TNAG-1765-FCO40-2519-Hong-Kong-stock-market-and-exchange-rate-1989 — Page 39

Comment or recommendation

29. Paragraph 8.29 "We therefore recommend

(a) in view of the default risk in Hong Kong, it may be appropriate for the HKPE and the CH to use a high confidence factor in setting margin levels; and (b) the Clearing House should apply appropriate haircuts if it allows securities and other traded items to be deposited in fulfilment of margin requirements; if it allows bank letters of credit to be posted it must restrict these to the soundest banks and must keep the creditworthiness of those banks under review."

30. Paragraph 8.31 "We strongly recommend

that hedge position concessions should not be introduced by the Clearing Eouse."

31. Paragraph 8.39 "We therefore recommend

that (a) steps must be taken by the regulatory authority as appropriate to ensure that the direct debit system is secure; in particular banks should always confirm that they will (or will not) make a payment before the market

Action taken by the HKFE

Executive is of the view that their resources are insufficient to enable them to handle large volumes of trading. It is no longer proposed that cooperative GCMS should be allowed.

These recommendations have been noted and the points well taken by the Exchange. The view of the Exchange is that margin levels and the question of acceptance of security should be matters which remain under constant review by both the Exchange and the Clearing House. The new provisions inserted in the Rules of both entities will enable frequent and close exchanges of information which should put both entities in a much better position to judge appropriate levels of margin and the adequacy of security which is being offered. It is expected that in the short term both the Exchange and the Clearing House will take a more conservative attitude than that which was adopted in the past.

This recommendation is noted, but the Clearing House intends to keep this matter under constant review. The Exchange believes that one of the prime raisons d'etre of any futures exchange is to permit hedging. Accordingly, it is expected as part of the process of expanding and developing the Exchange that hedging will be encouraged. This may lead to hedge position concessions being offered.

These recommendations are noted and endorsed by the Clearing House. The matters referred to in (a) are outside the control of the Exchange and the Clearing House. It is the intention to introduce the provisions