OTC Premia

50 Pages Posted: 28 Aug 2018

See all articles by Gino Cenedese

Gino Cenedese

Fulcrum Asset Management

Angelo Ranaldo

University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen

Michalis Vasios

European Securities and Markets Authority

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2018

Abstract

Using trade repository data at transaction and ID levels, we provide the first systematic study of interest rate swaps traded over the counter in the new regulatory regime. We find substantial and persistent heterogeneity in derivatives prices consistent with a pass-through of regulatory costs on to market prices via the so-called valuation adjustments (XVA). Specifically, a client pays a higher price to buy interest-rate protection from a dealer (ie, 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. Also, OTC premia are absent for dealers suggesting dealers' bargaining power.

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

JEL Classification: G18

Suggested Citation

Cenedese, Gino and Ranaldo, Angelo and Vasios, Michalis, OTC Premia (August 17, 2018). Bank of England Working Paper No. 751, Available at SSRN: https://ssrn.com/abstract=3233714 or http://dx.doi.org/10.2139/ssrn.3233714

Gino Cenedese

Fulcrum Asset Management ( email )

66 Seymour Street
London, W1H 5BT
United Kingdom

Angelo Ranaldo

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Michalis Vasios (Contact Author)

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

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