CPMI and IOSCO published, for public comment, a discussion paper on central counterparty (CCP) default management auctions. The discussion in this paper reflects the current practices at one or more CCPs and identifies the types of factors that one or more CCPs take into account when planning and conducting default management auctions. Additionally, the discussion paper identifies certain considerations that may be useful for CCPs to take into account when planning for auctions. CPMI and IOSCO also published a cover note listing the issues on which inputs are being solicited. The comment period on this discussion paper ends on August 09, 2019.
This discussion paper is intended to facilitate the sharing of existing practices and views on default management auctions and to advance industry efforts and foster dialog on the key concepts, processes, and operational aspects used by CCPs in planning and executing effective default management auctions. The effective and smooth management of a participant default is essential to the resilience of a CCP and can help reduce systemic risk. A default management auction is one of the tools that a CCP may use to transfer a defaulting participant’s positions, or subset thereof, to a non-defaulting participant, thus restoring the CCP to a matched book. The paper presents a number of questions and invites comments on the benefits and challenges of various approaches as well as on the potential ways to overcome challenges inherent in default management auctions.
The paper focuses on the following five key aspects of the default management auctions of a CCP:
- Governance—The paper discusses the roles and responsibilities of key stakeholders in a CCP’s default management auction. The paper specifies that an effective auction process includes specifying the roles and responsibilities of the auction participants and a CCP’s board of directors, management, and other personnel, who may be involved in the auction process.
- Considerations for a successful default management auction—The paper outlines considerations of a successful default management auction and, by contrast, identifies scenarios in which a CCP may determine an auction to be unsuccessful. It also discusses activities that take place before the auction and the potential options available to a CCP in the event of an unsuccessful auction.
- Operational considerations—The paper describes the operational issues a CCP considers when planning and executing a default management auction.
- Client participation—The paper highlights that a CCP and its clearing members may take into account several considerations when deciding whether to permit or facilitate client participation, including liability of the clearing member, incentives of clients to bid competitively, the level of legal and operational readiness at the client, and the risk of information leakage.
- Default of a common participant across multiple CCPs—The paper identifies potential issues inherent when two or more CCPs conduct auctions concurrently, thus creating further operational and/or financial strains on auction participants.
Comment Due Date: August 09, 2019
Keywords: International, Banking, Securities, CCP, Systemic Risk, Default Management Auction, Governance, CPMI, IOSCO
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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