Abstract
AbstractIn 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.
Highlights
Since the global financial crisis in 2007, the G20 has overseen an ambitious program of regulatory reform in financial markets
In this paper we focus on the three asset classes that correspond to the three largest markets for OTC derivatives: (i) interest rates derivatives (IR); (ii) credit derivatives (CD); and (iii) foreign exchange derivatives (FX)
In order to rank financial institutions according to their centrality, first we introduce the Absolute Functional Multiplex PageRank (Abs FMP) XiFMP of node i given by
Summary
Since the global financial crisis in 2007, the G20 has overseen an ambitious program of regulatory reform in financial markets. One goal of the reform program is to make derivative markets safer by reducing systemic risk and improving counterparty risk management For this reason, many standardized over-the-counter (OTC) derivative contracts must be cleared through Clearing Houses (CCPs). We use UK trade state reports from DTCC and Unavista (as of 30th June 2016) that include data on both centrally and non-centrally cleared trades of CCP clearing members This allows us to build a network of exposures between those institutions across three OTC markets: interest rate, credit, and foreign exchange derivatives. In order to quantitatively estimate the vulnerability of financial institutions we develop and compare two extensions of the eigenvector centrality and of the PageRank centrality.
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