Don’t run CCP auctions by fear, study argues

Paper by BoE economist and co-authors backs ‘second-price’ auctions and limited penalties

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Threats may be an effective way for central counterparties (CCPs) to get their members to bid on defaulted portfolios but they could backfire in a crisis, new research claims.

Instead of penalties for non-participation, the research argues for an overhaul of the mechanics of default auctions, with one eye on making the price easier to digest for the winner, and another on limiting the pain for the losers.

The research was conducted by Gerardo Ferrara, an economist at the Bank of England