Treasury Bills Risk Triggers Higher H.K. Margin Discount
Hong Kong’s futures and options market operator said traders will need to put up additional collateral when using some U.S. Treasury bills to back their positions, citing concern the U.S. is at risk of a default.
Hong Kong Exchanges & Clearing Ltd. (388) will impose a “haircut” of 3 percent on Treasuries with maturities of less than one year in margin requirements for index futures and options, it said today in a circular. That’s up from 1 percent previously, and charges for Treasuries with longer maturities aren’t affected, according to the circular.
An impasse in Washington over raising the U.S. debt ceiling is rippling through global financial markets as the Oct. 17 deadline for increasing the borrowing authority approaches. Rates on Treasury bills due Oct. 24 climbed as high as 0.50 percent today before falling to 0.31 percent. China and Japan, the biggest foreign creditors of the U.S., have urged action to head off the risk of a default. The decision in Hong Kong preceded a three-day holiday.
“Other countries may follow Hong Kong’s decision if the U.S. government stalemate continues next week,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. A default “is not our base case as we expect lawmakers will reach a last-minute deal,” he said.
Financial markets are under stress because of “uncertainty” over the debt limit, U.S. Treasury Secretary Jacob J. Lew said in testimony prepared for a hearing before the Senate Finance Committee today. Congressional leaders are open to a short-term increase in the $16.7 trillion debt ceiling that may stave off the risk of default, according to Republican and Democratic aides who spoke on the condition of anonymity.
The rate on bills schedule to mature on Oct. 17 dropped for the first time in six days on speculation House Republican and Senate Democrats will begin work toward a budget deal.
House Republican leaders will present their members with a proposal to raise the debt limit for six weeks without policy conditions, said a congressional aide familiar with the details. The move would lessen the risk of a U.S. default one week from a lapse in borrowing authority.
Rates on Treasury bills maturing Oct. 17 fell 0.10 percentage point to 0.38 percent, at 2:10 p.m. in New York, according to Bloomberg Bond Trader prices. Yields fell for all bills maturing through Nov. 14.
The Hong Kong Monetary Authority reminded banks to manage liquidity risks properly and is closely monitoring the U.S. debt-limit developments, it said in an e-mailed statement today. It hasn’t made any change to its collateral arrangements, it said.
The SIX Swiss Exchange Ltd. is monitoring the situation in the U.S., spokesman Alain Bichsel said by phone. ICE Clear Europe’s current haircut for U.S. Treasuries is 3 percent, and any change would be communicated via a market circular, according to spokeswoman Claire Miller. Rachael Harper, a spokeswoman for LCH.Clearnet Group Ltd., declined to comment in an e-mailed response to questions.
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 possible there could be a U.S. debt default,” Lorraine Chan, a spokeswoman for Hong Kong Exchanges said by telephone. The extra measures don’t indicate an expectation of a default, she said. “We’ve been closely monitoring the operations of our clearinghouses and markets and as always we will take appropriate risk-management measures,” Chan said.
“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.”
Longer-dated bill rates haven’t increased as much as those maturing immediately after the Oct. 17 deadline. The extra yield investors get for buying one-month securities instead of 91-day securities was 16.7 basis points, after reaching 28.9 basis points on Oct. 8, the biggest difference since March 2008, according to closing-market data. The longer-dated bills usually yield more than their one-month counterparts.
The decision by the Hong Kong market operator looks “a bit premature,” said Patrick Jacq, a senior rates strategist at BNP Paribas SA in Paris. “We are not yet in a situation of default,” he said.
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. Japan must consider the impact of any default on its bond holdings, even as the U.S. will probably avoid a fiscal crisis, Japanese Finance Minister Taro Aso said on Oct. 8.
“U.S. debt default risk isn’t at a stage for us to consider similar arrangements” to HKEX, Naoya Takahashi, a spokesman at Japan Exchange Group Inc., the operator of the world’s second-biggest stock market, said by phone. “If it does default we may take some steps.”
Singapore Exchange Ltd., Southeast Asia’s biggest bourse operator, already has “conservative haircuts on government securities that cover stress market conditions,” and it’s monitoring the situation closely, Agnes Siew, head of clearing risk, said by e-mail.
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