XN000022-1987-11-02 — Page 4

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MONDAY, NOVEMBER 2, 1987

SHARES MARKET

AS A RESULT OF THE SUBSTANTIAL FALL IN THE PRICE OF THE COMPRISING THE HANG SENG INDEX, BROKERS TRADING IN THE FUTURES IN HANG SENG INDEX CONTRACTS WHO HAD "LONG" POSITIONS WERE CALLED UPON TO PUT UP VERY LARGE ADDITIONAL SUMS BY WAY OF VARIATION MARGIN.

"IT BECAME CLEAR THAT A NUMBER WOULD HAVE GREAT DIFFICULTY IN MEETING THEIR MARGIN REQUIREMENTS LEADING TO DEFAULT AND SUSPENSION FROM THE FUTURES EXCHANGE, AND THAT, IN TURN. THE QUARANTEE CORPORATION WHICH GUARANTEES to MEET SUCH DEFICIENCIES MIGHT HAVE INSUFFICIENT RESOURCES TO MAKE UP THE SHORTFALL, HE SAID.

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"THIS WOULD, IN TURN, HAVE LED TO THE CLOSURE OF THE FINANCIAL FUTURES MARKET AND OBLIGED THE FORCED SETTLEMENT OF ALL CONTRACTS AT AN ARBITRARY PRICE."

MR NENDICK SAID THERE WOULD HAVE BEEN A CONSEQUENTIAL AND VERY SERIOUS IMPACT ON THE PHYSICAL STOCK MARKET, AS THOSE WHO HAD BEEN ARBITRATING BETWEEN THE PHYSICAL AND FUTURES MARKETS (BEING "SHORT" IN THE FUTURES MARKET AND "LONG" IN THE STOCK MARKET} WOULD THEN HAVE BEEN OBLIGED TO CLOSE OUT THEIR UNCOVERED "LONG" POSITIONS IN THE PHYSICAL MARKET.

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"THE DAMAGE TO HONG KONG'S REPUTATION AS AN INTERNATIONAL FINANCIAL CENTRE WOULD HAVE BEEN IMMEASURABLE AND BECAUSE THOSE MOST AFFECTED WOULD THEN TAKE THEIR BUSINESS ELSEWHERE THE EXCHANGE RATE WOULD, I BELIEVE, HAVE COME UNDER SUSTAINED AND HEAVY PRESSURE.

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IT WAS IN THE LIGHT OF THESE CONSIDERATIONS FACILITIES WERE PUT IN PLACE.

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THAT THE SUPPORT

"IT MAY BE NOTED THAT THOSE WHO HAD MOST TO GAIN BY THE FINANCIAL FUTURES MARKET BEING KEPT IN BEING CONTRIBUTED SIGNIFICANTLY TO THE SUPPORT ARRANGEMENTS, AS DID THOSE WHO ARE FIRMLY COMMITTED TO HONG KONG'S CONTINUING WELL-BEING AS AN INTERNATIONAL FINANCIAL CENTRE,

MR NENDICK SAID. THE SUPPORTIVE STANCE TAKEN BY CHINA, INCLUDING THE IMPORTANT CONTRIBUTION TO THE SECOND SUPPORT FACILITY MADE BY THE BANK OF CHINA, WAS PARTICULARLY APPRECIATED.

MR NENDICK ADDED: "IT MAY BE NOTED, TOO, THAT THE SPECULATORS HAVE NOT BEEN 'RESCUED'. NONE OF THE FUNDS WHICH HAVE BEEN PROVIDED ARE TO BE PUT AT THE DISPOSAL OF THOSE WHO WERE 'LONG' IN THE FUTURES MARKET, AND THE GUARANTEE CORPORATION WILL TAKE WHAT IT CONSIDERS AS APPROPRIATE STEPS AGAINST THOSE WHO FAIL TO MEET THEIR COMMITMENTS."

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