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

UN: 1 Million Somalis at Risk of Hunger

Group warns region is in dire need of humanitarian aid, with at least 200,000 children under age of five acutely malnourished as drought hits southern, central part of nation More

Human Rights Groups Allege Supression of Freedoms in Thailand

Thailand’s military, police have suppressed release of independent report assessing human rights in kingdom during first 100 days of latest coup More

Jennifer Lawrence Contacts FBI After Nude Photos Hacked

'Silver Linings Playbook' actress' photos were posted on image-sharing forum 4chan; Federal Bureau of Investigations is looking into matter More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Ukraine Schools Resume Classes, Donate to Government Forcesi
X
September 02, 2014 12:58 PM
A new school year has started in Ukraine but thousands of children in the war-torn east are unable to attend because of ongoing clashes with pro-Russia rebels. In Ukraine's capital, patriotic education has become the norm along with donations to support injured security forces fighting to take back rebel-held areas. VOA's Daniel Schearf reports from Kyiv.
Video

Video Ukraine Schools Resume Classes, Donate to Government Forces

A new school year has started in Ukraine but thousands of children in the war-torn east are unable to attend because of ongoing clashes with pro-Russia rebels. In Ukraine's capital, patriotic education has become the norm along with donations to support injured security forces fighting to take back rebel-held areas. VOA's Daniel Schearf reports from Kyiv.
Video

Video US Detainees Want Negotiators for Freedom in North Korea

The three U.S. detainees held in North Korea were permitted to speak with foreign media Monday. The government of Kim Jong Un restricted the topics of the questions, and the interviews in Pyongyang were limited to five minutes. Each of the men asked Washington to send a representative to Pyongyang to secure his release. VOA’s Carolyn Presutti has our story.
Video

Video Internet, Technology Offer New Tools for Journalists

The Internet and rapidly evolving technology is quickly changing how people receive news and how journalists deliver it. There are now more ways to tell a story than ever before. One school in Los Angeles is teaching the next generation of journalists with the help of a state-of-the-art newsroom. Elizabeth Lee has this report.
Video

Video Turkmen From Amerli Describe Survival of IS Siege

Over the past few weeks, hundreds of Shi'ite Turkmen have fled the town of Amerli seeking refuge in the northern city of Kirkuk. Despite recent military gains after U.S. airstrikes that were coordinated with Iraqi and Kurdish forces, the situation remains dire for Amerli’s residents. Sebastian Meyer went to Kirkuk for VOA to speak to those who managed to escape.
Video

Video West Africa Ebola Vaccine Trials Possible by Early 2015

A U.S. health agency is speeding up clinical trials of a possible vaccine against the deadly Ebola virus that so far has killed more than 1,500 people in West Africa. If successful, the next step would be a larger trial in countries where the outbreak is occurring. VOA's Carol Pearson has more.
Video

Video Survivors Commemorate 70th Anniversary of Nazi Liquidation of Jewish Ghetto

When the German Nazi army occupied the Polish city of Lodz in 1939, it marked the beginning of a long nightmare for the Jewish community that once made up one third of the population. Roughly 200,000 people were forced into the Lodz Ghetto. Less than 7,000 survived. As VOA’s Kane Farabaugh reports, some survivors gathered at the Union League Club in Chicago on the 70th anniversary of the liquidation of the Lodz Ghetto to remember those who suffered at the hands of the Nazi regime.
Video

Video Cost to Raise Child in US Continues to Rise

The cost of raising a child in the United States continues to rise. In its latest annual report, the U.S. Department of Agriculture says middle income families with a child born in 2013 can expect to spend more than $240,000 before that child turns 18. And sending that child to college more than doubles that amount. VOA’s Deborah Block visited with a couple with one child in Alexandria, Virginia, to learn if the report reflects their lifestyle.
Video

Video Chaotic Afghan Vote Recount Threatens Nation’s Future

Afghanistan’s troubled presidential election continues to be rocked by turmoil as an audit of the ballots drags on. The U.N. says the recount will not be completed before September 10. Observers say repeated disputes and delays are threatening the orderly transfer of power and could have dangerous consequences. VOA correspondent Meredith Buel reports.

AppleAndroid