CCPs and network stability in OTC derivatives markets

Heath, Alexandra; Kelly, Gerard; Manning, Mark; Markose, Sheri M; Shaghaghi, Ali Rais

doi:10.1016/j.jfs.2015.12.004

Cited by 30 publications

(30 citation statements)

References 18 publications

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“…Paddrik et al (2016) and Paddrik and Young (2017) make different assumptions about the contagion mechanism, which focus on solvency risks. Heath et al (2016) also study the network of net exposures from OTC derivatives. On the contrary, we focus solely on the short-term dynamics of liquidity shocks across different OTC derivative markets in the form of reduced payments, rather than focusing on potential solvency problems that might subsequently ensue.…”

Section: Literature Reviewmentioning

confidence: 99%

“…For example, they allow institutions to meet their obligations by also using the initial margins they have collected, which should normally be usable only after the default of the institutions that posted them. Furthermore, we extend the contagion mechanism used in Heath et al (2016) by accounting for incoming VM payments and by allowing partial payments by institutions in stress. Heath et al (2016) also study the network of net exposures from OTC derivatives.…”

Section: Literature Reviewmentioning

confidence: 99%

“…In the literature of financial networks, the centrality of a given node is normally considered a proxy for the vulnerability of that node to shocks (Alter et al, 2015;Heath et al, 2016;Markose et al, 2017;Siebenbrunner, 2017). In the literature of financial networks, the centrality of a given node is normally considered a proxy for the vulnerability of that node to shocks (Alter et al, 2015;Heath et al, 2016;Markose et al, 2017;Siebenbrunner, 2017).…”

Section: Fmp Fmec and Vulnerability Of Financial Institutionsmentioning

confidence: 99%

“…When the value of the contract held by an institution undergoes a particularly large negative variation, its counterparty will typically ask the institution to post some VM. We compute VM shocks by using the approach followed in Heath et al (2016), which simulates extreme changes to OTC derivative exposures. Given the greater complexity of our network, which includes different classes of contracts, here we take a simpler approach whereby shocks are estimated by means of an impact valuation model (Heath et al, 2016;Cerezetti et al, 2017;Bardoscia et al, 2015;2017).…”

Section: Liquidity Contagion Modelmentioning

confidence: 99%

“…On the contrary, we focus solely on the short-term dynamics of liquidity shocks across different OTC derivative markets in the form of reduced payments, rather than focusing on potential solvency problems that might subsequently ensue. Heath et al (2016) also study the network of net exposures from OTC derivatives. Similarly to them, we draw VM shocks randomly from a normal distribution to simulate extreme changes to OTC derivative exposures and directly trace the propagation of contagion through the system.…”

Section: Literature Reviewmentioning

confidence: 99%

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Multiplex network analysis of the UK over‐the‐counter derivatives market

2019

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In this paper, we analyse the network of exposures constructed by using the UK trade repository data for three different categories of contracts: interest rate, credit, and foreign exchange derivatives. We study how liquidity shocks related to variation margins propagate across the network and translate into payment deficiencies across different derivative markets. A key finding of the paper is that, in extreme theoretical scenarios where liquidity buffers are small, a handful of institutions may experience significant spillover effects due to the directionality of their portfolios. Additionally, we show that two novel multiplex centrality measures, the Functional Multiplex Eigenvector Centrality and the Functional Multiplex PageRank, can be used as a proxy for the vulnerability of financial institutions, with the Functional Multiplex PageRank improving on the results that can be obtained using the Functional Multiplex Eigenvector Centrality. KEYWORDS clearing house (CCP), financial networks, liquidity shock, multiplex networks, systemic risk JEL CLASSIFICATION

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Fmp Fmec and Vulnerability Of Financial Institutionsmentioning

confidence: 99%

Section: Liquidity Contagion Modelmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

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Multiplex network analysis of the UK over‐the‐counter derivatives market

2019

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Fundamental questions on central counterparties: A review of the literature

Berndsen

2021

Journal of Futures Markets

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Central counterparties (CCPs) function as financial infrastructures for capital markets in derivatives. They are designed to reduce aggregate counterparty credit risk. Although CCPs have existed for well over a century, they have only gained prominence after the Great Financial Crisis compelled the G20 to implement the mandatory clearing policy to make over-the-counter derivative transactions safer. This has led to a boom in CCP literature, 60% of which has been published in the last 5 years. This article provides a review of the literature on derivative CCPs focusing on some fundamental topics regarding the raison d'être, resilience, and governance of the CCP.

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A systemic change of measure from central clearing

Hwang

Kim

2021

Journal of Futures Markets

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This study investigates the systemic impact of central clearing based on a financial network model in which edge weights represent the sensitivities of one participant's failure to its counterparties' default likelihood. The reducedform model specifies the mechanism of systemic risk concentration under central clearing in that a central counterparty redistributes the probability mass of the systemic failure from the center of the distribution into its tail.Numerical illustrations shed light on implications for regulating the adverse dependence between risk concentration under central clearing and the resiliency of the financial system via proper margin schemes.

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CCPs and network stability in OTC derivatives markets

Cited by 30 publications

References 18 publications

Multiplex network analysis of the UK over‐the‐counter derivatives market

Multiplex network analysis of the UK over‐the‐counter derivatives market

Fundamental questions on central counterparties: A review of the literature

A systemic change of measure from central clearing

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