Motivation:
Central clearing has reduced bilateral counterparty risk in credit default swap (CDS) markets, yet it has also concentrated risk at CCPs without resolving pervasive price opacity. When member defaults occur, variation margin mechanics, constrained CCP liquidations, and fragmented information can interact to amplify shocks via price-mediated contagion. This extended abstract presents a dynamic network framework that isolates opacity as a structural driver of spread mispricing, volatility, and systemic amplification in CCP-cleared CDS markets, and quantifies the stabilizing effect of transparency without altering market topology.

Model and Approach: I develop a dynamic contagion model centered on a CCP star network with core-periphery dealer structure and dealer–client spokes. Three ingredients are integrated:
• CCP microstructure and margining: daily mark-to-market and variation margin accrual/exchange; default management via porting/hedging/auction/sales subject to tight time and equity constraints.
• Price-mediated contagion with partial information: spreads embed fundamentals (approximated by bond-implied Z-spreads) and transient price impacts from distressed liquidations, predatory trades, and downstream counterparty chains. Opacity is modeled as local quote visibility that forces dealers to estimate market trading rates from a small neighborhood, creating systematic misestimation of own price impact.
• Strategic behavior under constraints: dealers are either distressed (liquidity/margin constrained) or unconstrained (potential predators). Trading rules induce primary (direct), secondary (counterparty), and tertiary (network) price impacts with empirically motivated lags.

Key Theoretical Contributions:
• A tractable spread decomposition embeds the fundamental component and multiple lagged price-impact channels, showing how partial information and clearing frictions generate feedback from trading to spreads.
• The model predicts spurious, transient covariance among CDS spreads during stress, induced by concentrated interdealer links and variation-margin chains rather than asset fundamentals.
• Under opacity, predatory strategies are miscalibrated: predators cannot anticipate their own price impact and face feedback through spreads and margins, rendering predation self-defeating over realistic horizons.

Simulation Design: A small-world, scale-free CCP network with 14 core dealers and many clients is initialized with stylized market parameters. An exogenous dealer default triggers CCP liquidation over a five-day window. Two information regimes are compared: (i) a second-best transparent market (full price visibility but same contractual fragmentation), and (ii) an opaque market (dealers observe only nearest-neighbor quotes to estimate market trading rates). Running market spreads are tracked against fundamentals (Z-spreads) to measure mispricing; liquidity shocks perturb market depth.

Findings:
• Opacity-induced mispricing: The deviation between running CDS spreads and fundamentals grows nonlinearly over the liquidation horizon under opacity, whereas the second-best transparent market exhibits small deviations despite the same network fragmentation.
• Volatility and feedback: Spread volatility and overshoots amplify under opacity as dealers misestimate average trading rates and cannot attenuate their own price impact. Contractual fragmentation and opacity interact: more partitions increase mispricing at any fixed opacity level.
• Spurious covariance and contagion: Secondary and tertiary impacts along counterparty chains generate transient comovements across CDS positions, propagating stress via variation margin obligations even without fundamental correlation.
• Predation is self-defeating: In opaque markets, predators incur the largest losses in aggregate because miscalibrated selling depresses prices, raises volatility, and feeds back into their own margin exposures, especially with competing predators.
• Policy lever—transparency: Increasing price transparency (e.g., real-time post-trade reporting, centralized price dissemination) significantly reduces spread deviations and volatility without changing the hub-and-spoke architecture, thereby dampening feedback loops.

Implications for Credit Risk and Contagion: The results provide a structural explanation for the “unexplained” component of CDS spread dynamics during crises: feedback-driven mispricing under partial information. They also clarify why CCP default management can unintentionally transmit stress and how transparency can curb price-mediated contagion. Although the analysis focuses on CDS, the mechanisms extend to other opaque OTC markets. The framework is readily adaptable for stress testing under exogenous shocks (including climate-related transition or physical risk scenarios) to study climate-driven contagion in multilayer financial networks.

Keywords: CDS, central clearing, variation margin, opacity, price impact, predatory trading, mispricing, network contagion, spurious covariance, stress propagation, transparency.