Auction characteristics

Defining characteristics of Term Auctions.

Sealed-bid

Term Auctions are "sealed-bid" auctions, where participants' tenders (to borrow or lend) are hidden from the public through a hashing algorithm until the market clears and bids/offers are revealed.

Single-shot

Term Auctions are "single-shot" auctions. Offers submitted during the auction window are batched and held to clear at a pre-announced point in time. This is in contrast to continuous auctions that operate much like central limit order books found on centralized exchanges.

Single-price

Term Auctions are "single-price" auctions, where all borrowers and lenders transact at a single clearing price. Lenders asking at or below the clearing price (low cost suppliers) and borrowers bidding at or above the clearing price (most willing to pay) are eligible to receive an allocation through the auction.

Second-price

The clearing price is determined as an average of second best offer on the borrowing and lending side. This is to reduce incentives for participants to tender any bids or offers at any price other than their true valuation. e.g. incentive compatibility.

Double-auction

Term Auctions are "double-auctions" where both borrowers and lenders actively participate and submit offers to borrow and lend, respectively. This is in contrast to the more familiar single-auction in which only one party (typically the buyer) is active (e.g. auction house or e-bay seller selling to the highest active bidder).

Pro-rata on the margin allocation

Allocations prioritize cheapest cost suppliers on the lending side and borrowers most willing to pay. This ensures that resources are allocated to the most efficient suppliers and those with the best use of proceeds. Where there is excess supply or demand at the clearing price on the margin, those marginal lenders (borrowers) are allocated in proportion to their share of all offers (bids) at the marginal price. This process is standard convention in traditional finance (e.g. U.S. Treasury auctions).