ASIA NEWS NETWORK
WE KNOW ASIA BETTER
HK takes risk measures on treasury bills used as collateral
Publication Date : 12-10-2013
Financial centre Hong Kong is taking steps to protect itself in the event of a US default - in one of the first cautionary measures by regulators to hedge against the possibility.
Its stock exchange on Thursday demanded that investors and brokers put up more cash or securities when using short-term US Treasury bills as collateral.
The Hong Kong Exchanges and Clearing (HKEx) raised the so-called haircut on Treasury bills that mature in less than a year, from 1 per cent to 3 per cent.
What this means is that these bills will be valued at 97 per cent rather than 99 per cent of their market value, when used as collateral for trades.
Meanwhile, Hong Kong's monetary authority has sent a memo to banks reminding them to be prepared in managing liquidity risks, it told The Straits Times.
While stressing that "the possibility of a debt default is very low", the monetary authority said it was keeping its eye on the issue.
"If the debt default does happen, as a financial centre, Hong Kong cannot avoid the impact," the Hong Kong Monetary Authority said in an e-mail.
The city is the 12th largest foreign holder of US debt. As of end July, it held US$120 billion in US government debt, according to the US treasury department.
Another reason the city is particularly vulnerable to a US default is that Hong Kong's currency is pegged to the US dollar.
"US dollars serve not only as reserves in the bank, they are like the city's own currency," said finance professor Wong Ka Fu of Hong Kong University.
"The banks now should raise their cash reserve ratio and buy futures to hedge the liquidity risk. If major banks get mired in bad debt at the same time, the city will be in chaos."
That said, analysts and the authorities are sanguine that the United States will get its act together to avert such a crisis by next Thursday - the deadline to raise the country's borrowing limit.
The HKEx, for instance, said that "the additional risk management measures don't indicate HKEx's expectations on the likelihood of a possible US default".
For now, there is little impact on the city's financial activities and stock market, said Law Kar Chung, chief economist at the Hong Kong branch of the Bank of Communication. The market is still maintaining a wait-and-see attitude, he said, and "there's no sign showing a large sell-off of US bonds, although investors are more careful".
Hu Yifan, chief economist of securities group Haitong International, also notes that banks have increased their short-term interest rates and swap rates since the US government shutdown on Oct1. This could mean that banks are trying to attract more deposits and increase their liquidity position.