Swap Trading after Dodd-Frank: Evidence from Index CDS

The Dodd-Frank Act mandates that certain standard OTC derivatives, also known as swaps, must be traded on swap execution facilities (SEFs). Using message-level data, we provide a granular analysis of dealers' and customers' trading behavior on the two largest dealer-to-customer SEFs for index CDS. On average, a typical customer contacts few dealers when seeking liquidity. A theoretical model shows that the benefit of competition through wider order exposure is mitigated by a winner's curse problem and dealer-customer relationships. Consistent with the model, we find that order size, market conditions, and customer-dealer relationships are important empirical determinants of customers' choice of trading mechanism and dealers' liquidity provision.

Keywords: Dodd-Frank Act, OTC Derivatives, Swaps, Swap Execution Facility, Request for Quotes, Auction, Competition, Winner's Curse, Relationship

JEL Classification: G01, G12, G14, G18

Suggested Citation: Suggested Citation

Riggs, Lynn and Onur, Esen and Reiffen, David and Zhu, Haoxiang, Swap Trading after Dodd-Frank: Evidence from Index CDS (August 17, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3047284 or http://dx.doi.org/10.2139/ssrn.3047284