Financial Resources

NOS’ clearing concept differs from the traditional member-owned clearing organization with regard to how potential counterparty losses are covered. Firstly, NOS does not maintain a guarantee fund or reserve fund to which users contribute. Secondly, NOS does not enforce a mutual loss-sharing scheme among its members.
Instead, a conservative and best practice margining methodology, the collateral pledging requirements, the pro-active risk management and the risk-bearing capital act as a buffer between any defaulting counterparty and all other clearing members. This means that NOS’ own risk-bearing capital is at risk, and not that of the members. Thus, NOS has a fully vested interest in ensuring that risk management routines applied at all times provide for the accurate measurement, reasonable control and satisfactory protection against risks arising within the clearing organisation.

Regulatory requirements

According to the Norwegian Securities Trading Act a clearing house shall have risk capital appropriate for the risk exposure assumed by the clearing house. There are also strict regulations of the investment management of the clearing house capital.
In addition to the above mentioned regulation, NOS adheres to international standards and recommendations for clearing houses:

• The European Association of Central Counterparty Clearing Houses (EACH) has established standards of risk management for its members. These standards give guidelines regarding financial resources of clearing houses.
• Bank for International Settlements (BIS) and International Organization of Securities Commissions (IOSCO) has established Recommendations for Central Counterparties.

Assessing the Capital Adequacy

A clearing house assumes the counterparty risk in each position that is cleared. To cover this risk, the clearing house calculates and requires the clearing members to post collateral. The residual risk occurs if the collateral based on the margining methodology applied proves to be insufficient to cover the costs associated when the clearing
house closes out the positions of a defaulting member.
To estimate the residual risk, and hence the need for risk capital, NOS conducts stress testing. When stress testing, NOS is simulating the effect of market movements beyond what is used in ordinary margin calculations.
The simulated market movements in the stress test shall reflect extreme, but plausible market conditions.
The present internal rule requires that the risk capital of NOS must be sufficient to cover the hypothetical default of the largest member exposure (the member whose positions generate the largest stress-test loss) and the next two members with the highest stress-test loss in the same market scenario as the largest member.

Risk Bearing Capital, Insurance and Guarantees

 The Norwegian Securities Trading Act provides a capital requirement, stating that a clearing house shall have sufficient risk capital according to the risk exposure with a minimum of NOK 50 million in liable capital. There are also strict regulations of the investment management of the clearing house capital. These regulations are very much similar to international recommendations regarding clearing house capital.
NOS has established a robust and scaleable capital structure by use of a mix of own capital and “synthetic capital” provided by the insurance industry. The capital is structured into different layers that will absorb losses due to member default. No clearing member is financially exposed to other participants’ defaults. The margins are scaled to be large enough to cover almost all market movements. In addition to margin, all members post individual base collateral. The base collateral is kept on segregated accounts and is not subject to joint liability.
NOS is continuously stress testing the open positions in extreme, but plausible scenarios. Positions that have a simulated margin in these scenarios higher than posted collateral should be absorbed by the layers in NOS’ counterparty capital.

These layers are structured in the following way (read the figure from the bottom and up), meeting a default: 

NOS Clearing ASA holds risk capital in the case of a default which, together with the margins held, is more than needed to satisfy the regulations, the current exposure and the expected growth.