Details for Talk on: 04.12.2018

  • Speaker: Steffen Schuldenzucker
  • Title: Portfolio Compression and Financial Contagion
  • Abstract: Portfolio Compression is a post-trade mechanism for multilateral netting in financial OTC markets. It corresponds to the removal or reduction of cycles in the financial network. Having originated in the private sector, portfolio compression has been endorsed by regulators and made mandatory under the EMIR regulations. While compression simplifies the network of exposures, its implications for financial contagion have experienced little attention so far.
    In my talk, I will illustrate that, surprisingly, portfolio compression can worsen contagion effects even in simple example networks. I will then present results from a recently completed master's project by our students Wei Qiu and Pouyan Rezakhani where we quantify this effect. Based on Monte Carlo simulations on random networks, we find that compression is not universally desriable from a systemic risk perspective. Rather, this is dependent upon the characteristics of the network, the expected shock, and the desired systemic loss distribution. Towards the end of my talk, I want to discuss opportunities for my future work in this strand of research.