Swap Trading after Dodd-Frank: Evidence from Index CDS

67 Pages Posted: 4 Oct 2017 Last revised: 27 Aug 2019

See all articles by Lynn Riggs

Lynn Riggs

Commodity Futures Trading Commission (CFTC)

Esen Onur

Commodity Futures Trading Commission (CFTC)

David Reiffen

U.S. Commodity Futures Trading Commission (CFTC)

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: August 17, 2019

Abstract

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

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

Lynn Riggs

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Esen Onur

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

David Reiffen

U.S. Commodity Futures Trading Commission (CFTC) ( email )

Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
United States

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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