Are CDS Auctions Biased and Inefficient?

We study the design of CDS auctions, which determine the payments by CDS sellers to CDS buyers following the defaults of bonds. Through a simple model, we nd that the current two-stage design of CDS auctions leads to biased prices. First, dealers may manipulate the rst-stage quotes to prot from their CDS positions. Second, various restrictions imposed on both stages of CDS auctions prevent certain investors from participating in the price-discovery process. The resulting allocations of bonds are also inecient. As a remedy, we propose a double auction design that delivers more ecient price discovery and allocations.