DP15569 Currency Mispricing and Dealer Balance Sheets
We find dealer-level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity. Our analysis uses a unique dataset of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the UK leverage ratio framework. Dealers that are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients' demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a pre-existing relationship.