Post-trade netting and contagion

Luitgard A. M. Veraart and Yuliang Zhang

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We analyse how post-trade netting in over-the-counter derivatives markets affects systemic risk. In particular, we focus on two post-trade netting services that rely on multilateral netting techniques: portfolio rebalancing and portfolio compression. First, we provide mathematical characterisations of their netting mechanisms and explain their relationship. Then, we analyse the effects of post-trade netting from a network perspective by considering contagion arising from defaults on variation margin payments. We provide sufficient conditions for post-trade netting to reduce systemic risk and show that post-trade netting can be harmful. We also explore the implications, particularly when institutions strategically react to liquidity stress by delaying their payments.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2025-11-07
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Published in Operations Research, 7, November, 2025. ISSN: 0030-364X

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