Post-trade netting and contagion

Veraart, Luitgard A. M. ORCID: 0000-0003-1183-2227 and Zhang, Yuliang (2025) Post-trade netting and contagion. Operations Research. ISSN 0030-364X (In Press)

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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.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Mathematics
Subjects:	Q Science > QA Mathematics H Social Sciences > HG Finance
Date Deposited:	19 Sep 2025 10:24
Last Modified:	19 Sep 2025 10:24
URI:	http://eprints.lse.ac.uk/id/eprint/129549

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