OTC premia

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 17 August 2018

Staff Working Paper No. 751

By Gino Cenedese, Angelo Ranaldo and Michalis Vasios

Using trade repository data at transaction and ID levels, we provide the first systematic study of interest rate swaps traded over the counter in the new regulatory regime. We find substantial and persistent heterogeneity in derivatives prices consistent with a pass-through of regulatory costs on to market prices via the so-called valuation adjustments (XVA). Specifically, a client pays a higher price to buy interest-rate protection from a dealer (ie, the client pays a higher fixed rate) if the contract is not cleared via a central counterparty. This OTC premium decreases by posting initial margin and with higher buyer's creditworthiness. Also, OTC premia are absent for dealers suggesting dealers' bargaining power.

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