Financial network analysis is used to provide firm level bottom-up holistic visualizations of interconnections of financial obligations in global OTC derivatives markets. This helps to identify Systemically Important Financial Intermediaries (SIFIs), analyze the nature of contagion propagation, and also monitor and design ways of increasing robustness in the network. Based on 2009 FDIC and individually collected firm level data covering gross notional, gross positive (negative) fair value and the netted derivatives assets and liabilities for 202 financial firms which includes 20 SIFIs, the bilateral flows are empirically calibrated to reflect data-based constraints. This produces a tiered network with a distinct highly clustered central core of 12 SIFIs that account for 78 percent of all bilateral exposures and a large number of financial intermediaries (FIs) on the periphery. The topology of the network results in the “Too- Interconnected-To-Fail” (TITF) phenomenon in that the failure of any member of the central tier will bring down other members with the contagion coming to an abrupt end when the ‘super-spreaders’ have demised. As these SIFIs account for the bulk of capital in the system, ipso facto no bank among the top tier can be allowed to fail, highlighting the untenable implicit socialized guarantees needed for these markets to operate at their current levels. Systemic risk costs of highly connected SIFIs nodes are not priced into their holding of capital or collateral. An eigenvector centrality based ‘super-spreader’ tax has been designed and tested for its capacity to reduce the potential socialized losses from failure of SIFIs.

Systemic risk from financial derivatives markets came to the forefront with the accelerated growth in credit derivatives to about US$60 trillion at its peak in 2007.Excessive liabilities from a small segment of credit default swaps (CDS) on residential mortgage-backed securities for key institutions such as American Insurance Group (AIG) threatened to destabilize the financial system. The collapse of the United States (U.S.) house prices triggered widespread weakness in this class of credit derivatives that had initially helped in the proliferation of U.S. mortgage backed securities globally, leading to the unprecedented taxpayer bailouts of financial institutions estimated at over US$14 trillion over the course of the 2007̶8 financial crisis (Alessandri and Haldane (2009)). The bailouts premised a moral hazard problem identified as arising from some financial institutions being “Too- Interconnected-To-Fail” (TITF), with threats to the financial system as a whole following from domino effects of the failed entity on others. The AIG bailout aimed to stem the negative externalities of its failure to deliver on its CDS guarantees to major counterparties.2 The correlated jump to default spikes in CDS premia for contracts for which Lehman Brothers was the protection seller and the triggering of CDS on Lehman Brothers as the reference entity is estimated to have magnified liquidity demands during the conditions, which led to a ‘run’ on the wholesale money markets in 2008 (Gorton and Metrich (2009)).