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

Robert T. Cox

Journal of Financial Market Infrastructures

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.

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