Multiplex network analysis of the UK over-the-counter derivatives market

Abstract

In this paper, we analyse 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 two novel multiplex centrality measures, the Functional Multiplex Eigenvector Centrality and the Functional Multiplex PageRank, can be used as a proxy for the vulnerability of financial institutions, with the Functional Multiplex PageRank improving on the results that can be obtained using the Functional Multiplex Eigenvector Centrality.