Einar Aas’s case

Nurgalieva Karina

IFF 17-3к

Essay

Einar Aas’s case

What happened?

For almost two decades, Einar Aas was the most successful trader on one of Europe’s largest power markets. The 47-year-old was making huge bets on Nordic power in Grimstad. His failed trades on Nasdaq Nordic power exchange in September 2018 almost burned through the exchange's clearinghouse default fund and required clearing member firms to plug in $113 million to cover the losses.

The unfortunate trade was a bet that the spread between the Nordic and German power would narrow. Instead, when the market opened that Monday, carbon emission allowances were surging and pushed up the German market. At the same time, wet weather forecasts caused the Nordic next-year contract to drop the most since January 2017.

Norwegian trader has incurred losses for the Nasdaq Commodities exchange, spurring market volatility as his positions are forced to close. The loss was equivalent to around 68% of the fund’s capital. Einar took a position that was simply too big in relation to the liquidity in the market. After massive adjustments in prices in both the German and Nordic contracts, Aas was forced to pay out his last free liquid funds to the exchange, but it wasn’t enough. On Tuesday, September 11, 2018 Aas was declared in default and placed under administration. His portfolio was liquidated the next day.

What wrong solutions and wrong activity did result in these losses?

In normal circumstance, traders are overseen by a clearer, otherwise known as a guarantor of trades. Aas had none. If he’d gone through another clearing member, that company could possibly have stopped the bets earlier by demanding additional collateral.

What should be done to prevent these losses and what strategy can be recommend to avoid such potentials in future?

In trading, clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction. It involves the management of post-trading, pre-settlement credit exposures to ensure that trades are settled in accordance with market rules, even if a buyer or seller should become insolvent prior to settlement. Clearing is the procedure by which financial trades settle - that is, the correct and timely transfer of funds to the seller and securities to the buyer. Often with clearing, a specialized organization acts as intermediary and assumes the role of tacit buyer and seller in a transaction, to reconcile orders between transacting parties. It provides smoother and more efficient markets as parties can make transfers to the clearing corporation rather than to each individual party with whom they transact.