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

Lion Cecil's Killing Sparks 'Canned Hunting' Debate in S. Africa

Conservationists believe incident, which triggered worldwide outrage, will reshape debate about practice in which hunters are allowed to target animals bred for hunting More

US Urges Taliban to Stay With Afghan Peace Talks

Top US Afghan diplomat also meets with Pakistani, Afghan officials following news of Mullah Omar's death More

Environmentalists Issue Warning on Mekong Biodiversity

Scientists say decades of economic development, hydropower-dam construction, lax law enforcement and trafficking have taken their toll More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Astronauts Train Underwater for Deep Space Missionsi
|| 0:00:00
...    
🔇
X
George Putic
July 30, 2015 8:59 PM
Manned deep space missions are still a long way off, but space agencies are already testing procedures, equipment and human stamina for operations in extreme environment conditions. Small groups of astronauts take turns in spending days in an underwater lab, off Florida’s southern coast, simulating future missions to some remote world. VOA’s George Putic reports.
Video

Video Astronauts Train Underwater for Deep Space Missions

Manned deep space missions are still a long way off, but space agencies are already testing procedures, equipment and human stamina for operations in extreme environment conditions. Small groups of astronauts take turns in spending days in an underwater lab, off Florida’s southern coast, simulating future missions to some remote world. VOA’s George Putic reports.
Video

Video Civil Rights Leaders Struggled to Achieve Voting Rights Act

Fifty years ago, lawmakers approved, and U.S. President Lyndon Johnson signed, the Voting Rights Act of 1965. The measure outlawed racial discrimination in voting, giving millions of blacks in many parts of the southern United States federal enforcement of the right to vote. Correspondent Chris Simkins introduces us to some civil rights leaders who were on the front lines in the struggle for voting rights.
Video

Video Booming London Property a ‘Haven for Dirty Money’

Billions of dollars of so-called ‘dirty money’ from the proceeds of crime - especially from Russia - are being laundered through the London property market, according to anti-corruption activists. As Henry Ridgwell reports from the British capital, the government has pledged to crack down on the practice.
Video

Video Hometown of Boy Scouts of America Founder Reacts to Gay Leader Decision

Ottawa, Illinois, is the hometown of W.D. Boyce, who founded the Boy Scouts of America in 1910. In Ottawa, where Scouting remains an important part of the legacy of the community, the end of the organization's ban on openly gay adult leaders was seen as inevitable. VOA's Kane Farabaugh reports.
Video

Video 'Metal Muscles' Flex a New Bionic Hand

Artificial limbs, including the most complex of them – the human hand – are getting more life-like and useful due to constant advances in tiny hydraulic, pneumatic and electric motors called actuators. But now, as VOA’s George Putic reports, scientists in Germany say the future of the prosthetic hand may lie not in motors but in wires that can ‘remember’ their shape.
Video

Video Russia Accused of Abusing Interpol to Pursue Opponents

A British pro-democracy group has accused Russia of abusing the global law enforcement agency Interpol by requesting the arrest and extradition of political opponents. A new report by the group notes such requests can mean the accused are unable to travel and are often unable to open bank accounts. VOA's Henry Ridgwell reports.
Video

Video 'Positive Atmosphere' Points Toward TPP Trade Deal in Hawaii

Talks on a major new trade agreement among 12 Pacific Rim nations are said to be nearing completion in Hawaii. Some trade experts say the "positive atmosphere" at the discussions could mean a deal is within reach, but there is still hard bargaining to be done over many issues and products, including U.S. drugs and Japanese rice. VOA's Jim Randle reports.
Video

Video Genome Initiative Urgently Moves to Freeze DNA Before Species Go Extinct

Earth is in the midst of its sixth mass extinction. The last such event was caused by an asteroid 66 million years ago. It killed off the dinosaurs and practically everything else. So scientists are in a race against time to classify the estimated 11 million species alive today. So far only 2 million are described by science, and researchers are worried many will disappear before they even have a name. VOA’s Rosanne Skirble reports.
Video

Video Scientists: One-Dose Malaria Cure is Possible

Scientists have long been trying to develop an effective protection and cure for malaria - one of the deadliest diseases that affects people in tropical areas, especially children. As the World Health Organization announces plans to begin clinical trials of a promising new vaccine, scientists in South Africa report that they too are at an important threshold. George Putic reports, they are testing a compound that could be a single-dose cure for malaria.
Video

Video 'New York' Magazine Features 35 Cosby Accusers

The latest issue of 'New York' magazine features 35 women who say they were drugged and raped by film and television celebrity Bill Cosby. The women are aged from 44 to 80 and come from different walks of life and races. The magazine interviewed each of them separately, but Zlatica Hoke reports their stories are similar.
Video

Video US Calls Fight Against Human Trafficking a Must Win

The United States is promising not to give up its fight against what Secretary of State John Kerry calls the “scourge” of modern slavery. Officials released the country’s annual human trafficking report Monday – a report that’s being met with some criticism. VOA’s National Security correspondent Jeff Seldin has more from the State Department.
Video

Video Washington DC Underground Streetcar Station to Become Arts Venue

Abandoned more than 50 years ago, the underground streetcar station in Washington D.C.’s historic DuPont Circle district is about to be reborn. The plan calls for turning the spacious underground platforms - once meant to be a transportation hub, - into a unique space for art exhibitions, presentations, concerts and even a film set. Roman Mamonov has more from beneath the streets of the U.S. capital. Joy Wagner narrates his report.
Video

Video Europe’s Twin Crises Collide in Greece as Migrant Numbers Soar

Greece has replaced Italy as the main gateway for migrants into Europe, with more than 100,000 arrivals in the first six months of 2015. Many want to move further into Europe and escape Greece’s economic crisis, but they face widespread dangers on the journey overland through the Balkans. VOA's Henry Ridgwell reports.
Video

Video Stink Intensifies as Lebanon’s Trash Crisis Continues

After the closure of a major rubbish dump a week ago, the streets of Beirut are filling up with trash. Having failed to draw up a plan B, politicians are struggling to deal with the problem. John Owens has more for VOA from Beirut.
Video

Video Paris Rolls Out Blueprint to Fight Climate Change

A U.N. climate conference in December aims to produce an ambitious agreement to fight heat-trapping greenhouse gases. But many local governments are not waiting, and have drafted their own climate action plans. That’s the case with Paris — which is getting special attention, since it’s hosting the climate summit. Lisa Bryant takes a look for VOA at the transformation of the French capital into an eco-city.

VOA Blogs