CONFIDENTIAL
by which thome official sterly romos
had
end-February but that the Bank told Hong Kong on 23 May that the reserve figures it would submit to HM Treasury should include non-sterling reserves as at end-March. After some amendments, both consequential and otherwise, been made to the figures then available Hong Kong was, I understand, told on 14 June that the Bank was ready to make the recommendation to HM Treasury and asked to confirm certain figures. The confirmation requested was given by Hong Kong on 15 June.
4. Our own view is that the Bank's calculation is incorrect. This is because the modified settlement basis concerns only the amount which is deemed to be that used for official sterling reserves at end-March for the purpose of the De claration. Since no reference was made to altering the basis on which total reserves were calculated and the relevant balances were still, in form, those at end-March there was no justification for Hong Kong's initial inclusion of total reserves as at end-February; but neither was there reason to include within end-March total reserves sterling reserve g as under the modified settlement basis. Total reserves continued to be defined as under the Sterling Agreement, which treats total and sterling reserves independently and does not build the former up from the latter. (This is not, I think, affected by the final line of paragraph (1)(iii) of the Agreement which is concerned to specify a limitation on securities which are included within sterling reserves, not to state that the latter are included as such within total reserves).
5.
We believe that our view is consistent with our intention, evident to Hong Kong, in framing the modified settlement basis. This was to compensate on the basis of eligible balances at end-March (or in September, if lower) but to allow as official sterling reserves only the amount which Hong Kong would hold if it adhered to its understanding of the accidental breach provision. The corollary was that the non-sterling component of total reserves would be increased by the amount of sterling purchases which was disallowed.
6.
I should record he re a further interpretation which has been put forward. This is based on the provision in paragraph (3) of the Sterling Agreement that 'balances eligible for gurantee shall be that portion of official sterling reserves, exceed 10% of total official afering reserves as defined in paragraph (1)(a)'. According to this
interpretation the total reserves in question are those of which the relevant sterling reserves form a part and need to be those actually held at end-February. However, for the reasons already stated we view the relevant total reserves ag being determined independently both of official sterling
(A difficulty reserves and the modified settlement basis.
in the interpretation set out in this paragraph is that the relevant sterling includes not only that actually held at end-February but also-topping-up purchases and interest accruals.)