In a clearing-member default, central counterparties (CCPs) auction the defaulting member’s portfolio to flatten their risk exposure. All non-defaulting members must bid on the entire portfolio as a single package, and failure to do so risks forfeiting default-fund contributions.

The challenge is that large, complex portfolios often contain contracts that some members cannot or will not price. Many bids are therefore incomplete, causing auctions to fail and exposing the CCP to potential loss.

A contingent bidder model could address this. Here, a third-party trading entity provides conditional bids for contracts where members lack capacity. These bids could be structured as credit-contingent agreements, offering a defensive tool for clearing members and an asymmetric opportunity for the bidder.

Alternatively, a hedge fund could act directly as a liquidity provider in CCP auctions, effectively “plugging the gaps” in dealer bids. This improves auction efficiency while capturing the widest bid–offer spreads available in the market. A CCP auction following a major default represents one of the most concentrated trading opportunities imaginable — yet the market remains poorly prepared for it.