OTC Premia
Type
conference paper
Date Issued
2018-11-06
Author(s)
Abstract
Using trade repository data at transaction and ID levels, we provide the first systematic study of interest rate swaps traded over the counter in the new regulatory regime. We find substantial and persistent heterogeneity in derivatives prices consistent with a pass-through of regulatory costs on to market prices via the so-called valuation adjustments (XVA). Specifically, a client pays a higher price to buy interest-rate protection from a dealer (ie, the client pays a higher fixed rate) if the contract is not cleared via a central counterparty. This OTC premium decreases by posting initial margin and with higher buyer's creditworthiness. Also, OTC premia are absent for dealers suggesting dealers' bargaining power.
Language
English
Keywords
Interest rate swaps
financial regulation
central celaring
over-the-counter market
valuation adjustments
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Event Title
Annual Central Bank Conference on Microstructure of Financial Markets
Event Location
Hong Kong Institute for Monetary Research (HKIMR) of the Hong Kong Monetary Authority
Event Date
5-6 November 2018
Subject(s)
Division(s)
Eprints ID
255890