Optimal Bidder Selection in Clearing House Default Auctions

Rodney Garratt, David Murphy, Travis Nesmith and Xiaopeng Wu ()

No 2023-033r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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 prove that an entry fee, by appropriately incentivizing some members not to enter the auction, can maximize the probability of auction success. The result is novel, both in auction theory and as a mechanism for CCP auction design.

Keywords: Auctions; Central counterparties; CCPs; Default; Derivatives; Entry mechanism; Financial stablity; Systemic risk (search for similar items in EconPapers)
JEL-codes: D44 D47 G13 G23 (search for similar items in EconPapers)
Pages: 47 p.
Date: 2023-05-12, Revised 2024-08-01
New Economics Papers: this item is included in nep-des
Note: Revision
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-33

DOI: 10.17016/FEDS.2023.033r1

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