This excerpt taken from the NDAQ 8-K filed Feb 20, 2008.
The combined company will be exposed to credit risk from third parties, including customers, counterparties and clearing agents.
We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. In particular, our subsidiary Nasdaq Execution Services may be exposed to credit risk, due to the default of trading counterparties, in connection with the clearing and routing services Nasdaq Execution Services provides for our trading customers.
System trades in Nasdaq-listed securities, NYSE-listed securities, AMEX-listed securities and trades routed to other market centers for Exchange members are cleared by Nasdaq Execution Services, as a member of the National Securities Clearing Corporation (the NSCC).
Pursuant to the rules of the NSCC and Nasdaq Execution Services clearing agreement, Nasdaq Execution Services is liable for any losses incurred due to counterparty or a clearing agents failure to satisfy its contractual obligations, either by making payment or delivering securities. Adverse movements in the prices of securities that are subject to these transactions can increase our credit risk. However, we believe that the risk of material loss is limited, as Nasdaq Execution Services customers are not permitted to trade on margin and NSCC rules limit counterparty risk on self-cleared transactions by establishing credit limit and capital deposit requirements for all
brokers that clear with NSCC. Nasdaq Execution Services has never incurred a liability due to a customers failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency or the perceived possibility of credit difficulties or insolvency of one or more larger or visible market participants could also result in market-wide credit difficulties or other market disruptions. We also have credit risk related to transaction fees that are billed to customers on a monthly basis, in arrears. Our potential exposure to credit losses on these transactions is represented by the receivable balances in our Condensed Consolidated Balance Sheets. Our customers are financial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations.
A majority of OMXs outstanding investments at September 30, 2007 were in securities issued by the Swedish Government. OMX has no significant concentration of credit exposure to any other individual counterparty.
The derivative instruments to which OMX is a party involve a counterparty risk, that is, that the counterparty will not fulfill its portion of the agreement relating to futures or options. In order to limit counterparty risk, only counterparties with a high degree of creditworthiness are accepted. OMX also uses the standard form of International Swaps and Derivatives Association, Inc. (ISDA) agreement to minimize counterparty risk. The total counterparty risk related to financial transactions amounted to SEK 409 million at December 31, 2006 and SEK 311 million at September 30, 2007, including bank balances but excluding counterparty risk attributable to the OMX Nordic Exchange Stockholm ABs clearing operations (see below) and collateral funds invested in Swedish Government securities. The largest exposure to an individual institution did not exceed SEK 97 million at December 31, 2006 and SEK 125 million at September 30, 2007.
No single OMX customer was responsible for more than 20% of invoicing as of September 30, 2007. Counterparty risk arises by the OMX Nordic Exchange Stockholm AB providing clearing services and thereby acts as the central counterparty in all derivatives contracts subject to counterparty clearing. For the purpose of minimizing this counterparty risk, the OMX Nordic Exchange Stockholm AB requires that the counterparties pledge collateral to guarantee fulfillment of their commitments to the OMX Nordic Exchange Stockholm AB. Pledged collateral amounted to SEK 15,458 million at December 31, 2006 and SEK 17,864 million at September 28, 2007. None of the members of the OMX Nordic Exchange Stockholm AB accounted for more than approximately 15% of the total exposure on September 28, 2007.