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Discriminatory Pricing of Over-the-Counter Derivatives

Yannick Timmer, Harald Hau (), Peter Hoffmann and Sam Langfield ()

No 2019/100, IMF Working Papers from International Monetary Fund

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

Keywords: WP; client sophistication; forward rate; dealer-client relationship; FX market; market structure; Transaction costs; search frictions; information rents; RFQ platforms; sophisticated client; RFQ platform; client order; relationship dealer; information rent; Over-the-counter markets; Public investment and public-private partnerships (PPP); Currency markets; Price adjustments; Securities markets; Global (search for similar items in EconPapers)
Pages: 45
Date: 2019-05-07
New Economics Papers: this item is included in nep-mst
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Working Paper: Discriminatory Pricing of Over-the-Counter Derivatives (2017) Downloads
Working Paper: Discriminatory Pricing of Over-The-Counter Derivatives (2017) Downloads
Working Paper: Discriminatory pricing of over-the-counter derivatives (2017) Downloads
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Handle: RePEc:imf:imfwpa:2019/100