Compressing over-the-counter markets

DOI10.1287/OPRE.2021.2107MaRDI QIDQ5031652zbMATH OpenOpenAlexFDO

Authors Marco D'errico, Tarik Roukny

Publication date 16 February 2022

Published in Operations Research (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1705.07155

zbMATH Keywords

central clearingderivativesfinancial regulationmultilateral nettingnetwork optimizationover-the-counter trading

Mathematics Subject Classification ID

Financial markets (91G15) Financial networks (including contagion, systemic risk, regulation) (91G45)

Abstract: Over-the-counter markets are at the center of the postcrisis global reform of the financial system. We show how the size and structure of such markets can undergo rapid and extensive changes when participants engage in portfolio compression, a post-trade netting technology. Tightly-knit and concentrated trading structures, as featured by many large over-the-counter markets, are especially susceptible to reductions of notional and reconfigurations of network structure resulting from compression activities. Using transaction-level data on credit-default-swaps markets, we estimate reduction levels consistent with the historical development observed in these markets since the Global Financial Crisis. Finally, we study the effect of a mandate to centrally clear over-the-counter markets. When participants engage in both central clearing and portfolio compression, we find large netting failures if clearinghouses proliferate. Allowing for compression across clearinghouses by-and-large offsets this adverse effect.

Recommendations

• Optimising the multilateral netting of fungible OTC derivatives
• Central clearing of OTC derivatives: bilateral vs multilateral netting
• Firm capital dynamics in centrally cleared markets
• Counterparty risk externality: centralized versus over-the-counter markets
• Credit default swaps and systemic risk

Cites work

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Cited in

(13)

• Serial rules in a multi-unit Shapley-Scarf market
• Optimising the multilateral netting of fungible OTC derivatives
• Over-the-Counter Markets
• When does portfolio compression reduce systemic risk?
• Optimal network compression
• Multi-period liability clearing via convex optimal control
• On Pareto optimal balanced exchanges
• Measuring financial systemic risk: net liability clearing mechanism and contagion effect
• Netting and novation in repo networks
• Systemic risk in markets with multiple central counterparties
• Optimal bailouts and strategic debt forgiveness in financial networks
• Two axiomatizations of the pairwise netting proportional rule in financial networks
• Computing balanced solutions for large international kidney exchange schemes when cycle length is unbounded

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