CCP auction design

Wenqian Huang and Haoxiang Zhu

Journal of Economic Theory, 2024, vol. 217, issue C

Abstract: Central counterparties (CCPs) are systemically important. When a clearing member defaults, the CCP sells the defaulted portfolio to surviving members in an auction, and losses, if any, are partly absorbed by a cash pool prefunded by the surviving members. We propose a tractable auction model that incorporates this salient feature. We find that “juniorization” – the CCP first uses prefunded cash of members who submit bad bids – increases the auction price. However, too aggressive juniorization can reduce members' total profit, presenting a misalignment between the CCP's objective and that of the members. A wider customer participation can increase both the auction price and the total profit of members and customers.

Keywords: Central counterparty (CCP); Auction; Default management (search for similar items in EconPapers)
JEL-codes: D44 G01 G23 (search for similar items in EconPapers)
Date: 2024
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Working Paper: CCP Auction Design (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:217:y:2024:i:c:s0022053124000322

DOI: 10.1016/j.jet.2024.105826

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