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Regulatory Reforms and Price Heterogeneity in an OTC Derivative Market

August 18, 2023
Daisuke Miyakawa*1
Takemasa Oda*2
Taihei Sone*3


After the great financial crisis in the late 2000s, the over-the-counter (OTC) derivative markets started to face a set of new regulatory reforms. In this study, we empirically examine how and whether these reforms have achieved the transparent OTC derivative market accompanied by homogeneous prices as one of its intended goals. To do so, we use data from the universe of JPY-denominated interest rate swap (IRS) contracts that were executed in the period from April 2013 to October 2021 and involved at least one Japan-based entity. First, as reported in Cenedese et al. (2020), we observe a higher fixed rate for bilateral clearing than for central clearing even after the introduction of a quantity-based measure: the central counterparty (CCP) mandate. Second, such price heterogeneity temporarily increased but eventually diminished after the introduction of new margin rules for bilateral clearing. These results indicate that the ultimate source of price heterogeneity had been the insufficient margin provision in the bilateral clearing that the reforms effectively resolved.

JEL classification
G12, G15, G18, G20, G28.

Interest rate swap, regulatory reforms, over-the-counter, central clearing, margin

The authors thank Jun Uno, Nao Sudo, and seminar participants at Waseda University, Bank of Japan, Nippon Finance Association 2022 Fall Congress, and RIETI for their valuable comments. The authors gratefully acknowledge the provision of data by Financial Services Agency, The Japanese Government (JFSA).

  1. *1School of Commerce, Waseda University, and Financial Markets Department, Bank of Japan
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  2. *2Financial Markets Department, Bank of Japan (currently at Institute for Monetary and Economic Studies, Bank of Japan)
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  3. *3Financial Markets Department, Bank of Japan
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