Peter Pang: Launch of the new cross-border collateral management
service
Remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary, at the
cross-border collateral management service signing ceremony and press conference,
Hong Kong, 20 June 2012.
* * *
Mr. Grimonpont, Mr. Bhatia, ladies and gentlemen,
Good afternoon. It is my pleasure to welcome you to this signing ceremony. The bilateral
agreements that I shall sign on behalf of the Hong Kong Monetary Authority with the
Euroclear Bank and J.P.Morgan today will pave the way for the launch of the new
cross-border collateral management service, a critical building block of the cross-border bond
investment and settlement platform launched in March 2012.
The new service, which will commence on 25 June, will bring significant benefits to the
contracting partners and the money market as a whole. For Hong Kong, it will advance the
development of our repo market, enhance the stability of our financial system and strengthen
further Hong Kong's role as the global hub for offshore renminbi business.
The repo market is a key component of major international financial centres. It serves as the
link between the money and capital markets, and is vital to the well functioning of the
financing channels. By providing credit enhancement through the use of securities as
collateral, the repo market also serves as the lubricant that keeps the financial engine
running particularly during times of risk aversion. The new collateral management service,
with its cross-border, cross-system, cross-time zone and cross-currency capabilities, will
provide an efficient repo infrastructure that will help develop the repo market in Hong Kong.
The importance of the repo market as a financing channel has assumed added prominence
since the outbreak of the global financial crisis in 2008. Due to a combination of the large
inflows of funds into Hong Kong in late 2008 and early 2009 and heightened risk aversion,
the interbank money market has been less active in recent years and financial institutions
have been more careful in lending funds to each other on an uncollateralized basis. The
average daily turnover of the uncollateralized interbank market has dropped significantly, by
71% from HK$286 billion in November 2007 to HK$83 billion in March 2012. The higher
frequency of flight to quality, and resultant tightness in the global supply of US dollar, has
also affected turnover in the currency swap market. The average daily turnover of the Hong
Kong dollar swap market also reduced notably by 32% from HK$263 billion to HK$179 billion
in the same period. While the Hong Kong banking sector is now faced with ample liquidity,
the situation will not be permanent and we will need to find new ways to facilitate efficient
interbank borrowing. Development of the repo market will help to activate the money market
by addressing the credit risk through the collateralized arrangement.
The cross-border funding issue is particularly important to Hong Kong given its role as an
international banking centre. 139 of the 199 authorized institutions in Hong Kong are either
branches or subsidiaries of banking groups incorporated outside of the territory. An important
function of the new service is to enable financial institutions to make use of securities held in
one of the partner systems as collateral to conduct secured borrowing in the Hong Kong
dollar or renminbi in Hong Kong. As an example, a bank in Europe can make use of its
securities held with Euroclear Bank or J.P. Morgan to borrow Hong Kong dollar to meet the
liquidity needs of its Hong Kong subsidiary. The enhanced capability of authorized
institutions to manage the liquidity needs in the local currency, no doubt, will help to maintain
financial stability in Hong Kong.
The facility will also substantially strengthen Hong Kong's role as the global hub for offshore
renminbi business. Being the first mover in developing offshore renminbi business, Hong
Kong has the largest offshore renminbi liquidity pool, amounting to RMB 674 billion at the
end of April 2012, and has developed a vibrant CNH market and the largest offshore RMB
bond market. More foreign banks are either choosing to have a base in Hong Kong or are
using RMB correspondent banking services provided by banks in Hong Kong. As at the end
of May 2012, there were 196 banks participating in Hong Kong's renminbi clearing platform.
Of these, 170 are foreign-owned or located overseas. At the same time, over 1,100 renminbi
correspondent accounts were maintained by overseas banks with banks in Hong Kong. The
amount due to and due from such overseas banks amounted to RMB 128 billion and
RMB 146 billion respectively. This is a clear indication that banks from around the world are
using Hong Kong's robust platform and large liquidity pool to offer renminbi services to their
customers at home.
As more and more companies and financial institutions conduct business and transactions in
the renminbi, we will see an increasing number of financial centres offering offshore renminbi
business in different parts of the world. These centres can benefit significantly from having
an access to the offshore renminbi platform and liquidity pool in Hong Kong. The HKMA is
taking proactive steps to aid the private sector in this endeavour. The private sector led Hong
Kong - London Forum is an excellent example of this effort. The Forum just held its first
meeting in Hong Kong in May this year, and agreed on a number of joint actions in the areas
of renminbi liquidity, payment and settlement arrangements and development of products
and services, to bring mutual benefits to the growth of offshore renminbi business in Hong
Kong and London. One of the key action points agreed at the Forum is to expand
cross-market renminbi funding activities through the cross-border collateral management
arrangement that will be launched jointly by the HKMA, Euroclear and J.P. Morgan on
25 June.
The HKMA is delighted to work with Euroclear Bank and J.P.Morgan, the two premier global
tripartite repo system operators, to bring this concept to fruition. With security pools valued at
EUR 10.8 trillion and US$ 17.9 trillion respectively, both institutions provide a huge reservoir
and a highly sophisticated platform to support cross-border cross currency lending with
ample choices of securities as collateral. Linked up by the HKMA's Central Moneymarkets
Unit (CMU) as an agent, CMU members will be able to enjoy the collateral management
service of the global repo operators which include functions like auto-selection and
auto-substitution of collateral, collateral eligibility filters, daily mark-to-market and prudent
haircut execution, all of which will help financial institutions in their collateral management
processes.
As a further development, we are working with our two partners to expand the repo service to
allow financial institutions in Hong Kong to use their securities kept with the CMU, Euroclear
and J.P. Morgan as collateral to obtain foreign currency liquidity such as US dollars from the
global broker dealers in the second half of 2012. This will help local companies and financial
institutions to obtain foreign currency liquidity as they expand their business overseas.
Finally, the HKMA has a long term vision for repo financing to become a more important
source of funding for companies and banks in Hong Kong. It is in Hong Kong's and Asia's
long-term interest to promote further development of the repo market, underpinned by a
closer integration with overseas markets to enable a wider variety of collateral to be
mobilized across borders and currencies. In this regard, the HKMA will continue to work
closely with the industry to advance the repo market with a dual aim to provide a safe and
more resilient source of funding, as well as to foster financial stability of the region.
Thank you.