OTC Microstructure in a Period of Stress: A Multi‑Layered Network Approach

Abstract

Using unique data at transaction and counterparty identity level, we study the microstructure of the Swiss franc FX over‑the‑counter (OTC) derivatives market during a time of stress that was triggered by the decision of the Swiss National Bank (SNB) to remove the Swiss franc‑euro exchange rate floor on 15 January 2015. Building on new methodology based on the topology of the trading network we segment the market into a multi‑layered structure. We observe that the SNB announcement had a clear and differentiate impact on the market from this perspective. Clients in a more central position in the network topology were able to enter the market sooner than peripheral counterparties, while the inter‑dealer core of the market was largely inactive. Using outstanding positions to proxy demand we observe that clients in greater need of trading were offered unfavourable prices if they found liquidity. Overall, our results point to a shortage of liquidity in the phase of market adjustment and highlight the heterogeneous reactions of different market segments during that time.

Keywords: OTC derivatives markets, FX markets, market microstructure, networks, financial stability, market regulation

JEL Classification: G14, G23, G24, C80