Concept of success and failure with businessman on statistics bar

Global financial regulators are consulting on processes to guard against systemic risk by dealing with a failing firm’s derivatives holdings.

The International Organization of Securities Commissions, an umbrella group of global securities regulators, and the banking regulators’ Committee on Payments and Market Infrastructures published a joint consultation paper on Wednesday that deals with central counterparties’ (CCPs’) default management auctions.

Default auctions are a procedure that a CCP can use to shore up financial stability by transferring the derivatives positions of a failing firm to solvent firms.

“A CCP’s ability to effectively manage a default is essential to its resilience and can help reduce systemic risk,” the regulators stated.

The paper covers various aspects of a CCP default auctions, including governance issues and operational considerations, in an effort to facilitate discussion about the processes used by CCPs in planning and executing effective auctions.

“The effective conduct of auctions necessitates clarity and understanding of auction procedures, as well as documented and transparent auction governance arrangements, on the part of both the CCP and the auction participants,” the paper noted.

Comments on the paper are due by August 9.