The Impact of Procyclical Margin Requirements on Financial Market Liquidity in Hong Kong

This applied research paper was written by Sean Foley (Macquarie University), Bernt Arne Ødegaard (University of Stavanger), Jiri Svec (University of Sydney) and Angelo Aspris (University of Sydney). The outbreak of the COVID-19 pandemic caused some of the largest — and fastest —market dislocations in modern history. During the outbreak, global margins rose rapidly across all markets. We look at the case of Hong Kong, which, uniquely among major financial markets, publishes margins for futures contracts on individual stocks. We document the determinants of the required margin level, as well as the factors which lead to the decision to increase or decrease margins. We show that margin levels themselves do not have a significant impact on market liquidity over and above the volatility experienced during March, 2020. Finally, we show that the existence of designated market makers and individual stock futures serve to stabilize trading in the Hong Kong equities market. Amongst its global peers, the Stock Exchange of Hong Kong remained resilient in the face of the dramatic challenges of the COVID-19 pandemic.