Optimal Bidder Selection in Clearing House Default Auctions

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: 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