Mr Yam looks at the benefits a US dollar clearing system
will bring to Hong Kong
Speech by Mr Joseph Yam, Chief Executive, Hong Kong Monetary Authority, at the Signing
Ceremony for the US Dollar Clearing System, Hong Kong, on 9 March 2000.
* * *
It is a pleasure to welcome you all to this afternoon's signing ceremony. The purpose of the ceremony
is for the HKMA formally to appoint HSBC as the Settlement Institution for the new US dollar
clearing system that will be developed in Hong Kong over the coming months. When it is fully
running - prospectively by the end of the year - this system will enable a wide range of financial
transactions in US dollars to be settled here in Hong Kong, many of them on a real time basis. The
project marks an important milestone in the development of Hong Kong's financial infrastructure and
it should help to consolidate Hong Kong's position as an international financial centre.
Developing Hong Kong's financial infrastructure is, along with maintaining currency and banking
stability, one of the three main policy objectives of the HKMA. Financial infrastructure, when it works
efficiently, is something that is so much taken for granted that it is barely noticed. It is a far less
prominent public issue than currency or banking stability. Yet, without a properly working financial
infrastructure, there is little chance of currency and banking stability. Effective financial infrastructure
is as important to Hong Kong as is the extensive and far more visible physical infrastructure that we
see around us. And Hong Kong is fortunate to be equipped with a financial infrastructure that is as
advanced, reliable and efficient as the road, rail and airport facilities that keep our city moving.
Since 1994 the HKMA has implemented a number of major reforms to Hong Kong's payment and
settlement systems. The largest of these reforms was the launch, in December 1996, of Hong Kong's
Real Time Gross Settlement (RTGS) system for interbank payments in Hong Kong dollars. This
state-of-the-art system is widely acknowledged to be one of the most advanced and robust of its kind.
It has served Hong Kong remarkably well, and made an important contribution to maintaining
financial stability during the Asian financial crisis, which erupted not long after its introduction. Our
experience with the RTGS system, and in particular the technology produced for it, plays an essential
role in the development of the next great milestone, the US dollar clearing system.
The US dollar is the currency in which most world trade in merchandise and financial products is
denominated. Because of Hong Kong's role as an international financial centre, and the fact that our
own currency is linked to the US dollar, there is extensive holding of US dollars and a considerable
trade in US dollar-denominated assets. The existing market demand within Hong Kong for a US dollar
potential
clearing system is a persuasive enough argument for its introduction: the demand for such a
system, and the strategic impetus that it would give to our development as a leading financial centre, is
considerable. In the near term, Hong Kong's US Dollar Clearing System will provide the necessary
infrastructure to support the Stock Exchange's launch of the Growth Enterprise Market (GEM), which
will allow listed shares to be denominated and settled in US dollars. In the longer term, the system will
provide a range of opportunities for further developing our stock and debt markets into major world
markets.
A local US dollar clearing system will bring with it the advantages of speed, convenience and
efficiency: it will, for example, allow US dollar cheques to be settled within two days, instead of the
current two weeks. In addition to these obvious advantages, it will also carry the benefit of safety, in
the form of reduced settlement risk. By enabling, within Hong Kong, delivery versus payment (DvP)
for US dollar-denominated securities, and payment versus payment (PvP) for foreign exchange
transactions between US dollars and Hong Kong dollars, the system will eliminate the settlement risk
that arises when a transaction is spread across different time zones.
Greater safety at the level of individual transactions will be complemented by the contribution the
system will make to monetary stability. By reducing the need for using the Hong Kong dollar as a
vehicle currency for conducting non-domestic financial business, the US Dollar Clearing System will
reduce the impact on local monetary conditions of movements in portfolio capital unrelated to
economic developments intrinsic to Hong Kong. This is an excellent illustration of how a piece of
robust and efficient financial infrastructure can be conducive to other important policy objectives, in
this case monetary stability.
Let me turn now to the mechanics of the system. The arrangement adopted here is a private sector
solution, in which the Settlement Institution is a commercial bank. This is not only consistent with the
tradition in Hong Kong, but is also in line with international practice and with the recommendations of
the Bank for International Settlements. At the end of a rigorous selection process, a Selection Panel
made up of disinterested members of the Exchange Fund Advisory Committee (EFAC) and senior
executives from the HKMA recommended to EFAC that HSBC be appointed the Settlement
Institution for a franchise period of five years. Under the arrangements agreed between the HKMA
and HSBC, the Settlement Institution will in turn appoint Hong Kong Interbank Clearing Ltd, the
current operator of the Hong Kong dollar payment system, to develop and operate the US dollar
clearing system. The role of the HKMA will be to oversee the design and implementation of the
system and to ensure that it meets the highest international standards.
The conceptual design of the system is firmly in place. The intention is that it should encompass not
only the best, internationally agreed, principles of payment system design but also state-of-the-art
technology. Leveraging on the technology used for the existing Hong Kong dollar RTGS system, this
US Dollar Clearing System will offer a range of advanced and sophisticated clearing functions. These
will include linkage with the Hong Kong dollar payment system to provide real time PvP settlement
for US dollar-Hong Kong dollar transactions, as well as linkages with the stock and debt securities
clearing houses to provide DvP settlement. For the general public, the System will enable banks to
offer US dollar cheque deposit accounts, which means that US dollar payments can be discharged
through the writing of a cheque in US dollars drawn upon a bank in Hong Kong. The various features
of the system will be introduced in phases. All being well, we hope to see real-time interbank
payments and PvP for US dollar-Hong Kong dollar foreign exchange transactions introduced by the
third quarter of this year and US dollar paper cheque clearing and a linkage with the HKMA's Central
Moneymarkets Unit completed by the end of the year.
People have asked whether we propose to introduce clearing in other foreign currencies once the US
dollar system is established. In principle this would be possible. In practice there needs to be a
business case. The HKMA is certainly ready to respond if there appears to be market demand for
similar clearing systems for other major currencies.
Hong Kong will shortly have a state-of-the-art facility for conducting US dollar transactions in Asian
time. The benefits of this for both local business and international customers, in both trade and
finance, should be considerable. I take this opportunity to thank and congratulate those who have
worked hard to bring the project to its present advanced stage in so short a time, and I wish every
success to all who will be involved in translating the design into reality.