When does portfolio compression reduce systemic risk?
- Date: Thursday 5 December 2019, 14:00 – 15:00
- Location: Roger Stevens LT 03 (7.03)
- Type: Probability and Financial Mathematics, Seminars, Statistics
- Cost: Free
Dr. Luitgard Veraart, London School of Economics
We analyse the consequences of portfolio compression on systemic risk.
Portfolio compression is a post-trading netting mechanism that reduces gross positions while keeping net positions unchanged and it is part of the financial legislation in the US (Dodd-Frank Act) and in Europe (European Market Infrastructure Regulation). We derive necessary structural conditions for portfolio compression to be harmful and discuss policy implications. In particular, we show that the potential danger of portfolio compression comes from defaults of firms that conduct portfolio compression. If no such defaults occur, then portfolio compression reduces systemic risk.