OTC Premia

54 Pages Posted: 28 Aug 2018 Last revised: 13 Dec 2018

See all articles by Gino Cenedese

Gino Cenedese

Fulcrum Asset Management

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

Michalis Vasios

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: December 9, 2018

Abstract

Using unique data at transaction and identity levels, we provide the first systematic study of interest rate swaps traded over the counter. We find substantial and persistent heterogeneity in derivative prices consistent with a pass-through of regulatory costs on to market prices via so-called valuation adjustments (XVA). A client pays a higher price to buy interest-rate protection from a dealer (i.e., the client pays a higher fixed rate) if the contract is not cleared via a central counterparty. This OTC premium decreases by posting initial margin and with higher buyer's creditworthiness. OTC premia are absent for dealers suggesting bargaining power.

Keywords: interest rate swaps, financial regulation, central clearing, over-the-counter market, valuation adjustments

JEL Classification: G12, G15, G18, G20, G 28

Suggested Citation

Cenedese, Gino and Ranaldo, Angelo and Vasios, Michalis, OTC Premia (December 9, 2018). University of St.Gallen, School of Finance Research Paper No. 2018/18. Available at SSRN: https://ssrn.com/abstract=3233635 or http://dx.doi.org/10.2139/ssrn.3233635

Gino Cenedese (Contact Author)

Fulcrum Asset Management ( email )

66 Seymour Street
London, W1H 5BT
United Kingdom

Angelo Ranaldo

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Michalis Vasios

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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