Compressing Over-the-Counter Markets
87 Pages Posted: 4 May 2017 Last revised: 11 Jan 2019
Date Written: January 2019
The size and structure of over-the-counter markets have become key policy issues. We show how such markets can be subject to large and rapid reductions of notional in presence of portfolio compression cycles. We find that the levels of compression are driven by the tightly-knit and concentrated trading structure of over-the-counter markets. Using granular European derivatives data, we estimate reduction levels consistent with historical changes observed since the Global Financial Crisis. When participants have access to both central clearing and portfolio compression, we find large netting failures if clearinghouses proliferate. Allowing for multilateral compression across clearinghouses by-and-large offsets this adverse effect.
Keywords: over-the-counter trading, multilateral netting, derivatives, networks, financial regulation
JEL Classification: G20, G28, G15, C61, L14
Suggested Citation: Suggested Citation