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SUMMARY:Systemic Risk and Centralized Clearing of OTC Derivatives: A Netwo
 rk Approach - Borovkova\, S (Vrije Universiteit Amsterdam)
DTSTART:20140923T090000Z
DTEND:20140923T094500Z
UID:TALK54460@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:We analyze the effect of central clearing of OTC derivatives o
 n the financial system stability by means of network simulation approach. 
 We build simple but realistic networks of financial firms\, connected by b
 ilateral links and via a single CCP. We simulate balance sheets of firms a
 nd introduce shocks to the system to simulate defaults. The default mechan
 ism and shock absorption in presence of the CCP is modeled in the way that
  maximally reflects the reality. We run Monte Carlo simulations of the net
 works' evolution and obtain their default and contagion characteristics. W
 e analyze the likelihood of the CCP's default and compare the stability of
  the financial network with and without the CCP for various network config
 urations and market scenarios.\n\nWe find that\, for a homogeneous financi
 al system\, the presence of the CCP increases the network's stability and 
 the probability of the CCP's failure is virtually zero. However\, for non-
 homogeneous financial networks\, we find the opposite effects: the presenc
 e of the CCP leads in this case to a disproportionately large probability 
 of contagion defaults\, especially for smaller financial firms. Furthermor
 e\, we find that the probability of the CCP failure is substantial in this
  case\, regardless of the capitalization requirements. In all\, we find th
 at non-homogeneous networks exhibit greater instability and contagion in t
 he presence of the CCP: a worrying fact\, given that any real financial sy
 stem is highly inhomogeneous in terms of size and concentration.\n
LOCATION:Seminar Room 1\, Newton Institute
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