Hong Kong Raises Haircut On Treasury Bill Collateral Over Debt Default Fears

Tyler Durden's picture

While there is hope that DC will engage in its favorite, can-kicking activity any minute and if not resolve then at least push back the funding and debt ceiling stalemate by a few weeks, the reality is that without a deal in seven days, there may be no cash to pay down maturing Bills starting with the October 17 issue whose yield soared to nearly 50 bps yesterday. The reason for the capitulation as was revealed yesterday, is that various money market funds such as Fidelity's have been selling all paper around the X-Date. This morning the contagion surrounding the use of Bills as collateral has crossed the Pacific, following news that the "Hong Kong’s futures and options market operator will require traders to put up more collateral when using some Treasury bills to back their positions, citing concern that the U.S. is at risk of a default." In other words, as we forecast on Monday, the debt-ceiling confusion in cash-land has now openly engulfed the repo market, which only makes the states of a debt deal that much higher. Because if the repo, $2.5 trillion money market, and subsequently, the entire $80 or so trillion custodian market freeze up, what happens next will make Lehman seem like a quiet walk in the park.

Bloomberg has more:

The “haircut” will rise to 3 percent from 1 percent today for Treasuries with maturities of less than one year in margin requirements for index futures and options, Hong Kong Exchanges & Clearing Ltd. said in a circular. The exchange increased margin requirements for H-share and Mini H-share index futures by about 15 percent, it said in an e-mail.


The decision illustrates how the impasse in Washington over raising the U.S. debt ceiling is starting to ripple through global financial markets. The move comes ahead of a three-day holiday in the city and after China and Japan, the biggest foreign creditors of the U.S., urged action to head off the risk of a default.


“It’s possible there could be a U.S. debt default,” Lorraine Chan, a spokeswoman for Hong Kong Exchanges said by telephone. She said that the extra measures don’t indicate an expectation of a default, adding that “we’ve been closely monitoring the operations of our clearinghouses and markets and as always we will take appropriate risk-management measures.”


In Hong Kong, investors using short-dated Treasuries to back up their trades will need to put up additional collateral to make up the shortfall caused by the new rules. The city hosts the third-largest stock index futures and options market in Asia by value of trades for the year through Aug. 31, according to data compiled by the World Federation of Exchanges.


“It’s understandable that the HKEX would raise the haircut,” said Steven Leung, director of institutional sales at UOB-Kay Hian Holdings Ltd. (UOBK) in Hong Kong. “It’s reasonable for them to take the precaution.”


Haircuts for treasuries with longer maturities aren’t affected, according to the circular. Chan declined to comment on the likelihood of a U.S. default.

We are confident that Hong Kong, just like everyone else, will be watching Jack Lew's fire and brimstone presentation at 8:30 am this morning, explicitly listing all the apocalyptic events that would occur should the US boldly go where no other insolvent America has gone before, and cross the X-Date, while a few hundred trillion in obligations rely on the USD's explicit reserve currency status. It should make for an amusing presentation.

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GetZeeGold's picture



The only way the US defaults is Obama sinks 22 thirty foot jump shots in a row.....not gonna happen.


I would have preferred Harry Reid would have passed the pay China first bill....it would have made it law.


It wasn't actually called pay China first...that's what Harry called it. It would have just stopped any talk of a default.....we can't have that now can we?

ghengis86's picture

I would have guessed a few hole in ones, as that seems to be his current occupation. But it is getting cooler, and basketball season is just around the corner....

Regardless, we're fucked with this muppet

Ghordius's picture

all this reminds me of "Dr. Boom, Gloom and Doom" Marc Faber's prediction (long time ago) that the US might come to a moment where an external default might seriously get discussed, in politics, or even just done

Tricky Dick, part 2?


if memory is not failing me Hong Kong's dollar is an exceptional currency: just 100% backed by... USDs. "ultra-pegged"

Slartebartfast's picture

Oh, right!

And home prices in the US can NEVER fall!  Never gonna happen.  Obozo wouild have to sink 23 of them, whatever shots, before that could happen.  Right, oh all knowing oracle?

Catullus's picture

So what's the point at which the "damage is already done", and they realize the collateral has been pledged several times over and you can't un-bake this cookie? Does that have an X date?

Headbanger's picture

I think "they" realized that point some time ago and are just going through the motions now to blow more smoke at us to screen their escape from all the debris about to crash down on "them".

BoNeSxxx's picture

For those of you around in '85, remember Gramm-Rudman?  That was the last time Congress discussed balancing the budget in any meaningful way.  Granted, the final bill was a watered-down sham full of back doors and bypass valves... but if you take the time to look at the Congressional Record from the floor debates, it is clear that they took the debt ceiling very seriously... they knew back then that we would be f*cked once we passed the event horizon.

Since the debt ceiling was increased the first time after G-R, it's been game over for the U.S.  All we are buying is time.

This is not to suggest that G-R was ever taken seriously (or that it wasn't too little too late).  But compared to 1985 this is kabuki theater at best.

Keloid's picture

What a great way to inject predictable movement into the markets. Best not go to this well too often, as seems to happen so often to our best manipulation/short-cut tctics. I hope Warren B is playing this aggressively, so USA can have adequate funding when he is last taxpayer available, 

Idea to pay off US Federal debt (and fund heretofor unfunded pension oblications of the US gov't) Tip off Warren ahead of any and all market moving activity sufficiently in advance to rake in huger pile of assets. Then tax him upon death.

Under old BK rules, shouldn't Fannie Mae and Freddie Mac become outrageously huge holders of residential real estate, which should have then reverted to Fannie and Freddie bond holders? Just asking.

Ghordius's picture

I still maintain that the megabank's trading desks love, love, love movements in the markets. and their other profitable arms love, love, love to sell insurance against those movements

I call it churn. I see them like the millers of old, extracting energy from a stream. or those devices that try to extract energy from waves in the sea

since the banking industry's contribution to US political coffers is quite extensive, you could say that congressmen are just satisfying a political... need? request? demand?

the Rothschilds of old made money by stability. they bought debt from the Tsar of Russia and peddled it as safe. market-makers, old style. no wonder they are something like living fossils, in our age. energized markets, that's the ticket!

don't leave markets liquid and deep! stretch them, make them shallow, so that every wave rises manyfold above the median level! shallow them into the millisecond, little algos!

GMadScientist's picture

It's more like bullies extracting lunch money or a mafia protection racket, but yeah.

"Avast ye scurvy dogs, prepare to be boarded!"

GMadScientist's picture

Isn't Warren "giving most of it away"?

As for Fannie Kreuger, there were never actually any houses, it was all hypothecated bandini in those MBS. :)

the not so mighty maximiza's picture

Dr Paul Craig Roberts said Obama would just call a national emergency and raise it directly like a ceaser or have the fed loan money to the treasury directly. Nothing stopping ether action. I agree.

You have idiots like Al Hunt from Bloomberg claiming they should just get rid of the debt ceiling, what sort of morons believe in just expanding debt forever to govern? Has this ever worked in history? These guys don't care they just don't want the collapse while they are alive. Horray for me and fuck the future kids.

the not so mighty maximiza's picture

i did not know they proved that, who did that????   The end game is simple, through the chaos in the end a goverment that only functions with what revenues it takes in, if it needs debt it can only borrow what can be paied back in 12 months with no roll overs, very simple end game actually.   What was supposed to be the end game?


SMC's picture

D.O.L.L.A.R = Dismal Overextended Liability Leading to Another Revolution

forwardho's picture

While all the 'talk' about default is bullshit political scare tactics, (Incoming taxes et al) There is an aspect to this ongoing narrative that is desturbing. For over 4 yrs, the whole of our economy has been held together by the collective "belief" that the Fed can print imaginary wealth to reinflate the massive bubble that imploded in '08. Any rational being knows that belief in a fantasy does not make it reality.

The whole world has had to buy into this fantasy, what is the alternative, Collapse, chaos,panic? Reality has a way of reaserting itself. Through the media (who also has everthing to loose) a false tale has been spun, and since all wanted to believe(indeed had to beleive) the "recovery" was born. While every major metric by which the production of value is measured was crashing, we have been inundated with the mantra that all will be just fine. All is not fine.

The doubt that has now been injected into the collective mindset may begin to fester. As more and more people become nervous about the future they will take action to protect their own intrest. If it continues, a panic will set in to get out of the fanasy first.


kralizec's picture

...that "collective mindset" contains a lot of detritus..."some" people may try to get ahead of the game...but yeah by the time the herd moves the beasts will already be at their heels...

SheepDog-One's picture

Total disaster looms, unless they can continue robbing more people to service $80 trillion in fake bonds. Just wonderful.

yogibear's picture

US bond rate rates should be a lot higher. 

Son of Loki's picture

Many HK'ers were suckered in to the subprime junk such as Lehman's MiniBonds which promprtly sunk to zero and HK folks lost biullions. Even though their gubmint reimbursed many of them a portion of their loses, I doubt many will touch any financial poroducts from the USA...only the Biggest HK Sucker/Muppets maybe but not the Middle Class HK investors anymore.

DYS's picture

Let it burn.