Finance and Economics Discussion Series (FEDS)
May 2023
Optimal Bidder Selection in Clearing House Default Auctions
Rodney Garratt; David Murphy; Travis Nesmith; Xiaopeng Wu
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 inducing members 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.
DOI: https://doi.org/10.17016/FEDS.2023.033
PDF: Full Paper
Related Materials: Accessible materials (.zip)
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