Several trade associations provided feedback on key areas of central counterparty ("CCP") default management auctions. The comments were in response to a discussion paper issued by the Committee on Payments and Market Infrastructures ("CPMI") and IOSCO.

As described in the paper, a CCP may use a default management auction to "transfer a defaulting participant's positions or subset thereof to a non-defaulting participant." CPMI and IOSCO requested feedback on five issues raised by default management auctions:

  • roles and responsibilities in default management auctions;
  • considerations for a successful default management auction;
  • operational considerations;
  • client participation; and
  • the default of a common participant across multiple CCPs.

ISDA and FIA prefaced their feedback by clarifying their perspective on the main objective of default management auctions. ISDA and FIA stated that the goal of any auction is to liquidate the defaulting clearing member's portfolio while simultaneously minimizing the (i) disruption to the market and (ii) cost to the defaulting clearing member, CCP and non-defaulting members, and clients. To achieve this, ISDA and FIA advised CPMI and IOSCO to balance the "flexibility" of the rules concerning CCPs, while maintaining strong governance.

According to ISDA and FIA, participating CCPs, clients and clearing members ("CMs") agreed on most topics with the exception of two major areas: (i) the scope of the default management group's ("DMG") role, including the requirement to consult with the DMG in auctions for all products, and (ii) whether or not clearing member and client incentives are aligned. ISDA and FIA suggested, among other things, that (i) CMs should have a role in default management governance, given that they "underwrit[e] the tail risk of default management," (ii) CCPs should not take into account their own financial soundness in determining next steps in the default management process, as that could lead to moral hazard, (iii) more granular auction packages would attract more and better bids and, where possible, smaller portfolios grouped according to asset class would be easier to price and absorb, (iv) CCPs examine a series of considerations in determining who should be permitted to participate in an auction, and (v) client participation in auctions would be beneficial, though there was disagreement among CMs, clients and a CCP as to how that participation should occur.

The Managed Funds Association ("MFA") and SIFMA AMG urged, among other things, that CPMI and IOSCO issue a recommendation for clients to be included in the default management process. The MFA and SIFMA AMG asserted that client participation is "critical to the auction's success" due to a number of factors, including (i) aligned incentives, (ii) participant diversity, (iii) higher auction demand, and (iv) increased sources of available private capital. The MFA and SIFMA AMG warned that restricting participants in CCP default management auctions to clearing members would also restrict market depth and available liquidity, which may increase the cost of the auction and overall cost to the CCP. The MFA and SIFMA AMG pushed back on a suggestion that clients should be required to contribute to a CCP guaranty fund prior to bidding in a default auction, stating that clients are still subject to losses through haircuts and tear-ups if a default process does not successfully allocate a defaulting member's positions, and that clients already have strong incentives to "bid aggressively to ensure the resilience of a CCP."

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