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Dealers' insurance, market structure, and liquidity

Author

Listed:
  • Francesca Carapella
  • Cyril Monnet

Abstract

We develop a parsimonious model to study the effect of regulations aimed at reducing counterparty risk on the structure of over-the-counter securities markets. We find that such regulations promote entry of dealers, thus fostering competition and lowering spreads. Greater competition, however, has an indirect negative effect on market-making profitability. General equilibrium effects imply that more competition can distort incentives of all dealers to invest in efficient technologies ex ante, and so can cause a social welfare loss. Our results are consistent with empirical findings on the effects of post-crisis regulations and with the opposition of some market participants to those regulations.

Suggested Citation

  • Francesca Carapella & Cyril Monnet, 2020. "Dealers' insurance, market structure, and liquidity," BIS Working Papers 861, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:861
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    More about this item

    Keywords

    liquidity; dealers; insurance; central counterparties;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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