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Swap trading after Dodd-Frank: Evidence from index CDS

Author

Listed:
  • Riggs, Lynn
  • Onur, Esen
  • Reiffen, David
  • Zhu, Haoxiang

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.

Suggested Citation

  • Riggs, Lynn & Onur, Esen & Reiffen, David & Zhu, Haoxiang, 2020. "Swap trading after Dodd-Frank: Evidence from index CDS," Journal of Financial Economics, Elsevier, vol. 137(3), pages 857-886.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:3:p:857-886
    DOI: 10.1016/j.jfineco.2020.03.008
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Dodd-Frank Act; OTC derivatives; Swaps; Swap execution facility; Request for quotes; Auction; Competition; Winner’s curse; Relationship;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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