Hong Kong’s futures and options market operator will require traders to put up more collateral when using some Treasury bills to back their positions, citing concern that the U.S. is at risk of a default.
The “haircut” will rise to 3 percent from 1 percent today for Treasuries with maturities of less than one year in margin requirements for index futures and options, Hong Kong Exchanges & Clearing Ltd. (388) said in a circular. The exchange increased margin requirements for H-share and Mini H-share index futures by about 15 percent, it said in an e-mail.
The decision illustrates how the impasse in Washington over raising the U.S. debt ceiling is starting to ripple through global financial markets. The move comes ahead of a three-day holiday in the city and after China and Japan, the biggest foreign creditors of the U.S., urged action to head off the risk of a default.
“It’s possible there could be a U.S. debt default,” Lorraine Chan, a spokeswoman for Hong Kong Exchanges said by telephone. She said that the extra measures don’t indicate an expectation of a default, adding that “we’ve been closely monitoring the operations of our clearinghouses and markets and as always we will take appropriate risk-management measures.”
U.S. Deadlock
U.S. Treasury Secretary Jacob J. Lew says the government will run out of cash to pay its bills on Oct. 17 without Congress increasing its borrowing authority. Some economists say the government can prioritize payments to bond holders to avoid a default. Congressional leaders are open to a short-term increase in the $16.7 trillion debt ceiling, according to Republican and Democratic aides who spoke on the condition of anonymity.
In Hong Kong, investors using short-dated Treasuries to back up their trades will need to put up additional collateral to make up the shortfall caused by the new rules. The city hosts the third-largest stock index futures and options market in Asia by value of trades for the year through Aug. 31, according to data compiled by the World Federation of Exchanges.
“It’s understandable that the HKEX would raise the haircut,” said Steven Leung, director of institutional sales at UOB-Kay Hian Holdings Ltd. (UOBK) in Hong Kong. “It’s reasonable for them to take the precaution.”
Haircuts for treasuries with longer maturities aren’t affected, according to the circular. Chan declined to comment on the likelihood of a U.S. default.
Chinese Premier Li Keqiang said China is paying “great attention” to the U.S. debt-ceiling issue, without elaborating, Xinhua News Agency said in a report posted today to the government’s website. He made the comment in a meeting yesterday with U.S. Secretary of State John Kerry at the Association of Southeast Asian Nations summit in Brunei, Xinhua said.
To contact the reporters on this story: Eleni Himaras in Hong Kong at [email protected]; Fion Li in Hong Kong at [email protected]
To contact the editor responsible for this story: Sarah McDonald at [email protected]