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Swap trading after Dodd-Frank: Evidence from index CDS

Lynn Riggs, Esen Onur (), David Reiffen and Haoxiang Zhu

Journal of Financial Economics, 2020, vol. 137, issue 3, 857-886

Abstract: The Dodd-Frank Act mandates that certain standard over-the-counter (OTC) derivatives must be traded on swap execution facilities (SEFs). Using message-level data, we provide a granular analysis of dealers’ and customers’ trading behavior on the two largest dealer-to-customer SEFs for index credit default swaps (CDS). On average, a typical customer contacts few dealers when seeking liquidity. A theoretical model shows that the benefit of competition through wider order exposure is mitigated by a winner’s curse problem and dealer-customer relationships. Consistent with the model, we find that order size, market conditions, and customer-dealer relationships are important empirical determinants of customers’ choice of trading mechanism and dealers’ liquidity provision.

Keywords: Dodd-Frank Act; OTC derivatives; Swaps; Swap execution facility; Request for quotes; Auction; Competition; Winner’s curse; Relationship (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jfineco.2020.03.008

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