Central counterparty auction design

Ferrara, G., Li, X. and Marszalec, D. 2019. Central counterparty auction design. Journal of Financial Market Infrastructures. 8 (2), pp. 47-58 2019.119. https://doi.org/10.21314/JFMI.2019.119

TitleCentral counterparty auction design
TypeJournal article
AuthorsFerrara, G., Li, X. and Marszalec, D.
Abstract

We analyze the role of auctions in managing the default of a central counterparty's clearing member. We first consider two established sealed-bid auction formats in which clearing members simultaneously submit bids for a defaulting clearing member's portfolio: first price and first price with budget constraints. We argue that the use of some form of penalty could have significant implications for financial stability by inefficiently distributing losses deriving from the unallocated portfolio to surviving clearing members. In response to these potential adverse implications, we propose a third auction type, second price with loss-sharing, which increases the revenue by allowing bidders to consider potential losses within their bidding function without passively waiting for a possible form of penalty.

KeywordsAuction
Default Management
Central Counterparty
Loss Distribution
Risk Allocation
Financial Stability
Article number2019.119
JournalJournal of Financial Market Infrastructures
Journal citation8 (2), pp. 47-58
ISSN2049-5404
2049-5412
Year2019
PublisherRisk Journals
Publisher's version
File Access Level
Open (open metadata and files)
Digital Object Identifier (DOI)https://doi.org/10.21314/JFMI.2019.119
Web address (URL)https://www.risk.net/journal-of-financial-market-infrastructures/7564226/central-counterparty-auction-design
Publication dates
Published22 Jun 2020

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