Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act

Evangelos Benos (), Richard Payne () and Michalis Vasios

No 580, Bank of England working papers from Bank of England

Abstract: We use transactional data from the USD and EUR segments of the plain vanilla interest rate swap market to assess the impact of the Dodd-Frank mandate that US persons must trade certain swap contracts on Swap Execution Facilities (SEFs). We find that, as a result of SEF trading, activity increases and liquidity improves across the swap market, with the improvement being largest for USD mandated contracts which are most affected by the mandate. The associated reduction in execution costs is economically significant. For example, execution costs in USD mandated contracts, where SEF penetration is highest, drop, for market end-users alone, by $3 million–$4 million daily relative to EUR mandated contracts and in total by about $7 million–$13 million daily. We also find that inter-dealer activity drops concurrently with the improvement in liquidity suggesting that execution costs may have fallen because dealer intermediation chains became shorter. Finally, we document that the Dodd-Frank mandate caused the activity of the EUR segment of the market to geographically fragment. However, this does not appear to have compromised liquidity. Overall, our results suggest that the improvements in transparency brought about by the Dodd-Frank trading mandate have substantially improved interest rate swap market liquidity.

Keywords: Swap Execution Facilities; transparency; market liquidity (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-01-15
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Centralized Trading, Transparency, and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd–Frank Act (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0580

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