OTC Premia

Abstract:

We provide the first systematic study of interest rate swaps traded over-the-counter in the new regulatory regime. Using trade repository data at transaction and ID levels, we find substantial and persistent heterogeneity in derivatives prices. Buying interest-rate protection for a dealer's client (i.e., paying the fixed rate) is more expensive if the contract is not cleared via a central counterparty. This OTC premium decreases by posting initial margin and with buyer's credit worthiness. Conversely, OTC premia are smaller or inexistent for dealers suggesting dealers' market power and a pass-through of regulatory costs on market prices consistent with so-called valuation adjustments (XVA).