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Centralized Trading, Transparency, and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd–Frank Act

Published online by Cambridge University Press:  03 December 2018

Evangelos Benos ,
Richard Payne  and
Michalis Vasios
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Abstract

We use proprietary transaction data on interest rate swaps to assess the effects of centralized trading, as mandated by Dodd–Frank, on market quality. Contracts with the most extensive centralized trading see liquidity metrics improve by between 12% and 19% relative to those of a control group. This is driven by a clear increase in competition between dealers, particularly in U.S. markets. Additionally, centralized trading has caused interdealer trading in EUR swap markets to migrate from the United States to Europe. This is consistent with swap dealers attempting to avoid being captured by the trade mandate in order to maintain market power.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 1 , February 2020 , pp. 159 - 192
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We are grateful to Hendrik Bessembinder (the editor), Jean-Edouard Colliard (discussant), Thierry Foucault (the referee), Michael Moore (discussant), Emil Siriwardane (discussant), Peter Van Tassel (discussant), David Bailey, Paul Bedford, Darrell Duffie, Pedro Gurrola-Perez, Wenqian Huang, Esen Onur, Angelo Ranaldo, Rhiannon Sowerbutts, Chester Spatt, and seminar participants at the Bank of England, the Bank of Greece, the Bank of Lithuania, the U.S. Commodity Futures Trading Commission (CFTC), the U.S. Securities and Exchange Commission (SEC), the European Securities and Markets Authority (ESMA), the European Systemic Risk Board (ESRB), the Federal Reserve Board, the U.K. Financial Conduct Authority (FCA), the 2016 Annual Central Bank conference on the Microstructure of Financial Markets, the 2016 European Finance Association meeting, the 2017 American Finance Association meeting, the 2017 conference on OTC derivatives at the New York Fed, the 2017 Midwest Finance Association meetings, the 2017 conference on OTC Markets and their Reform, the Brunel University, the University of Belfast, the University of Gothenburg, the University of St. Gallen, and the University of Southampton for helpful comments and suggestions. The views expressed in this paper are those of the authors and not necessarily those of the Bank of England.

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