All Times ET
Keywords: Cross-currency swap, Trade repository, Network analysis
Gauging liquidity conditions in over-the-counter derivative markets is particularly difficult due to lack of granular data. For instance, cross-currency basis spreads are known to be an indicator of liquidity conditions in cross-currency swap market. Nevertheless, they do not yet reveal how market participants would react to unexpected market turbulence and change their trading behavior. With novel, transaction-level data on cross-currency swap market based on the reporting from trade repositories and financial institutions in Japan, this paper examines how market participants in cross-currency swap market for USD/JPY reacted to the COVID-19 crisis, which deteriorated the dollar funding availability in March 2020. As far as the authors know, this is the first study to look at the network structure of the cross-currency swap market over time. The key findings are twofold. First, liquidity providers for the dollar appear to have broken down trades into smaller blocks. Second, market participants traded with more counterparties than normal time. From April 2020 onwards, liquidity conditions in cross-currency swap market seem to have recovered following the policy actions by major central banks including expanding the central bank swap lines.