Default Management Auctions represent one of the tools that CCPs may use to successfully deal with a default management event in order to reduce market contagion and promote financial stability. The European Association of CCP Clearing Houses (EACH) welcomes the opportunity to provide input to the CPMI-IOSCO discussion paper ‘A discussion paper on central counterparty default management auctions’. Some of the highlights of the EACH response include:
- No need for additional granular standards
- EACH believes that while discussions with authorities, clearing members and clients are extremely useful to consider potential ways to further improving the functioning of the market, we do not think there is a need for additional granular standards on CCP auctions. The CCP rulebooks currently intend to balance the need for predictability of auction processing and flexibility.
- Roles and responsibilities
- Ex-ante predictability/testing - EACH considers it appropriate that the CCP’s rulebook includes clear documentation on the default management process tools, governance arrangements and obligations of the clearing members.
- Flexibility for unexpected market conditions - In line with Principle 13 of the Principles for financial market infrastructures (PFMIs), due to unpredictable market conditions at the time of a CCP member default, predefined rules have to allow certain flexibility for CCPs to act appropriately and to ensure the best possible liquidation outcome while disrupting the market to the least extent possible.
- Default Management Groups (DMGs) on a case-by-case basis - EACH Members have default management teams responsible for addressing default management events. While some CCPs have DMGs that involve clearing members (e.g. seconded traders), CCPs should have the flexibility to decide on asset class level if the convention of such a DMG is required or not. Seconded traders may or may not be needed, depending on e.g. if an order book or clear prices exists.
- Considerations for a successful auction
- Definition of a successful auction - While most EACH Members generally agree with the definition of successful auction, EACH observes that there are some challenges in introducing a prescriptive definition of what constitutes a successful auction. CCPs cannot control the end result of an auction in monetary terms, so EACH considers it appropriate that a successful auction be also based on the factors that are under the CCP’s control (e.g. number of participants invited, as the CCP cannot directly influence the quality of the bids received).
- Incentives - EACH considers it appropriate that CCPs have properly balanced incentives. These may include:
- Juniorisation of the default fund – EACH Members generally agree that juniorisation seems to be one of the most effective incentives
- Mandatory participation in auctions
- Fines
- Operational considerations - CCPs and their clearing members should continually improve and test the default management process by regularly exercising the process.
- Client participation - EACH believes that client participation increases the probability of a successful liquidation process returning the CCP to a matched book. Client participation may depend on whether the CCP believes there is a need to get client bids (e.g. if the clearing members are only ‘clearers’ and have no proprietary risk-taking capability).
- Testing though multi-CCP drills - It is beneficial for members and CCPs to simultaneously fire drill a global event across multiple CCPs as in times of crisis most likely multiple CCPs will be impacted and may run their default management process in parallel.
For more information, please find attached the EACH response or visit our website www.eachccp.eu