News / Asia

US Debt Fears Raise Heat on Treasury Bills as Collateral

FILE - US Hundred dollar notes.
FILE - US Hundred dollar notes.
TEXT SIZE - +
Reuters
— Some financial institutions are reducing the use of U.S. Treasury bills as collateral for transactions in stocks and swaps as they prepare for the possibility of a U.S. government default.
 
Hong Kong's securities exchanges announced on Thursday they will apply a bigger discount on the U.S. Treasuries used as margin collateral.
 
Traders and risk officers at banks said they were carefully monitoring portfolios and collateral, with some putting contingency plans in place to deal with default or a sudden loss of liquidity in the securities, the world's most risk-free assets after cash.
 
“Maintaining liquidity is a primary focus of contingency plans set up to deal with a default,” said a trader at an American bank in Tokyo. Shorter-maturity Treasury securities would no longer be accepted as collateral if the United States defaulted on its debt, he said.
 
“Many repo agreements are being amended to exclude these types of instruments in order to ensure liquidity is maintained,” he said.
 
Traders expect the $5 trillion U.S. repo market, used to fund short-term borrowings against government securities, to be the worst hit if the United States defaulted.
 
Even if markets believed that the U.S. government will eventually meet its debt obligations, a temporary delay in payments would be construed as default, and financial markets do not trade or lend against defaulted securities.
 
The fiscal standoff in Washington is in its third week. Most government services have been shut down since Oct. 1, when lawmakers failed to agree on funding them.
 
President Barack Obama and Republican leaders were in talks late on Thursday to try to reopen government and extend its borrowing authority beyond Oct. 17.
 
Failing that, the government will hit its $16.7 trillion borrowing limit and could potentially default on social security or Treasury payments late in October or early next month.
 
The Hong Kong Exchanges & Clearing (HKEx) said it will apply a haircut of 3 percent versus the current 1 percent for treasury bills with a maturity of less than a year that are used as collateral to meet margin requirements.
 
Haircuts applied to longer-dated bills remain unchanged. HKEx is the holding company for The Stock Exchange of Hong Kong Ltd, Hong Kong Futures Exchange Ltd and Hong Kong Securities Clearing Company Ltd.
 
“Participants should make necessary funding arrangements to cover any shortfall to their margin requirements resulting from the increase in the U.S. Treasuries haircut,” HKEx said.
 
Waiting, watching 

Exchanges elsewhere in Asia have not so far disclosed any plans to deal with a U.S. debt default.
 
“We are monitoring, but I don't think things will get to a point where some kind of an emergency plan has to be activated,” said Seo Sang-joon, market conditions team manager for the Korea Exchange. Seo said Treasuries were not commonly used in Korea as collateral.
 
The Japan Securities Clearing Corp, whose clients include the Tokyo Stock Exchange, was reviewing procedures, said Katsuya Sakaba, head of its Risk Management Division.
 
“As a rule, if there is a default, we will revise collateral haircuts. We'll apply a more conservative haircut rate, or raise the rate, although that's never happened, not even two years ago,” he said, referring to a similar U.S. political showdown over debt in 2011.
 
A U.S. default could kick up a storm in financial markets and a massive rush into risk-free assets.
 
But, in some ways, that risk is a bigger headache for regulators and market participants than exchanges in Asia, most of which use cash as collateral.
 
Equities are exchange-traded, but there is no mandatory requirement in Asia for currency and interest rate swaps to be cleared through an exchange as they are in the United States and parts of Europe.
 
For most over-the-counter swaps and other derivatives traded in Asia, collateral is posted directly between the two parties to a deal.
 
Most deals use cash as collateral, rather than Treasuries, said Singapore-based Sam Ahmed, head of collateral services sales at Citi in Asia.
 
“For now we are just tracking and stress-testing client portfolios that hold short-dated Treasuries with November and December maturities,” Ahmed said.
 
The risk that the margin collateral posted on transactions loses value rapidly, and thereby undermines the protection against default, is higher for stock and securities exchanges than for individual banks or traders, said a risk officer at an Asian bank in Singapore.
 
“These exchanges are multilateral, and stand between several counterparties at the same time,” he said. “They are stuffed if they get it wrong.”

You May Like

Multimedia Anti-Keystone XL Protests Continue

Demonstrators are worried about pipeline's effect on climate change, their traditional way of life, health and safety More

Thailand's Political Power Struggle Continues

Court gave Prime Minister Yingluck Shinawatra until May 2 to prepare her defense over abuse of power charges but uncertainty remains over election timing More

Malaysia Plane Search Tests Limits of Ocean Mapping Technology

Expert tells VOA existing equipment’s maximum operating depth is around 6 kilometers as operation continues on ocean bed for any trace of MH370 More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Pet Kangaroo Helps Spread Environmental Messagei
X
Penelope Poulou
April 22, 2014 5:53 PM
Children’s author Julia Heckathorn travels the world to learn about different ecosystems and endangered animals. She pours her knowledge into children’s books, hoping the next generation will right the environmental wrongs of our times. As in many children's books, the main character in Heckathorn's stories is an animal. Unlike those other characters, though, this one is real - a kangaroo, that lives in the author’s backyard. VOA’s Penelope Poulou has more.
Video

Video Pet Kangaroo Helps Spread Environmental Message

Children’s author Julia Heckathorn travels the world to learn about different ecosystems and endangered animals. She pours her knowledge into children’s books, hoping the next generation will right the environmental wrongs of our times. As in many children's books, the main character in Heckathorn's stories is an animal. Unlike those other characters, though, this one is real - a kangaroo, that lives in the author’s backyard. VOA’s Penelope Poulou has more.
Video

Video Pro-Russian Separatists Plan 'Federalization Referendum' in Eastern Ukraine

Pro-Russian separatists in eastern Ukraine say they plan to move forward next month with a referendum vote for greater autonomy, despite the Geneva agreement reached with Russia, the U.S. and Ukraine to end the political conflict. VOA's Brian Padden reports from the city of Donetsk in Eastern Ukraine.
Video

Video Pope Francis Hopes Dual Canonizations Will Reconcile Church

On April 27, two popes - John the XXIII and John Paul II - will be made saints in a ceremony at St. Peter’s Square. VOA religion correspondent Jerome Socolovsky says the dual canonization is part of the current pope’s program to reconcile liberals and conservatives in the Roman Catholic Church.
Video

Video In Capturing Nature's Majesty, Film Makes Case for Its Survival

French filmmaker Luc Jacquet won worldwide acclaim for his 2005 Academy Award-winning documentary "March of the Penguins". Now Jacquet is back with a new film that takes movie-goers deep into the heart of a tropical rainforest - not only to celebrate its grandeur, but to make the case for its survival. VOA's Rosanne Skirble reports.
Video

Video Boston Marathon Bittersweet for Many Runners

Monday's running of the Boston Marathon was bittersweet for many of the 36,000 participants as they finished the run that was interrupted by a double bombing last year. Many gathered along the route paid respect to the four people killed as a result of two bombings near the finish line. VOA's Carolyn Presutti returned to Boston this year to follow two runners, forever changed because of the crimes.
Video

Video International Students Learn Film Production in World's Movie Capital

Hollywood - which is part of Los Angeles - is the movie capital of the world, and many aspiring filmmakers go there in hopes of breaking into the movie business. Mike O'Sullivan reports that regional universities are also a magnet for students who hope to become producers or directors.
Video

Video Pacific Rim Trade Deal Proves Elusive

With the U.S.-led war in Iraq ended and American military involvement in Afghanistan winding down, President Barack Obama has sought to pivot the country's foreign policy focus towards Asia. One aspect of that pivot is the negotiation of a free-trade agreement among 12 Pacific Rim nations. But as Obama leaves this week on a trip to four Asian countries he has found it very difficult to complete the trade pact. VOA's Ken Bredemeier has more from Washington.
Video

Video Autistic Adults Face Housing, Job Challenges

Many parents of children with disabilities fear for the future of their adult child. It can be difficult to find services to help adults with disabilities - physical, mental or emotional - find work or live on their own. The mother of an autistic boy set up a foundation to advocate for the estimated 1.2 million American adults with autism, a developmental disorder that causes communication difficulties and often social difficulties. VOA's Faiza Elmasry reports.
AppleAndroid