after Norwegian power trader Einar Aas wrongly bet that the spread between Nordic and German power would narrow.

“This was a traumatic event,” Kemp said.

The exchange has added about $22 million of its own money to replenish the default fund for a 90-day period, Friedman said, and consulting firm Oliver Wyman has been hired to assess the Nordic market’s risk management, rules and member requirements. The report will be done in a few weeks, she said. “We need to make sure we take it extremely seriously.”

Questions have centered on how Aas, as an individual, was allowed to be a direct member of Nasdaq’s Nordic market -- meaning he didn’t need to have a bank or brokerage act on his behalf and oversee his trading, something that would have added an extra layer of risk management on his trading. Friedman said there are many direct members on the Nordic market, and whether that should still be allowed is being reviewed.

‘Adult Supervision’

“When you put an individual in there, we don’t have that same level of visibility” as would be the case if a bank such as Citigroup were acting as a broker for a trader, said Jeff Sprecher, CEO of Intercontinental Exchange Inc., owner of the New York Stock Exchange and some of Europe’s largest futures markets. “This individual had a very large position in a very complicated market,” he said, adding that there wasn’t much “adult supervision.”

Nasdaq expelled Aas from the Nordic market last month. Sweden’s financial regulator has said it will investigate how Aas racked up huge losses and acted as his own clearer, or guarantor of trades. Among the clearing members who had to share the loss were Finnish utility Fortum Oyj, which paid 20 million euros into the exchange’s clearing default fund, and Norway’s Statkraft SF, which paid 5 million euros.

Exchange executives said the amount of money they contribute to the default fund has to be balanced with the risk that investors will take too many chances because they know the funds are available to remedy losses. Nasdaq had about $8 million of its own money in the default fund that was used to repay a portion of the Nordic loss.

“There is a balance,” said Terrence Duffy, CEO of CME Group Inc., the world’s largest futures exchange. “The more risk you bring, the more you need to bring to the default fund.”

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