Central counterparties in crisis: the Hong Kong Futures Exchange in the crash of 1987

Robert T. Cox

Abstract

ABSTRACT

The Hong Kong Futures Exchange faced a major clearing house crisis during the global equity market crash of 1987. During a four-day market closure initiated by the stock exchange, clearing member performance failures were of sufficient magnitude to overwhelm the solvency of the guarantor of the clearing house's trades and cause a dramatic loss in confidence. The crisis triggered a resolution effort that was led by the Hong Kong government. This is the only known example of the successful resolution of a central counterparty (CCP). This paper examines the development of the interlinked equities and futures markets in Hong Kong, the market infrastructural weaknesses that contributed to the crisis, the challenge that the crisis presented to the government's prevailing market dogma, the influence of special interests and the execution of the resolution itself. The findings of the Davison Report, commissioned after the crisis, and the actions taken to implement it are reviewed. This episode gives us insight into the contemporary problem of CCP resolutions and the choices and challenges that CCP stress present to resolution authorities.