Andy Atkeson, Andrea Eisfeldt, Pierre-Olivier Weill, 17 September 2014

Entry and trading in over-the-counter (OTC) derivatives markets have received considerable attention. However, many critical questions remain unaddressed. This column describes a formal study of banks’ incentives to enter and trade in OTC derivatives markets. In equilibrium, only large banks enter to become dealers, and middle-sized banks only enter as customers. Care should be given not to reduce rents so much when dealer participation costs are high.

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