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Working Paper
Optimal Bidder Selection in Clearing House Default Auctions
Central counterparties’ ability to hold successful default auctions is critically important to financial stability. However, due to the unique features of these auctions, standard auction theory results do not apply. We present a model of CCP default auctions that incorporates both the vital, but non-standard, objective of minimizing the likelihood it suffers reputationally damaging losses and the potential for information leakage to affect CCP members’ private portfolio valuations. This gives insight into the key question of how CCPs should select auction participants. In particular, we ...
Working Paper
Optimal Bidder Selection in Clearing House Default Auctions
Default auctions at central counterparties (or 'CCPs') are critically important to financial stability. However, due to their unique features and challenges, standard auction theory results do not immediately apply. This paper presents a model for CCP default auctions that incorporates the CCP's non-standard objective of maximizing success above a threshold rather than revenue, the key question of who participates in the auction and the potential for information leakage affecting private portfolio valuations. We show that an entry fee, by appropriately inducingmembers to participate or not, ...