BoE paper: XVA pass-throughs mean bilateral IRS is more expensive than cleared

OTC premia
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.

The full paper is available at https://www.bankofengland.co.uk/working-paper/2018/otc-premia

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