CONFIDENTIAL
the end of any one month would be condoned provided that the sum of interest accruals and topping-up purchases in the following month This were sufficient to offset any breach in the previous month. modified basis meant that Hong Kong would be compensated in respect of the "corrected" end-February position at the end of March using the (incorrect) Hong Kong interpretation of the guarantee.
6 We had in mind when we devised the modified settlement basis that topping-up purchases would be necessary over and above interest accruals to make up for the end-February shortfall which (on the basis of various titbits of evidence) we had tentatively put at around
£10 million. In the event, the shortfall on the basis applied by Hong Kong was only £6.8 million whereas the sum of Hong Kong's topping- up purchases plus interest accruals for which compensation is claimed is £8.9 million.
7
Should we compensate on £6.8 million or £8.9 million?
8 The Hong Kong implementation advice shows interest accruals (plus small miscellaneous receipts) of £4.9 million in March and claims an implementation payment on £4 million of the total topping-up purchases of £14 million made in that month. The £4 million was purchased between the end of February and 19 March to meet Hong Kong's then estimate of the topping-up requirement. In fact, the end-February shortfall and thus the topping-up requirement was £2.1 million less than the original Hong Kong estimate. But this was not realised until well after the event because Hong Kong's information on the total reserve position is only available after a fairly substantial lag.
9
The intention was that we should compensate only on "necessary" topping-up (plus interest accruals). But I think it would be hard to argue that topping-up purchases made by Hong Kong in good faith "in accordance with your interpretation of the accidental breach provision" (the key phase in the relevant telegram) are ineligible for compensation in respect of the amount by which they exceeded