Discriminatory Pricing of Over-the-Counter Derivatives

46 Pages Posted: 14 Jun 2019

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: May 2019

Abstract

New regulatory data reveal extensive price discrimination against non-financialclients in the FX derivatives market. The client at the 90th percentile pays aneffective spread of 0.5%, while the bottom quarter incur transaction costs of lessthan 0.02%. Consistent with models of search frictions in over-the-counter markets,dealers charge higher spreads to less sophisticated clients. However, price discriminationis eliminated when clients trade through multi-dealer request-for-quote platforms.We also document that dealers extract rents from captive clients and marketopacity, but only for contracts negotiated bilaterally with unsophisticated clients.

Keywords: Market interest rates, Credit default swap, Exchange markets, Interest parity, Currency swaps, Transaction costs, search frictions, information rents, RFQ platforms, RFQ, mid-price, counterparties, price adjustment, price discrimination

JEL Classification: G14, G18, D4, F16, E01, G21, E52, E64

Suggested Citation

Hau, Harald and Hoffmann, Peter and Langfield, Sam and Timmer, Yannick, Discriminatory Pricing of Over-the-Counter Derivatives (May 2019). IMF Working Paper No. 19/100. Available at SSRN: https://ssrn.com/abstract=3404056

Harald Hau (Contact Author)

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

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 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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