EconPapers    
Economics at your fingertips  
 

How does standardization affect OTC markets in the long term? Evidence from the small bang reform in the CDS market

Radu-Dragomir Manac, Chiara Banti and Neil Kellard

Journal of International Financial Markets, Institutions and Money, 2024, vol. 96, issue C

Abstract: Focusing on the most liquid segment of the European CDS market, this paper studies the impact of a key standardization reform, known as the CDS Small Bang. We document that the reform provided unexpected long-term consequences. Particularly, we show that the introduction of an upfront fee to standardize the cash flow of CDS contracts created an initial capital cost for traders, which acts as a friction that increases CDS prices. This relation holds after accounting for well-known determinants of spreads, suggesting a separate funding channel driven by the greater capital intensity of trading. This effect grows in magnitude for several years following the implementation of the reform, becomes stronger when dealers are likely to bear the initial capital cost and is present across all industries, except for swaps written on financials shortly after the reform was introduced.

Keywords: Standardization; Credit default swaps; CDS small bang; Funding costs (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042443124001094
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:96:y:2024:i:c:s1042443124001094

DOI: 10.1016/j.intfin.2024.102043

Access Statistics for this article

Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

More articles in Journal of International Financial Markets, Institutions and Money from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2025-03-19
Handle: RePEc:eee:intfin:v:96:y:2024:i:c:s1042443124001094