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Hong Kong Futures Clearinghouse Case Study

Finance kumuking 36127浏览 0评论

Authors: Qin Rong, Fei Wang, Qiao Wang

The full report is attached in the buttom.

Introduction

A good case of what can go wrong with a futures exchange is the Hong Kong Futures Exchange in the stock disaster of 1987.

In 1987, the structure of the HKFE was not able to handle and manage risk effectively. The roles in the structure of the HKFE included the exchange, the clearinghouse and the guarantors. The guarantee fund separated from clearing house and exchange. Legally, there was no mutual restraint relationship between the exchange and the guarantors. The exchange had no responsibility to ensure the guarantor maintain adequate fund. Besides, there was no direct relationship between the guarantors and the clearing members. They all relied on the clearinghouse.

On Oct 19 1987, the stock disaster spread through the world. In Hong Kong, many investors did not increase their guarantee fund, but defaulted the contracts. Those lucky investors could not get margin moneys returned on their profitable futures positions.

HK-BLACK-MONDAY Figure 1: Hang Seng Index Chart Ranged Between Apr 1, 1987 & Apr 29, 1988

Hong Kong’s main capital market decided to shut down the exchanges. The shutdown was last 4 days. Meanwhile, world markets had fallen further. So it would mostly happen that the recapitalized clearinghouse would go bust again when the exchanges were open, as positions would be marked down immediately. The Hong Kong government and the clearing banks had to supply huge funds to the clearinghouse.

After the crash, Hong Kong had done a lot of reforms. The regulations and laws on futures were rewritten and published, and the relationship between the clearinghouse and exchanges were restructured. What’s more, the Hong Kong exchanges introduced, or enhanced various measures to manage risks.

Hong Kong Futures Clearinghouse case is a notable central clearinghouse failure. The project will explain the causes of the failure, the impact on the derivatives clearing field and the lesson we can take from it.

Methodology

The research methodology involves gathering data from the specified documents and compiling databases to achieve more complete understanding and historical reconstruction of the Hong Kong Futures Clearinghouse case.

Objective

Solve the following questions in the research:
1) What’s the background of the Hong Kong Futures Clearinghouse case?
2) Who was responsible for the loss and the big debacle?
3) Who suffered from the debacle?
4) How much did the company and the clearinghouse loss from this failure affair? What’s the aftermath of this affair?
5) What lessons can we learn from the Hong Kong Futures Clearinghouse case?
6) Why is Hong Kong Futures Clearinghouse case important to derivatives clearing landscape?
7) The OTC clearing landscape today.

References

[1] “Hong Kong Futures Exchange”, Wikipedia, Web. 29 Sept. 2013. [2] Jason Quarry, Barrie Wilkinson, Toby Pittaway, Jay Cheah, “OTC Derivatives Clearing-
Perspectives on The Regulatory Landscape and Considerations for Policymakers”, Oliver Wyman, Web. 29 Sept. 2013.
[3] Adrian E. Tschoegl, “The Key to Risk Management: Management”, Risk Management: Challenge and Opportunity (2nd ed). Ed. Michael Frenkel, Ulrich Hommel, and Markus Rudolf. Springer-Verlag, 2004.
[4] “The Hong Kong Experience in 1987”, Numa, Web. 29 Sept. 2013.

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