## Discriminatory Pricing of Over-the-Counter Derivatives

_IMF Working Papers, May 7, 2019_

## Source details

**Canonical URL:** [Discriminatory Pricing of Over-the-Counter Derivatives](https://www.imf.org/en/publications/wp/issues/2019/05/07/discriminatory-pricing-of-over-the-counter-derivatives-46686)

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## Bibliographic details
- Authors: Harald Hau, Peter Hoffmann, Sam Langfield, Yannick Timmer
- Published: May 7, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498303774.001

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### Key findings and evidence
- 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%.
- The bottom quarter incur transaction costs of less than 0.02%.
- Dealers charge higher spreads to less sophisticated clients, consistent with models of search frictions in over-the-counter markets.
- Price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms (RFQ platforms).
- Dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.

### Analysis and interpretation
- Market structure and search frictions: Evidence supports frameworks where dealer market power and client search costs lead to heterogeneity in pricing across client types.
- Client sophistication: Sophistication is a key determinant of spreads charged; less sophisticated clients face systematically higher effective costs.
- Trading venue effects: Use of multi-dealer RFQ platforms reduces or eliminates discriminatory pricing, implying venue-based competition mitigates information rents.
- Bilateral negotiation risks: Bilaterally negotiated contracts with unsophisticated clients and opaque market conditions create opportunities for dealers to extract rents.

### Policy implications and recommendations
- Promote multi-dealer RFQ platforms to increase competition and reduce discriminatory pricing in FX derivatives for non-financial clients.
- Enhance transparency and reduce market opacity to limit information rents that dealers extract from captive or unsophisticated clients.
- Target regulatory attention to bilateral OTC contracting practices involving unsophisticated clients to protect against excessive spreads.

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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/07/discriminatory-pricing-of-over-the-counter-derivatives-46686_