Staff Working Paper No. 1,154
By Gerardo Ferrara and Helene Hall
Using granular transaction-level data, this paper investigates the characteristics and implications of dealer-client trading relationships in the over-the-counter FX derivatives market. We first document that dealer-client trading relationships are persistent over time. Then, to shed light on the role of relationship strength for client access to these instruments during times of dealer stress, we examine the collapse of Credit Suisse in March 2023. Our analysis reveals that clients with greater exposure to Credit Suisse experienced a larger increase in spreads at the client level relative to unexposed clients by about 16 basis points per notional dollar traded on average across maturities, although their trading activity remained unchanged. The greater spread increases paid by clients who relied more heavily on Credit Suisse occurred through their trades with non-Credit Suisse dealers. While more exposed clients continued to trade with Credit Suisse in the post-period, less exposed clients reduced their trading activity with Credit Suisse, but increased their trading activity elsewhere, indicating an ability to substitute counterparties. These findings underscore the critical role of search and bargaining frictions in this market, particularly when a relationship dealer encounters adverse shocks.
The value of trading relationships in FX derivatives: evidence from Credit Suisse's collapse
