Swap Trading after Dodd-Frank: Evidence from Index CDS
59 Pages Posted: 4 Oct 2017 Last revised: 26 Jan 2018
Date Written: January 26, 2018
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 an endogenous winner's curse problem. 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