Bank of England staff paper finds Credit Suisse exposed FX derivatives clients paid about 16 basis points more in spreads after the March 2023 shock

The Bank of England published Staff Working Paper No. 1,154 analysing dealer-client trading relationships in the over-the-counter foreign exchange derivatives market using granular transaction-level data. The paper finds that relationships are persistent and that the March 2023 distress at Credit Suisse was associated with higher trading costs for clients that were more reliant on Credit Suisse, even though their overall trading activity did not fall. The analysis shows clients are more likely to trade with dealers used more recently and more heavily, and with whom they have outstanding positions in the same currency pair, consistent with search and bargaining frictions in a largely bilaterally cleared market. Around Credit Suisse’s collapse, clients with greater exposure to Credit Suisse experienced a larger increase in spreads than unexposed clients by about 16 basis points per notional dollar traded on average across maturities, with the higher costs arising through trades with non-Credit Suisse dealers; the results also suggest a roughly 24 basis point differential increase at exposed clients’ main non-Credit Suisse dealer. More exposed clients continued to trade with Credit Suisse in the post-period, while less exposed clients reduced activity with Credit Suisse and increased trading elsewhere, indicating greater ability to substitute counterparties. The working paper is published as research in progress to elicit comments and does not represent Bank of England policy.