Regulation, economies of scale and credit Ratings: A puzzle of declining market concentration in the OTC derivatives market

We explore what impact regulatory change had on the over-the-counter (OTC) derivatives market dynamics. We find that despite the increase in regulatory burden and the associated costs of derivative business for broker/dealers, there is no evidence suggesting that the competition in the OTC derivatives business among banks declined, nor that it caused an increase in concentration of market share. In fact, the opposite appears to be the case. We suggest that this can be explained by derivative end-users having to spread their OTC derivative business among a larger number of banks for risk-management reasons.