The CCP Recovery Game: The Default Auction as a Stag Hunt

49 Pages Posted: 8 Aug 2018 Last revised: 19 Oct 2020

See all articles by Nadav Orian Peer

Nadav Orian Peer

University of Colorado Law School

Rebecca Lewis

Yale University - Law School

Date Written: August 8, 2018


In this article, we use game theory to study crisis dynamics at derivatives clearinghouses (CCPs). The mandate to clear standardized derivatives through CCPs has been a pillar of post-crisis reforms. Since the resilience of CCPs is now crucial to financial stability, regulators, academics and practitioners are at work designing an adequate framework for CCP recovery and resolution. So far, however, few have studied the behavior of a CCP’s clearing members during crisis. Doing so requires both a formal economic model and an understanding of the legal and institutional features of CCP default auctions – the latter traditionally the domain of practitioners. Our paper is the first to unite these fields, providing a model that is rigorous and institutionally grounded. We analyze clearing members’ behavior at the auction that follows a clearing member default. We find that the auction works as a “stag hunt” game with two equilibria: a cooperative equilibrium, where clearing members bid boldly and avert crisis, and an uncooperative equilibrium where they bid timidly and the auction fails. The potential for a CCP to reach the uncooperative equilibrium suggests that a key goal of recovery planning should be to tilt clearing members’ incentives towards the socially optimal cooperative equilibrium.

Keywords: Financial crisis, Central counterparty clearing, CCP recovery and resolution, Game theory, Stag hunt, Default auction, Matched book, Tear-up, Variation margin gains haircutting (VMGH), Clearing mandate

JEL Classification: G10, G18, H12

Suggested Citation

Orian Peer, Nadav and Lewis, Rebecca, The CCP Recovery Game: The Default Auction as a Stag Hunt (August 8, 2018). Tulane Public Law Research Paper No. 18-9, Available at SSRN: or

Nadav Orian Peer (Contact Author)

University of Colorado Law School ( email )

401 UCB
Boulder, CO 80309
United States

Rebecca Lewis

Yale University - Law School ( email )

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