Taiwan market braces for pressure after record drop - Taipei Times

Taiwan's markets are braced for a pressure test tomorrow after the Philadelphia Semiconductor Index plunged more than 10 percent on Friday, triggering a spillover effect that sent Taiwan index futures in after-hours trading down 3,006 points by the close, marking the largest point decline on record.

TAIEX futures plunged more than 3,000 points in after-hours trading. Losses on a standard futures contract reached about NT$600,000, while mini-contracts saw losses of about NT$150,000.

With the decline exceeding margin requirements, retail investors who maintained positions with only the minimum initial margin could have their positions forcibly liquidated by the system overnight if their intraday risk ratio fell below the 25 percent liquidation threshold.

Photo: Reuters

A futures brokerage executive yesterday said that long positions whose equity falls below the maintenance margin of about NT$443,000 for a standard contract, but that have not yet hit the 25 percent liquidation threshold, would face pressure to "top up their initial margin" during tomorrow's morning session.

If the required funds are not added by noon, the brokerage would trigger a second round of forced liquidations, they said.

The true extent of the damage from the overnight trading turmoil would become clearer the following day, when futures brokers report settlement defaults and the Taiwan Futures Exchange publishes the total value of defaults and the number of affected investors, they added.

The cash market is also facing a stress test, they said.

The TAIEX closed down 1.33% at 45,070.94 points on Friday, and if tomorrow's trading mirrors the futures plunge, high-leverage margin accounts would be hit first, they said.

Accounts with maintenance margin ratios that had previously hovered around a 140 to 150 percent could fall close to the 130 percent margin call threshold after tomorrow's session, raising the risk of a "margin call cascade."

However, a senior executive at a major brokerage said that many brokers have recently tightened margin lending due to risk controls and full credit limits.

As a result, the overall maintenance margin is actually above 170 percent, and even leveraged exchange-traded funds are being strictly managed, they said.

Most margin accounts were opened when the market was above 30,000 points, so even in extreme scenarios, the potential "damage" is not expected to be severe, they said.

Panic sell-off on Wall Street was sparked by stronger-than-expected US jobs data for last month, fueling fears that the US Federal Reserve would hold off on cutting rates.