Discriminatory Pricing of Over-the-Counter Derivatives

42 Pages Posted: 2 Jan 2018

See all articles by Harald Hau

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Sam Langfield

European Central Bank

Yannick Timmer

International Monetary Fund (IMF) - Research Department; International Monetary Fund (IMF) - Financial Studies Division

Multiple version iconThere are 3 versions of this paper

Date Written: December 2017

Abstract

New regulatory data reveal extensive discriminatory pricing in the foreign exchange derivatives market, in which dealer-banks and their non-financial clients trade over-the-counter. After controlling for contract characteristics, dealer fixed effects, and market conditions, we find that the client at the 75th percentile of the spread distribution pays an average of 30 pips over the market mid-price, compared to competitive spreads of less than 2.5 pips paid by the bottom 25% of clients. Higher spreads are paid by less sophisticated clients. However, trades on multi-dealer request-for-quote platforms exhibit competitive spreads regardless of client sophistication, thereby eliminating discriminatory pricing.

Keywords: corporate hedging, Dealer spreads, information rents, RFQ platforms

JEL Classification: D4, G14, G18

Suggested Citation

Hau, Harald and Hoffmann, Peter and Langfield, Sam and Timmer, Yannick, Discriminatory Pricing of Over-the-Counter Derivatives (December 2017). CEPR Discussion Paper No. DP12525. Available at SSRN: https://ssrn.com/abstract=3095575

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Yannick Timmer

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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