Staff Working Paper No. 726
By Marco Bardoscia, Ginestra Bianconi and Gerardo Ferrara
In this paper, we analyze the network of exposures constructed by using the UK trade repository data for three different categories of contracts: interest rate, credit, and foreign exchange derivatives. We study how liquidity shocks related to variation margins propagate across the network and translate into payment
deficiencies across different derivative markets. A key finding of the paper is that, in extreme theoretical scenarios where liquidity buffers are small, a handful of institutions may experience significant spillover effects due to the directionality of their portfolios. Additionally, we show that a variant of a recently introduced centrality measure - Functional Multiplex PageRank - can be used as a proxy for the vulnerability of financial institutions, outperforming in this respect the commonly used eigenvector centrality.