ISDA and FIA (associations) welcome the efforts by CPMI and IOSCO on auction design, especially the extensive engagement with the industry including the two workshops held on this topic. The CPMI-IOSCO discussion paper on central counterparty default management auctions (the discussion paper) accurately represents the views presented at these workshops, including some questions where different constituents of the industry do not agree.
The following responses to the question posed in the discussion paper is a joint effort by the associations. Representatives from one CCP, clients and clearing members (CM) have contributed to this document. While not all CCPs have contributed and may not share all views presented here, one CCPs has contributed to this response. The paper does not reflect the views CCPs who haven’t participated, and many of these other CCPs are in disagreement with the views.
This response covers default management practices of CCPs clearing derivatives. Many but not all of the points made will equally apply to CCPs clearing repos and other securities products.
At the outset it is worth noting that we believe that the objective of an auction is to liquidate the defaulter(s)’s portfolio(s) while disrupting the market to the least extent possible and while minimizing the cost to the defaulter, the CCP and non-defaulting members and clients, both in normal times and in stressed market conditions.
To achieve that, a CCP requires flexibility within its rules on how to approach a particular market situation to achieve the best outcome. Such flexibility must however be complemented by strong governance, including a voice for both clearing members, whose mutualized resources are at risk, and clients whose trades are cleared through and positions are held at the CCP.
The participating CCP, clients and CMs agreed on most topics. There are two areas in which differences of views persist:
Governance: The scope of the default management group’s (DMG) role and the requirement to consult with the DMG in auctions across all products.
Client participation: Whether CM and client incentives are sufficiently aligned.