Central Counterparty Auctions and Loss Allocation

Robert Oleschak



JEL classification
C72, D44, D53, D82, G23, G28

Central Counterparty, Default Management, Auctions, Recovery


In this paper, I analyse first-price single-item auctions in case of a default of a clearing agent in a central counterparty (CCP). The bidding surviving clearing agents attach a private value to the item to be sold and share eventual losses with the CCP. The CCP as auctioneer can choose the time of auction and the loss allocation mechanism in order to minimize her own losses.

I show that incentives (e.g. juniorising default fund contributions) are irrelevant for the outcome of the auction but that the composition of bidders matters. Auctions with a subset of bidders have distributional effects, i.e. the invited bidders are better off than those who are not invited to the auction. Conversely, inviting additional bidders (i.e., clients) could lead to an inefficient auction, yet their participation leaves the CCP as well as all the losing bidders better off. Recovery measures increase the safety and soundness of CCPs but can adversely affect incentives of a CCP in an auction. I show that in cases of extreme losses a CCP would rather prefer to wait than to swiftly conduct an auction, thereby inflicting costs on the financial system. Finally, I show that tear-ups are not only more costly than other recovery measures but that they fail to coordinate the actions of bidders, leading to an inferior equilibrium for all.