OTC Intermediaries

We estimate the systemic effects of exit by a key over-the-counter (OTC) intermediary. In our model, risk-averse traders are connected by a core-periphery network. If traders are also averse to concentrated bilateral exposures then the incomplete network prevents full risk sharing. We quantify the impact of the network structure on prices using the closed-form solution to our model and proprietary data on all credit default swap (CDS) transactions in the U.S. from 2010-2013. There are a small number of key OTC intermediaries whose exit can move markets dramatically. Eliminating one of these leads credit spreads to increase over 20%