Central counterparty auction design

Gerardo Ferrara and Xin Li ()
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Xin Li: University of Westminster

No 669, Bank of England working papers from Bank of England

Abstract: We analyze the role of auctions in managing the default of a clearing member in a generic central counterparty (CCP). We first consider three established alternative sealed bid auction formats in which clearing members simultaneously submit bids for a defaulting clearing member’s portfolio: first price without penalty, first price with penalty, and first price with budget constraints. Under our assumptions regarding bidders’ behaviour, although the revenue of the portfolio by the CCP might be the same for these auction formats mentioned above, there could be significant differences in the externalities arising from each of them. Additionally, this paper considers how mechanisms to incentivize competitive bidding could, in some circumstances, have adverse implications for financial stability by inefficiently distributing losses to surviving clearing members. In response to these potential adverse implications, we propose a fourth auction type — second price with loss sharing — which takes into account a bidder’s consideration that may bear part of the CCP’s losses.

Keywords: Auction; default management; central counterparty (search for similar items in EconPapers)
JEL-codes: D44 G18 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017-08-14
New Economics Papers: this item is included in nep-des and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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