The Liquidity of Credit Default Index Swap Networks

Abstract

Recent regulatory reforms like the mandatory clearing of standardized swap contracts and mandatory trading on centralized execution platforms have significantly changed the derivatives landscape. These reforms have, in certain cases, led the market to increasingly trade on multilateral platforms, potentially affecting the average cost of execution. Prior research has examined the effects of centralized trading on execution costs and has generally found reduced costs, especially for entities with higher transaction volumes or greater execution flexibility. We use detailed information on the trading of credit index swaps, the most actively traded credit derivatives instrument, between May 2014 and Sep 2016. We find that the customers who trade with a higher number of dealers (high network degree) and those who trade with the most active dealers (high network centrality) incur lower trading costs; for at least the less liquid indices, this cost improvement increases as trade size increases. We also identify a few liquidity trends: measures like average daily volumes, average price impact, and price dispersion have remained steady or have improved. However, during the same period, trade sizes for certain indices may have declined slightly.