IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/100033.html
   My bibliography  Save this paper

Optimal Bidder Selection in Clearing House Default Auctions

Author

Abstract

Central counterparties’ ability to hold successful default auctions is critically important to financial stability. However, due to the unique features of these auctions, standard auction theory results do not apply. We present a model of CCP default auctions that incorporates both the vital, but non-standard, objective of minimizing the likelihood it suffers reputationally damaging losses and the potential for information leakage to affect CCP members’ private portfolio valuations. This gives insight into the key question of how CCPs should select auction participants. In particular, we prove that an entry fee, by appropriately incentivizing some members not to enter the auction, can maximize the probability of auction success. The result is novel, both in auction theory and as a mechanism for CCP auction design.

Suggested Citation

  • Rodney Garratt & David Murphy & Travis D. Nesmith & Xiaopeng Wu, 2024. "Optimal Bidder Selection in Clearing House Default Auctions," Finance and Economics Discussion Series 2023-033r1, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:100033
    DOI: 10.17016/FEDS.2023.033r1
    Note: Revision
    as

    Download full text from publisher

    File URL: https://www.federalreserve.gov/econres/feds/files/2023033r1pap.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.17016/FEDS.2023.033r1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    Auctions; Central counterparties; CCPs; Default; Derivatives; Entry mechanism; Financial stablity; Systemic risk;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:100033. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.