Optimal Bidder Selection in Clearing House Default Auctions

24 Pages Posted: 22 May 2023

See all articles by Rodney Garratt

Rodney Garratt

Bank for International Settlements (BIS)

David Murphy

London School of Economics - Law School

Travis D. Nesmith

Board of Governors of the Federal Reserve System

Xiaopeng Wu

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May, 2023

Abstract

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, can maximize the probability the auction succeeds. The result is novel, both in auction theory and as a mechanism for CCP auction design.

Keywords: Clearinghouse, Derivatives, futures and options, Central counterparties, CCPs, Bidder selection, Auction theory, Default auctions

JEL Classification: G33, D47, G32, D44, G29

Suggested Citation

Garratt, Rodney and Murphy, David and Nesmith, Travis D. and Wu, Xiaopeng, Optimal Bidder Selection in Clearing House Default Auctions (May, 2023). FEDS Working Paper No. 2023-33, Available at SSRN: https://ssrn.com/abstract=4453931 or http://dx.doi.org/10.17016/FEDS.2023.033

Rodney Garratt (Contact Author)

Bank for International Settlements (BIS) ( email )

David Murphy

London School of Economics - Law School

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

Travis D. Nesmith

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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(202) 872 7533 (Fax)

HOME PAGE: http://www.federalreserve.gov/research/staff/nesmithtravisd.htm

Xiaopeng Wu

University of Toronto - Rotman School of Management ( email )

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