Compressing Over-the-Counter Markets

Over-the-counter markets are at the center of global reform financial system. We show how size and structure these can undergo rapid extensive changes when participants engage in portfolio compression, which is an optimization technology that exploits multilateral netting opportunities. find tightly knit concentrated trading structures, as featured by many large over-the-counter markets, especially susceptible to reductions notional amounts network reconfigurations resulting from compression activities. Using a unique transaction-level data set on credit-default-swaps we estimate reduction levels, suggesting adoption this account for share historical development observed since crisis. Finally, test effect mandate centrally clear over counter terms structure. When both central clearing with clearinghouse, failures if clearinghouses proliferate. Allowing across offsets adverse effect.