  Over-the-counter markets are at the center of the postcrisis global reform of
the financial system. We show how the size and structure of such markets can
undergo rapid and extensive changes when participants engage in portfolio
compression, a post-trade netting technology. Tightly-knit and concentrated
trading structures, as featured by many large over-the-counter markets, are
especially susceptible to reductions of notional and reconfigurations of
network structure resulting from compression activities. Using
transaction-level data on credit-default-swaps markets, we estimate reduction
levels consistent with the historical development observed in these markets
since the Global Financial Crisis. Finally, we study the effect of a mandate to
centrally clear over-the-counter markets. When participants engage in both
central clearing and portfolio compression, we find large netting failures if
clearinghouses proliferate. Allowing for compression across clearinghouses
by-and-large offsets this adverse effect.
