IMF Working Papers

Discriminatory Pricing of Over-the-Counter Derivatives

By Harald Hau, Peter Hoffmann, Sam Langfield, Yannick Timmer

May 7, 2019

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Harald Hau, Peter Hoffmann, Sam Langfield, and Yannick Timmer. Discriminatory Pricing of Over-the-Counter Derivatives, (USA: International Monetary Fund, 2019) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.

Subject: Currency markets, Expenditure, Financial markets, Over-the-counter markets, Price adjustments, Prices, Public investment and public-private partnerships (PPP), Securities markets

Keywords: Client order, Client sophistication, Currency markets, Dealer-client relationship, Forward rate, FX market, Global, Information rent, Information rents, Market structure, Over-the-counter markets, Price adjustments, Public investment and public-private partnerships (PPP), Relationship dealer, RFQ platform, RFQ platforms, Search frictions, Securities markets, Sophisticated client, Transaction costs, WP

Publication Details

  • Pages:

    45

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/100

  • Stock No:

    WPIEA2019100

  • ISBN:

    9781498303774

  • ISSN:

    1018-5941