Who's got the power? Bilateral oligopoly in credit derivatives markets

This paper investigates how the market power of dealers relative to customers affects transaction costs in credit default swap markets. Using detailed transaction data from the German single-name CDS market, we find that market concentration has increased and execution quality for non-centrally cleared CDS has deteriorated between 2010 and 2016. Controlling for counterparty risk and CDS characteristics, we show that dealers' market concentration worsens transaction costs. We also find that the bargaining power of customers may counterbalance dealers' market power. In particular, customers with more dealer connections, trading more often and in larger size obtain better prices.