News / Asia

US Debt Fears Raise Heat on Treasury Bills as Collateral

FILE - US Hundred dollar notes.
FILE - US Hundred dollar notes.
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

Republican Majority in Congress Off to Rough Start

Standoff over Homeland Security funding exposes philosophical, tactical problems within party More

Pakistan Blocks Baloch Activist from US Trip

Human Rights Commission of Pakistan slams Islamabad officials for stopping people from leaving country to attend human rights conference More

Video Muslims Long Thrived in North Carolina Before Students Killed

Idyll shattered February 10, when three Muslim university students living in Chapel Hill were gunned down by a neighbor More

ILO: Women Still Losing Out in Global Work Place

International Labor Organization says women are marginally better off now than they were 20 years ago More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Muslims Long Thrived in N Carolina Before Slaying of 3 Studentsi
X
Jerome Socolovsky
March 05, 2015 9:04 PM
The killings of three Muslim students in North Carolina early last month came as Muslims across the United States have felt under siege, partly as a result of terrorist attacks being committed internationally in the name of their faith. But Muslims have long thrived in university cities in this part of the American South. VOA's Jerome Socolovsky reports.
Video

Video Muslims Long Thrived in N Carolina Before Slaying of 3 Students

The killings of three Muslim students in North Carolina early last month came as Muslims across the United States have felt under siege, partly as a result of terrorist attacks being committed internationally in the name of their faith. But Muslims have long thrived in university cities in this part of the American South. VOA's Jerome Socolovsky reports.
Video

Video Fuel Shortages in Nigeria Threaten Election Campaigns

Nigeria is suffering a gas shortage as the falling oil price has affected the country’s ability to import and distribute refined fuels. Coming just weeks before scheduled March 28 elections, the shortage could have a big impact on the campaign, as Henry Ridgwell reports for VOA.
Video

Video Report: Human Rights in Annexed Crimea Deteriorating

A new report by Freedom House and the Atlantic Council of the United States says the human rights situation in Crimea has deteriorated since the peninsula was annexed by Russia in March of last year. The report says the new authorities in Crimea are discriminating against minorities, suppressing freedom of expression, and forcing residents to assume Russian citizenship or leave. Zlatica Hoke has more.
Video

Video 50 Years Later African-Americans See New Voting Rights Battles Ahead

Thousands of people will gather to mark the 50th anniversary of a historic civil rights march on March 7th in Selma, Alabama. In 1965, dozens of people were seriously injured during the event known as “Bloody Sunday,” after police attacked African-American demonstrators demanding voting rights. VOA’s Chris Simkins introduces us to some civil rights pioneers who are still fighting for voting rights in Alabama more than 50 years later.
Video

Video Craft Brewers Taking Hold in US Beer Market

Since the 1950’s, the U.S. beer industry has been dominated by a handful of huge breweries. But in recent years, the rapid rise of small craft breweries has changed the American market and, arguably, the way people drink beer. VOA’s Jeff Custer reports.
Video

Video Video Claims to Show Shia Forces in Iraq Executing Sunni Boy

A graphic mobile phone video is spreading on the Internet, claiming to show Iraqi forces or Shia militia executing a handcuffed Sunni boy. Experts have yet to verify the video, but already Islamic State followers are publicizing it across social media, playing on deep-rooted sectarian fears. VOA’s Jeff Seldin reports.
Video

Video Ukrainian Authorities Struggle to Secure a Divided Mariupol

Since last month's cease-fire went into effect, shelling around the port city of Mariupol has decreased, but it is thought pro-Russian separatists remain poised to attack. For the city’s authorities, a major challenge is gaining the trust of residents, while at the same time rooting out informants who are passing sensitive information to the rebels. Patrick Wells reports for VOA.
Video

Video Volunteer Gauge-Watchers Help Fine-Tune Weather Science

An observation system called CoCoRaHS is working to improve weather science, thanks to thousands of volunteers across the country who measure precipitation in their own backyards, then share their data through the Internet. VOA's Shelley Schlender reports.
Video

Video NASA Spacecraft Approaches a Dwarf Planet

NASA’s Dawn spacecraft will make history on Friday, March 6, when it becomes the first man-made object to orbit a dwarf planet named Ceres. It is located in the asteroid belt between Mars and Jupiter, almost 500 million kilometers from Earth. Among other objectives, Dawn will try to examine two mysterious bright white spots detected on the planet’s surface. VOA’s George Putic has more.
Video

Video Young Muslims Radicalized Online

Young Muslims are being radicalized ‘in their bedrooms’ through direct contact with Islamic State or ISIL fighters via the Internet, according to terror experts. There are growing concerns that authorities and Internet providers are not doing enough to counter online extremism - which analysts say is spread by a prolific network of online supporters around the world. Henry Ridgwell reports from London.
Video

Video Positive Messaging Transforms Ethiopia's Image

Ethiopia was once known for famine and droughts. Now, headlines more often point to its fast-growing economy and its emergence as a regional peacemaker. How has Addis Ababa changed the narrative? VOA's Marthe van der Wolf reports.
Video

Video Answers Elude Families of MH370 Passengers

For the families on board Malaysia Airlines flight MH370, an airline official’s statement nearly one year ago that the plane had lost contact with air traffic control at 2:40 AM is the only thing that remains confirmed. William Ide reports.

All About America

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More