One Trader Defaulted. Forty-One Firms Paid €114 Million In Nine Days.

STOCKHOLM, Sweden — In fifty years, the powers that let a clearing house reach into a surviving member's money have been used once.

We read the default-management chapters of six clearing-house rulebooks end to end — 2,908 pages — and coded every power in them: what triggers it, whose money it reaches, and where the book says it stops.

Seventy-one powers. Six waterfalls. One use.

The use was Stockholm, in September 2018, and it cost the survivors €114 million.

What the book actually allows

A clearing house stands between every buyer and every seller. Once a trade is registered the two sides no longer face each other; they both face the house, which owes the winner and is owed by the loser. That is the whole service, and it works until a member cannot pay.

The rulebook then says who does pay, in order. The order is called the waterfall.

The first three steps are uncontroversial. The defaulter's margin. The defaulter's own contribution to the mutual fund. Then a slice of the clearing house's own capital.

Below that line the money stops being the defaulter's and starts being everybody else's, and four powers live there. A cash call on the survivors. The haircutting of gains — the house pays a member less than it owes him on a position that won. Forced allocation, which hands a member part of the defaulter's book whether he wants it or not. And at the bottom, partial tear-up: the cancellation of live contracts, including profitable ones, at a price the house sets.

Four of the six rulebooks number this article in the 800s. We have used 802 throughout because it is the number in the one book that has been tested.

Stockholm, 10 September 2018

Torbjörn Sahlgren-Vik was a member of Norrklar in his own name — one of nine individuals in Europe then cleared without a firm behind them. He had been a member for eleven years. He held a spread between Nordic and German power, and on 10 September the spread moved seventeen per cent the wrong way.

His margin was €138 million. It was gone by Tuesday afternoon. His own contribution to the fund, €7.1 million, went with it.

Then €7.4 million of Norrklar's own capital.

Then €114 million of the €166 million that the other forty-one members had paid in.

Rule 802(a) was invoked at nine in the morning on the Wednesday. Replenishment notices went out the same hour — €114 million, pro rata across the forty-one survivors, payable in five business days. Every member paid. The last wire landed nine calendar days after the first notice and one firm paid a day early.

Nothing below 802(a) was reached. No gains were haircut. Nothing was torn up.

The number that is not in the rulebook

Here is what we did not go looking for.

Norrklar's own €7.4 million stood in front of €166 million of its members'. Four and a half per cent.

No rule sets that figure. No regulator approves it. It is decided by a board, minuted in a sentence, disclosed in a table without a percentage beside it, and it has never once had to be explained to the members whose money sits directly underneath it.

We asked all six clearing houses how theirs is arrived at. Two gave us a number and the board minute behind it. One gave a range, which cannot be compared with a number. Three said it was a matter for the board.

Professor Nkiruka Aderinto-Falk, who checked our coding, thinks the ratio we have chosen is the wrong one and prefers a measure against annual clearing revenue. On her measure Norrklar looks better. We publish her working beside ours because we would rather print the objection than pick the flattering denominator.

The consultation nobody answered

In three of the six rulebooks the definition of an affected contract — which decides how much of a market a tear-up could reach — was widened by technical amendment. Twenty-eight days, thirty days, forty-two days. Each consultation drew no responses.

None from a member. None from a trade body. None from us, and we had read the book.

What we could not make frightening

The clause exists. It is real, it is enforceable, and a reader is entitled to be told it is there.

It has also been invoked once in the lifetime of the institution, it operated exactly as printed, on the schedule printed beside it, and the people it fell on paid in nine days and went back to work.

The thing worth being uneasy about is four and a half per cent, and it is not in the rulebook at all.