In a Bloomberg Online news article dated October 11, 2013, entitled “Treasury Bills Risk Triggers Higher HK Margin Discount”, it was reported that Hong Kong’s futures and options market operator issued a directive calling for traders to put up additional collateral when using some US Treasury bills to support their positions. The latest measure comes at a time when Washington DC is still grappling with the challenges among some members of the US Congress and the White House to come to an agreement on raising the debt limit by October 17, 2013. The latest news out of Washington DC (as of early Asian morning trading hours on October 11, 2013) indicated that all sides are still negotiating over some of the terms needed to reopen the Federal Government, and raise the debt ceiling, but have not come into affirmative agreement on whether the Federal Government could reopen for the next six weeks, including the raising of the debt limit, while ongoing talks on the US budget resumes. All the major US stock index futures are pointing to a lower open later in the evening hours (Asia timings), however most major Asia-Pacific stock index futures, including Japan’s Nikkei Futures, Australia’s S&P ASX futures are pointing to a higher open later in the day.
This latest directive does not come as a surprise as many fund managers of pension funds, money market funds, etc. are duty-bound to protect the interests of their fund holders, and with several one-month Treasury bills (T-bills) expiring on October 17, 2013, and is the current deadline mentioned by US Treasury Secretary, Mr. Jacob Lew regarding the potential repercussions for not coming to an agreement on raising the debt ceiling, thus triggering a systematic default across the board of US Treasuries. As fund managers and acting as stewards for their fund holders, it is rightfully so that they have to step up the table in instituting any contingency plans, including the settlement and clearance of those inventories of soon-to-be expired T-bills on October 17, and avoid any potential harm a US debt default might cause to their fund portfolios.
In the Bloomberg News article, it mentioned that the Hong Kong Exchanges & Clearance will impose a “haircut” of 3.0 percent on Treasuries with maturities of less than one year in margin requirements of index futures and options. This is up from the previous 1.0 percent, and charges for Treasuries with longer maturities are waivered. In the meantime, rates on treasury bills maturing on October 24, 2013 climbed as high as 0.5 percent during the regular trading session in New York before falling back to 0.31 percent. Both of the largest debt-holders of the US Treasuries, China, and Japan, have urged urgent action from leaders at the Beltway to resolve the ongoing debates over raising the US debt ceiling in order to prevent any negative consequences to the global economy if there are no agreements to resolve the debt crisis. The latest decision by the Hong Kong Exchanges is likely to set a precedent for other exchanges around the globe to act appropriately in order to stem the negative consequences from a potential US debt default.
For the past ten days, and counting since the US Federal Government shutdown, global stock, bond, and futures markets have been in a high volatility mode, with the Chicago-traded VIX Index futures (a gauge used to measure ‘fear’ in the markets on the whole) have been spiking upwards. Most of the major US and Asia-Pacific stocks tumbled, as investors, both institutional, and retail, seek to relinquish their respective securities holdings in order to avoid any potential harm to their investment portfolios.
In addition to the latest measures announced by the Hong Kong Exchanges, the central bank in the Chinese territory reminded banks to manage liquidity risks properly and will continue to monitor the US debt-limit developments. It has not made any collateral arrangements yet. Other global exchanges, including the SIX Swiss Exchange Ltd., and the Singapore Exchange (SGX), have also taken conservative measures, including the imposing of higher collateral limits, to setting of ‘haircuts’ on government securities that cover distressed market conditions. Hong Kong is one of the financial hubs that hosts the largest stock index futures and options in Asia by value of trades through August 31, 2013, based on data compiled by the World Federation of Exchanges.
With all these policy directives issued by several Asia-Pacific trading exchanges in response to the potential debt impasse happening in the United States, it does show the tremendous risks associated with holding a sizeable portfolio of US Government securities. Hong Kong, having its local currency pegged to the US Dollar, faces a very severe large exposure to any unexpected events in the United States, both financial, and as well as terrorist-related events, like the one on September 11, 2001. These various events happening in the United States do point the need for many Asia-Pacific governments to examine closely their US Treasury holdings, and perhaps rebalance some of the portfolio exposures as part of risk management measures. I believe that most Asia-Pacific governments are currently making such plans and are downsizing their holdings of US Treasuries. However, given that the United States is and always has been viewed as ‘safe haven’ country, it is inevitable that several Asia-Pacific governments will consider maintaining their holdings of US Treasuries. However, it cannot be sustainable, as many have witnessed some of the events happening in the US prior to the current debt impasse, including concerns over the timing of the US Federal Reserve (US Fed) tapering initiatives, and other issues, both fiscal and monetary those have caused multiple volatilities to the global investments. Despite the various concerns, I believe that in the long-run, policy makers in the Asia-Pacific region, and across the globe, will have come up with an alternative currency to replace the US Dollar as a so-called ‘safe haven’, but this is still a debate that cannot be easily resolved in a matter of a few years.