Girding itself for the doomsday scenario of the United States defaulting on its debt obligations, Hong Kong Exchanges and Clearing has increased the collateral put up by investors and brokers using short-term US treasury bills.
A circular sent by the HKEx to futures traders said the "haircut" would rise to 3 per cent from 1 per cent, effective from yesterday, if the investors were using US treasuries with maturities of less than one year as collateral for margin requirements in trading index futures and options.
In addition, the exchange also increased the margin requirement of H-share and mini H-share index futures by about 15 per cent.
An increase in haircut, or the discount the HKEx applies to the valuation of collaterals to guard against volatility, means investors would need to pay more cash or put up more treasuries as collateral for their trades.
"The additional risk management measures don't indicate HKEx's expectation on the likelihood of a possible US default," a HKEx spokeswoman told the South China Morning Post yesterday.
"This is rather because of the expectation of market volatilities increasing due to the worry of a US debt default.
"HKEx has been closely monitoring the operations of its markets and clearing houses, and as always, it will take appropriate risk management measures when the need arises."
Brokers welcomed the move as it came ahead of a three-day market break - Monday is a public holiday - leaving the local market no wriggle room if the default indeed materialises during this period.
The US government will run out of cash on October 17 if the Congress does not increase its borrowing authority, and the Republicans have so far refused to do so.
However, international news agencies late last night were reporting that House Republican leaders were considering raising the debt limit for six weeks without policy conditions. The move would lessen the risk of a US default one week from a lapse in borrowing authority.
But the proposal would not end the partial government shutdown as Republicans try to shift the debate back to spending issues.
US stocks, however, jumped the most since June and the dollar gained while Treasury bill rates tumbled as signs grew that lawmakers could reach an agreement to increase the debt ceiling and avoid a default.
The Standard & Poor's 500 Index rose 1.5 per cent, the most since June 13 in the opening hours. The Stoxx Europe 600 Index rose 1.6 per cent, rebounding from a one-month low.
China and Japan, which are the biggest holders of US treasuries, have urged Washington to act to pre-empt a default.
Premier Li Keqiang yesterday said China was paying "great attention" to the US debt-ceiling issue, Xinhua reported.
Joseph Tong Tang, an executive director of Sun Hung Kai Financial, told the Post that many investors used short-term treasuries as margin deposit to trade futures contracts.
"The increase in the haircut to these treasuries is reasonable. Although we do not expect the US to default, the market will continue to be volatile. Increasing the margin and the haircut is a good risk management measure for the HKEx," Tong said.
Additional reporting by Bloomberg