Hong Kong Raises Haircut On Treasury Bill Collateral Over Debt Default Fears

Hong Kong Raises Haircut On Treasury Bill Collateral Over Debt Default Fears

Tyler Durden on 10/10/2013 07:44 -0400

While there is hope that DC will engage in its favorite, can-kicking activity any minute and if not resolve then at least push back the funding and debt ceiling stalemate by a few weeks, the reality is that without a deal in seven days, there may be no cash to pay down maturing Bills starting with the October 17 issue whose yield soared to nearly 50 bps yesterday. The reason for the capitulation as was revealed yesterday, is that various money market funds such as Fidelity’s have been selling all paper around the X-Date. This morning the contagion surrounding the use of Bills as collateral has crossed the Pacific, following news that the “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.” In other words, as we forecast on Monday, the debt-ceiling confusion in cash-land has now openly engulfed the repo market, which only makes the states of a debt deal that much higher. Because if the repo, $2.5 trillion money market, and subsequently, the entire $80 or so trillion custodian market freeze up, what happens next will make Lehman seem like a quiet walk in the park.We are confident that Hong Kong, just like everyone else, will be watching Jack Lew’s fire and brimstone presentation at 8:30 am this morning, explicitly listing all the apocalyptic events that would occur should the US boldly go where no other insolvent America has gone before, and cross the X-Date, while a few hundred trillion in obligations rely on the USD’s explicit reserve currency status. It should make for an amusing presentation.

Hong Kong Lifts Margin Discount on Treasuries on U.S. Risks

By Eleni Himaras and Fion Li – Oct 10, 2013

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 ehimaras@bloomberg.net; Fion Li in Hong Kong atfli59@bloomberg.net