Centralized Trading, Transparency and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd-Frank Act

49 Pages Posted: 15 Jan 2016 Last revised: 17 Jul 2017

See all articles by Evangelos Benos

Evangelos Benos

Bank of England

Richard Payne

City University London - The Business School

Michalis Vasios

European Securities and Markets Authority

Date Written: January 15, 2016

Abstract

We use transactional data from the USD and EUR segments of the plain vanilla interest rate swap market to assess the impact of the Dodd-Frank mandate that US persons must trade certain swap contracts on Swap Execution Facilities (SEFs). We find that, as a result of SEF trading, activity increases and liquidity improves across the swap market, with the improvement being largest for USD mandated contracts which are most affected by the mandate. The associated reduction in execution costs is economically significant. For example, execution costs in USD mandated contracts, where SEF penetration is highest, drop, for market end-users alone, by $3 million-$4 million daily relative to EUR mandated contracts and in total by about $7 million-$13 million daily. We also find that inter-dealer activity drops concurrently with the improvement in liquidity suggesting that execution costs may have fallen because dealer intermediation chains became shorter. Finally, we document that the Dodd-Frank mandate caused the activity of the EUR segment of the market to geographically fragment. However, this does not appear to have compromised liquidity. Overall, our results suggest that the improvements in transparency brought about by the Dodd-Frank trading mandate have substantially improved interest rate swap market liquidity.

Keywords: Swap Execution Facilities, transparency, market liquidity

JEL Classification: G10, G12, G14

Suggested Citation

Benos, Evangelos and Payne, Richard G. and Vasios, Michalis, Centralized Trading, Transparency and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd-Frank Act (January 15, 2016). Bank of England Working Paper No. 580, Available at SSRN: https://ssrn.com/abstract=2716066 or http://dx.doi.org/10.2139/ssrn.2716066

Evangelos Benos (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Richard G. Payne

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Michalis Vasios

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

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