CCP Auction Design

Central counterparties (CCPs) are systemically important. When a clearing member defaults, the CCP sells the defaulted portfolio to surviving members in an auction, and losses, if any, are partly absorbed by a cash pool prefunded by the surviving members. We propose a tractable auction model that incorporates this salient feature. We find that ``juniorization'' -- the CCP first uses prefunded cash of members who submit bad bids -- increases the auction price. Aggressive juniorization can push the auction price above the fair value and almost eliminate the need to use prefunded resources. Nonetheless, juniorization generates heterogeneous impact on members of different sizes.