Compressing Over-the-Counter Markets

85 Pages Posted: 4 May 2017 Last revised: 10 Jun 2019

See all articles by Marco D'Errico

Marco D'Errico

University of Zurich; European Systemic Risk Board

Tarik Roukny

Massachusetts Institute of Technology (MIT); KU Leuven - Faculty of Business and Economics (FEB)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2019


Over-the-counter markets are at the center of the post-crisis 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.

Keywords: over-the-counter trading, multilateral netting, derivatives, networks, financial regulation

JEL Classification: G20, G28, G15, C61, L14

Suggested Citation

D'Errico, Marco and Roukny, Tarik, Compressing Over-the-Counter Markets (January 1, 2019). Available at SSRN: or

Marco D'Errico

University of Zurich

Andreasstrasse 15
Zurich, 8050

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Tarik Roukny (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000

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